EURUSD Requires a Cautious Appoach as Range Flirts with Breakout

We have held off from releasing a range report until after the session close on Friday so as not to encourage traders to jump into the market too early. The majors have been driven to the very cusp of dollar-based support; and the risk of a breakout is tremendous.

Trading Tip – We have held off from releasing a range report until after the session close on Friday so as not to encourage traders to jump into the market too early. The majors have been driven to the very cusp of dollar-based support; and the risk of a breakout is tremendous. It is important to note that this is not just a potential fate for the greenback; but it is the same setup for all those assets that have a significant correlation to risk. For EURUSD, the link to risk trends is not as high as say AUDUSD or even GBPUSD. This works in our favor as it will help avoid volatility at these extremes when the market opens back up on Monday – a set of circumstances that frequently lead to false breakouts.  Another benefit to using the euro-paring as our dollar range setup is that it is has not actually rallied to its highs for the week – much less the highs for the year. And, while a trade can be crafted around a bearish reversal; our suggested strategy looks to play a possible pull back to 1.42. This follows the general bias of the past three months and has the greater technical battery. Despite the benefits of our positioning, however, the chances for a breakout against us are still high. Liquidity could thin out even further on Monday; but with the whole week ahead of European and Asian traders, trends are more plausible. As such, we will monitor this position very closely on Monday and remove all open orders by the end of the following day. 

Event Risk for the Euro Zone and US

Euro Zone – After the ECB rate decision this past Thursday, scheduled event risk eases over the coming week. On the docket, German factory activity data for July will offer a somewhat lagging indicator for a very important sector for Europe’s largest member economy. Second quarter Euro area employment data is fundamentally imperative yet severely lacking for speculative influence considering the monthly readings from the major member economies are already factored into growth forecasts. A release that should not be overlooked is the ECB’s monthly report. The central bank recently upgraded its growth forecasts; and we will receive more details for their outlook from this breakdown. All the data aside, broad investor sentiment will no doubt also have its way with the euro. The Euro Zone is still considered to have a relative advantage in interest rates and growth, and this keeps it on the risk appetite side.

US – Economic data on the US docket over the coming week will be invaluable for long-term forecasts but lacking for short-term volatility. The Fed Beige Book offers all the data that the central bank will take into account when it votes on interest rates at its next gathering. What’s more, forecasts for financial health, economic recovery and inflation will all be sourced from this public report. As for regular indicators, the consumer credit indicator for July will offer a more complete measure of lending health than bank default reports or government updates. The University of Michigan sentiment gauge may be the most promising indicator in terms of volatility; but modest surprises have offered little in the way of price action as the general pace of slow, economic recovery is set. In the end, risk appetite will decide the fate of the dollar. Without data to interfere, the pressure in investor sentiment finds a perfect lightening rod.

Written by: John Kicklighter, Currency Strategist for DailyFX.com
Questions? Comments? Send them to John at [email protected]