It took weeks to muster; but EURUSD has finally broken out of consolidation and is now looking to forge a distinct trend. However, how long can the market's most liquid currency pair plunge with another prominent low hovering just below? What's more, are the euro crosses destined for the same breakdown to build true momentum for market-wide selling behind the single currency? Our DailyFX Analysts weigh in and offer their picks for the week.
Chief Strategist - Antonio Sousa
My picks: Sell Short EUR/USD @ 1.28
Expertise: Global Macro
Average Time Frame of Trades: 1 month
I have been short EUR/USD since 1.47 and I expect more EUR/USD weakness going forward on speculation the ongoing financial crisis will force many European banks to announce more losses related to toxic mortgage assets. In fact, profits for more than 600 companies in Western Europe have declined 68 percent in the last quarter of 2008, according to data compiled by Bloomberg on earnings released since January. In addition, recent data on business sentiment, which normally looks forward, points towards a sharp contraction in economic activity in the euro zone in 2009 and lower interest rates by the ECB could be needed to prevent the region from falling into a severe recession. The trading recommendation I have for today is to sell-short EUR/USD with a limit order at 1.28 with a stop in a daily close above 1.30 for 200 pips in profit potential.
Senior Currency Strategist - Jamie Saettele
My picks: Long EURCAD, against 1.4818, target above 1.7522
Average Time Frame of Trades:
The long term trend for the EURCAD remains up. To review the long term picture… “from the 2001 low to the 2007 low, the EURCAD traced out 5 waves up and 3 waves down. Having already exceeded 1.6971, it is possible that a complex declining pattern of sorts is underway from 2.0564 (alternate). But, the preferred bullish count is intact as long as price is above 1.4818. Also, the pattern since the 1995 top has the look of an inverse head and shoulders continuation pattern (neckline broken last year).” Near term, a corrective decline (a-b-c) from 1.7522 may be complete. The 61.8% of the rally from 1.4818 has held on numerous occasions, which is supportive for bulls. The objective is above 1.7522.
Currency Strategist - John Kicklighter
My picks: Pending EURJPY Short
Expertise: Combining Money Management with Fundamental and Technical Analysis
Average Time Frame of Trades: 3 days - 1 week
The world's most liquid currency pair produced a significant, bearish break this morning - riling a market that has been trapped in consolidation for weeks. With so much liquidity, a serious bear wave from EURUSD could instigate euro selling and dollar buying across the market; but only with a substantial follow through. For my euro pick last week, a short EURCAD position has already been stopped out as congestion pulled the pair back from a serious breakout. It is worth looking at this pair and the other euro crosses; because they have yet to follow the dollar-based major with their own breakouts. Without confirmation from these pairs, it is unlikely that the euro will find any significant follow through. For this reason, I'm watching EURJPY. This is a very similar, fundamental position to the EURUSD short I laid out yesterday. However, this yen pairing is more attuned to general risk trends - which have been somewhat skewed over recent weeks. This cross is among a very few that could confirm the major's break and generate a genuine bear wave for the euro. There are few significant pieces of event risk that could trigger such an underlying shift in the market; so we will have to stay on top of fundamental developments.
Looking at the development in EURJPY price action action, it makes for an ideal trigger for the euro in general. This pair has been in a steady bear trend since July, interrupted by congestion over the past four months. Over the past month, the consolidation has tightened into an ascending wedge formation that has produced clear boundaries. I will look from a break to either side to set up a trade on this pair and confirm or negate my open EURUSD position. Should EURJPY pull hold its range, it is very likely that the EURUSD decline will fade and 1.2330 will not be overtaken. Should there be a confirmed break above 120 on the yen cross, I will look for entry on a long and look to my major positoining and decide whether I should stay with it, go flat or reverse. Alternatively, a confirmed close (on a lower time frame chart) below the short-term rising trend from Jan 21st, would initiate a reduced short position. I will keep position size low due to my EURUSD position and the fact that there is still the 112.00 low to overtake (equivalent to EURUSD's 1.2330).
Currency Strategist - Terri Belkas
My picks: Short EUR/JPY
Expertise: Fundamentals Combined With Technicals
Average Time Frame of Trades: 1 Day - 1 Week
Last Wednesday I was looking to buy EUR/JPY on a break above trendline resistance, and while this is still a relevant trade idea for the future, I see greater potential for long-term declines in the pair. Looking at the weekly charts, EUR/JPY has clearly pulled back from noted resistance, and with investor sentiment looking very jittery, the odds remain in favor of Japanese yen strength. I would look to get in near current levels, with a stop above this week's high of 118.18 to target the psychologically important 110 mark (secondary target of 106).
