EUR/USD: Early Europe market analysis
Courtesy of Chifbaw.com and you can view charts etc. on their site.
- Short the EURUSD at 1.2730 with SL 1.2750 target 1.2650 PROVIDED that volatility contracts (the market stays range bound 1.2740-1.2780 till 12:45 GMT) and a rate cut is announced.
- Buy EURUSD in between 1.2630 and 1.260 with SL 1.2570, targets 1.2650, 1.2670, 1.2730.
- The EURUSD will not make new highs (higher than 1.317) until Spain requests a bailout and the OMT is activated.
- The market will have a moderately bearish bias until further clarity emerges on the US Fiscal Cliff issue.
This morning the market has a bearish bias, continuing the risk-off started by the US election results. The ECB council meeting today is a key risk event and we expect the market to stay quiet (volatility contraction) until the ECB announces its rate decision. Yesterday’s bearish comments by Draghi suggest that a rate cut will be discussed. Given that the economic numbers have been mostly bad all across the Eurozone, given that Germany’s economy is now most likely entering a recession, given that the inflation rate in Germany (~2%) is moderate, and given that Germany is an export led economy, we believe that there are good chances for a rate cut (-0.25%) to be announced today. This rate cut is possibly already partially priced in. Our recommendation is to short the EUR/USD on a volatility breakout if there is a rate cut indeed. Our target to the downside is 1.2650, thus breaking the down trend channel that we identified earlier (see graph). Buying the EUR/USD is also an option if the market gets overly bearish and moves closer to 1.260. Two key levels to watch are the 100-MA at 1.263 and the 50% Fibonacci retracement at 1.2605. Our models also show that this area has strong probabilities of reversal or saturation of the price action if reached today. Keeping these long positions overnight might be a good idea since some of the EUR/USD shorts will cover tomorrow. If the ECB would maintain its interest rate at 0.75% the upside move will remain limited and will not offer good short opportunities.