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EURUSD Technical Analysis
EURUSD suffered from heavy losses in Tuesday’s session, retracing from 1.2475 to 1.2375. The moderate selling was as a result of broad US Dollar (USD) demand in the Forex market, fuelled by remarks from Fed members Fischer and Lacker. Many of the market finest analysts predict selling to continue in EURUSD as we are heading into the European Central Bank (ECB) monetary policy meeting on Thursday. As intraday support levels were violated by the market, Algorithmic trading kicked to ensure a successful breakout is maintained. The key risk for Thursday’s meeting is the introduction of sovereign-bonds purchasing program, which the Swiss National Bank (SNB) is speculated to consider join the conjured program, If the ECB will reveal the framework of such program heavy selling my be triggered in EURUSD, which is being priced-in in the market at the time of this writing. We are expecting the ECB to press EURUSD lower at Thursday’s meeting but we are mesmerised by Euro-Dollar daily chart, which hints a bullish surprise.
EURUSD Daily Chart
Please click on the chart to enlarge;
What is grabbing our attention in EURUSD daily chart is the Moving Average Convergence/Divergence indicator (MACD) histogram. It is considered as a lagging technical indicator so we do not use it for predicting the market trend but rather to search for positive or negative divergence following a healthy uptrend or downtrend. The MACD distinctly shows positive divergence has been affirmed, negating the bearish outlooks for the currency pair. In order to execute a long position, the MACD may dip lower but remain above its prior low, forming the third wave in which moderate gains will be expected. The market does not play by the book, which makes us wonder if a bullish entry is possible nevertheless.
The ‘Piercing’ reversal pattern appears to have exhausted its full potential as a recovery was noted to 1.2520 (approx.) before correcting lower. What can support the MACD positive divergence is the classic triple-bottom reversal pattern (key support at 1.2357), which may contribute to EURUSD bullish reversal. As technical analysis on its own is insufficient, we turn to the market fundamentals. Key data for Euro begins at 08:15am GMT when the Spanish Services PMI are released, followed by the Italian Services PMI at 08:45am GMT. At the US session, the US ADP Non-Farm Employment Change and the ISM Non-Manufacturing PMI at are likely to have a major impact on EURUSD. The rich data is sufficient to trigger a possible rally in Euro-Dollar, aided by short covering in the market. We took a deeper look into EURUSD and discovered a great battle will take place in today’s session between two major FX options holders that could support our long trade.
There are barrier options are set to expire at the NY cut (15:00 GMT). The chart below displays the price levels of these options.
EURUSD Options For the NY Cut
Please click on the chart to enlarge:
EURUSD is within a close proximity to 1.2375 that holds a option of EUR 598 million that has been successfully defended at the time of this writing. 1.2350 also holds a barrier option (amount and expiration date unknown) and 1.2300 holds a decent option of EUR 1.02 billion, set to expire at Wednesday’s NY cut. These options are below the current price of EURUSD. Above the current price there are two options, EUR 550 and EUR 626 million at 1.2420 and EUR 847 million at 1.2500. All these options are likely to be heavily defended as they are all set to expire at the NY cut. We are certain entry orders already placed in the market to protect the strike prices. We cannot confirm which banks or hedge funds are holding these options. A great battle is expected to take place at the opening of the European session.
We have decided to execute a long trade in EURUSD at market price bearing in mind the price may test the 1.2357 support before rebounding. The protective stop loss order is placed at1.2340, targeting 1.2480. We are not locating our stop loss order based on these options but based on our technical analysis. Our latest trading strategies are available at the homepage. You may review our current trades in USDRUB and USDJPY. We will be updating EURUSD long trade at the bottom of this page.
03/12/14 UPDATE: The options were targeted and sliced by the market following the poor Spanish Services PMI, triggering our protective stop loss order. Please note the positive divergence is still in place and has not been negated. We however choose to refrain reloading a long trade in EURUSD.
Euro-Dollar loss is absorbed by our prior trade in the pair. We will continue analysing the market and provided our trading strategies in “Research” and “Trade Alerts” sections.
Trade alerts are also issued in the weekly update.