How to Trade the Euro from Here

09/14/2011 7:00 am EST

Focus: FOREX

Raghee Horner

Author, Forex Trading for Maximum Profit

The fundamental and technical picture for the euro is considered in order to predict upcoming price movement against major-currency counterparts like the Japanese yen, Swiss franc, and US dollar.

The most popular question I received this past weekend was easily “What is the euro going to do next week?” Traders don’t predict, however, forecasting potential events is part of the job. So let’s look at some possible scenarios.

Fundamentally, and I should say from my viewpoint, the psychology surrounding the fundamentals are firmly negative and the tone of the entire Eurozone (EZ) crisis has shifted politically. I think first and foremost, German Chancellor Angela Merkel has lost a lot of support and the German people are fed up with paying the bill for Greece.

This along with the fact that the recent German court ruling has made it more difficult for further bailout money from Germany to flow makes the entire recovery in Europe shakier than ever.

By the way, this all accompanies a breakdown through 1.4000 in the EUR/USD, which has momentum as the Dow Jones continues to sink and the US dollar index has found the rocket boosters it needed to travel higher through 77.00.

A Greek default is steadily being discounted into the market, and this accounts for the consistent push lower in the EUR/USD and in the EUR/JPY, which touched 103.88 this week. It’s also important to note that this low breaks through the weekly support that was at 105.41. Look for this level to act as resistance as prices bounce higher through 105.00.

In fact, look at the 23.6% Fibonacci retracement of the last major selloff on the daily chart. It shows selling pressure to extend higher to 105.77, which is the in the area of the recent highs and the close for September 9.

See related: Fibonacci Analysis: Master the Basics

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The daily chart of EUR/JPY is bouncing from Monday’s lows, which did break the weekly horizontal support at 105.77. This correction could carry the pair to 105.77, where selling pressure is likely to be waiting.

When looking at the EUR/JPY, remember that the yen’s strength is being exacerbated by the Swiss franc (CHF) no longer being the safe haven it was before the 1.20 EUR/CHF peg.

NEXT: How to Trade Euro Against Swiss Franc and US Dollar

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My view of the EUR/CHF is that the Swiss National Bank (SNB) will continue to do what’s necessary to support the 1.20 level, or at very least continue to give the impression that it will. The pair will probably find a trading range between 1.2000 and the 200-period simple moving average (SMA) close resistance.

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The daily EUR/CHF chart reflects the continued support above 1.2000 as the Swiss National Bank (SNB) has made it clear that this level will be vigorously supported.

The EUR/USD, while certainly bearish and confirming a completed transition to a marked downtrend, is probably due for correction of the recent slide lower. A rally to a shallow correction should be considered.

There will be plenty of selling pressure on the pair as long as the dollar remains strong and the Dow continues to struggle below 11,000. The 240-minute EUR/USD chart continues to move lower at a “four to six o’clock” 34 EMA wave angle, and this sets up what could be another round of swing shorts at the area between the 20-period SMA and the 34-period EMA low.

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A swing short is waiting for (patient) EUR/USD bears, as the pair could correct higher after its rapid decline. Look for the 1.3800 level to help solidify selling pressure on a rally higher. The swing entry short would capitalize on the bearish directional bias of the overall (daily) trend.

By Raghee Horner, forex trader and chief currency analyst, InterbankFX.com

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