Currency Analyst - David Rodriguez
My picks: Flat the EUR/USD
Expertise: System Trading
Average Time Frame of Trades: 2-10 weeks
Last week I called for range trading the EUR/USD only to subsequently call for a break below important support. Unfortunately yesterday I lost heart and did not believe that the EUR/USD would break the key 1.2700 level, and I obviously didn't catch the overnight tumble. I am accordingly flat the EUR/USD. The obvious temptation is to chase EUR/USD weakness, but risk/reward simply isn't there anymore given the risk of rebounds at 1.2540, 1.2418, or 1.2320. I hope I'll have better luck next time.
Currency Analyst - Ilya Spivak
My picks: Remain Short EURGBP
Expertise: Macro Fundamentals, Classic Technical Analysis
Average Time Frame of Trades: 1 week - 6 months
I wrote last week that The Euro lost bullish momentum having rallied decisively against the British Pound in recent months, breaking below rising trend line support that has held up the pair since late October. Prices now look to be finding support above 0.8630, a level that acted as significant resistance in mid-November and as support in early December. Looking at candlestick positioning, we see two strong bearish days followed by clear indecision starting with a Doji and followed by a Star candle. Look for a corrective rally in the coming days to offer an attractive opportunity to enter short.
I opted to enter short at 0.8983 as prices signalled a double top below 0.9080 with a Hanging Man candlestick. Prices have indeed moved lower; continue holding short to initially target 0.8678 near the previous swing low.
Currency Analyst - John Rivera
My picks:Short EUR/USD
Expertise: Fundamentals Combined With Technicals
Average Time Frame of Trades: 2-4 Days
Despite an initial move higher after my long Euro pick, it was all down hill after that as the U.S. fiscal stimulus plan failed to inspire investor confidence. The lack of details from the U.S. bank bailout plan and no concrete plan emerging from the G-7 summit has markets worried that leaders have no idea how to stem the current crisis. A dismal Japanese GDP report which showed the biggest contraction since 1974 and concerns over the impact of failing Eastern European subsidiaries on their Western parents have sparked risk aversion. Although, 1.2500 is a key support level and we could see a bounce from there, I would be short the Euro at this point with interest rate expectations declining.
Currency Analyst - David Song
My picks: Stay Short EUR/USD
Expertise: Fundamentals and Technicals
Average Time Frame of Trades: 2 - 10 Days
During the early morning session, the EURUSD slipped to a low of 1.2603, which nearly reached my target for 1.2600, and as the banking sector in Europe remains under stress, I expect the single-currency to hold its bearish trend against the greenback. As a result, I will add to my short position once the pair makes a break below my previous target, and will move my target to 1.2450 as market participants expect the European Central Bank to ease policy further next months.
Currency Analyst - Joel S. Kruger
My picks: Pending Sell EUR/GBP @0.8900 for 0.8635 Objective, Stop @0.8975
Expertise: Technical Analysis
Average Time Frame of Trades: 1-3 Days
The market looks to be in the process of rounding out a lower top by 0.9075 (12Feb high) which will ultimately be confirmed on a break back below the recent trend lows at 0.8635 (10Feb low). Daily studies confirm bearish outlook and show room for deeper setbacks below 0.8635 over the coming days. Initially, a break below 0.8830 (Friday’s low) will accelerate declines and open a direct retest of 0.8635. Recommendation to be Removed if Not Triggered on Tuesday.
Fundamental Catalyst - We are starting to see a notable shift in correlations between the cross rate and risk aversion. Up until the past couple of weeks, any rise in risk aversion generally had translated into a higher cross rate with the broad based market flight to safety trade doing the most damage to the UK currency, on the back of a local economy which had been deteriorating at a much faster pace than the other major economies. However, over the past few weeks we have begun to see acceleration within the deterioration in the Eurozone economy to more than offset any concern for the UK economy. While data out of the Eurozone has begun to come in generally weaker than expected (today’s stronger ZEW is the exception), data out from the UK, on the whole, has been improving. Additionally, more talk of Eastern European banks under intense pressure and struggling to stay afloat has also been attracting a lot of attention, resulting in broad based Euro selling.
In the FX market, the name of the game is relative value. While all economies are suffering from the global financial crisis, those economies that have begun to deal with their problems more quickly, serve to benefit greatly in the long run. While the BoE has been very active in addressing ongoing threats to the local economy by introducing an overly accommodative monetary policy (much like the Fed), the ECB has arguably been behind the ball in coming to terms with the current market environment. This has begun to reflect itself in the cross rate, and we contend, should continue to do so over the longer term with EUR/GBP seen back towards 0.8000 over the coming weeks.
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