With the initial reaction to the the ECB rate cut seeming to be fade away, I think it might be time to consider jumping into what could be a change in direction for EUR/USD.
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On the daily chart above, we can see that it was a solid 500 pip move lower ever since the beginning of May when ECB President Draghi initially hinted on the possibility of the changes to European interest rates. Now that we’ve gotten past that interest rate cut this month, that momentum in euro weakness looks like it’s run out of steam ahead of the next major support level at 1.3500–and ahead of a potentially big monetary policy event.
We’ve got the FOMC meeting this week, with expectations of no interest rate changes and a continued reduction of the bond purchasing program by $10B per month. Word on the street is that we’ll also get a slightly rosier outlook on the U.S. economy and maybe a tick higher on inflation. This could be a spark for volatility as good news supports less of a need for easy money policies like quantitative easing and near zero interest rates. Of course, we won’t know until we get there, but what could happen beforehand is profit taking on the recent euro weakness, meaning a possible bounce higher on EUR/USD. If that’s the case I’ll look to jump in short.
On the chart above, we can see that the price area of the broken rising trendline coincides with the 100 and 200 MA’s, and with the Fibonacci retracement levels. I think we could see resistance there, given that we don’t get another surprise central bank policy change or rhetoric event. I’ll short there on a retest of the major psychological level, with a wide stop using the weekly ATR (150 pips), which would take me out above the 61% Fibonacci retracement level. My target is a big one because of the monetary policy divergence, with the ECB increasing easy money policies while the U.S. Federal Reserve reduces theirs. Here’s what I am doing:
Short full position EUR/USD at 1.3700, stop at 1.3850, max profit target at 1.3100
I’m risking 1.00% of my account on this one since this is meant to be a position trade, and with this trade structure, I have a potential reward-to-risk ratio of about 4:1. Of course, anything can happen in the forex markets, so if the story changes I’ll be sure to reassess and adjust quickly if necessary. Stay tuned by following me on Twitter and Facebook!