EURUSD Trading Signal: ECB Monetary Policy Strategy

The European Central Bank (ECB) monetary policy on Thursday is one of, the major economic events that is due this year. As noted in one of our prior strategies, Euro Dollar recent gains were triggered by Matteo Renzi resignation due to the referendum results although he will continue to act as Prime Minister for a short period of time. The ECB is widely expected to extend the current Quantitative Easing (QE) program on Thursday, however lea , what is likely to trigger a volatile reaction in all EUR pairs and crosses is whether the ECB chooses to taper (downsize) the QE. Prior speculations of tapering the lead to extreme gains in EUR pairs and crosses in the Forex market. Based on our market analysis there is room for moderate gains EURAUD and EURNZD. We have already initiated a long trade in EURNZD earlier this week but decided to exit with a decent profit. Before outlining our strategy for EURUSD signal we should highlight that there is a fair possibility we may witness a short-lived spike, ranging between 150 – 300 pips. We are uncertain whether gains will continue beyond Thursday.

EURUSD Daily Chart

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EURUSD Daily Chart 06/12/16

EURUSD Daily Chart 06/12/16

EURUSD has affirmed a reversed H&S on the daily chart. The recent retracement may allow us to initiate a long trade in the currency pair. We would prefer if 1.0686 will be tested prior to the daily close but it will not act as an obstacle if it does not take place. Tapering the QE could force EURUSD back to 1.1200 but we prefer a more conservative approach. Our target for EURUSD is 1.0975 with a relatively tight stop as 1.0686 acts as the key support.

EURGBP 4hr Chart

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EURGBP 4hr Chart 06/12/16

EURGBP 4hr Chart 06/12/16

Although we are attempting an intraday entry in EURGBP it is based on the daily chart. We have noted the potential for reversed H&S on the 4hr chart. As opposed to EURUSD the price may re-test the support, which is the potential drawdown of the signal. The UK manfufacturing data in Wednesday’s session is likely to either force a re-test or lead to breakout which will affirm further gains in EURGBP. We cannot determine whether such a re-test will indeed take place, which is why it must be absorbed if we do opt for a long trade.

EURAUD requires a +400 pips stop, which we find excessively large. We may be able to re-enter EURNZD, however, we prefer Euro Dollar and EURGBP at the time of this writing. If EURUSD closes  significantly below 1.0686 we will have to re-assess our entries in the market.

EURUSD Trading Signal

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EURUSD Daily Chart II 06/12/16

EURUSD Daily Chart II 06/12/16

EURUSD long at market price (1.0719)
Take profit: 1.0975
Protective stop: 1.0634
Risk Ratio (RR): 1 : 3 (approx.)
Estimated duration: 3 days

Note: The price may re-test 1.0686 before reversing higher, however, such re-tests are not guaranteed.

EURGBP Trading Signal

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EURGBP 4hr Chart II 06/12/16

EURGBP 4hr Chart II 06/12/16

EURGBP long at market price (0.8452)
Take profit: 0.8650
Protective stop: 08387
Risk Ratio (RR): 1 : 3 (approx.)
Estimated duration: 3 days

Note: As noted in the strategy, the price may re-test the support as we are initiating the trade from a high level, however, such re-tests are not guaranteed. The trigger for breakout or the rest is likely to be the UK manufacturing data.

07/12/16 UPDATE: EURGBP breakout took place prior to the UK manufacturing data. As this is a 4hr entry (even though it was derived from the daily chart) we can shift the stop to the entry.

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EURGBP 4hr Chart 07/12/16

EURGBP 4hr Chart 07/12/16

EURGBP is trading at 0.8506 at the time of this writing, we are closing 30% of the long trade at market price and shift the stop to the entry.

07/12/16 UPDATE II: EURGBP high at the 4hr close was fairly close to 0.8665, which is one of the hurdles EURGBP must overcome to extend its gains. As this is a 4hr entry it is managed differently. We are shifting the protective stop to 0.8487 and close 30% of the long trade at market price (0.8524). The reason for the second liquidation is due to the selling that took place prior to the 4hr close.

07/12/16 UPDATE III: EURUSD is trading at 1.0753 at the time of this writing. We are closing 20% of the long trade at market price and shift the protective stop to 1.0674.

Please click on the chart to enlarge:

EURUSD Daily Chart 07/12/16

EURUSD Daily Chart 07/12/16

The ECB statement may provide further details on the QE expansion, which if turns out to be the case it will be more significant the press conference itself. In a scenario a bullish spike materializes as a result of the statement and misses our take profit we may exit or substantially downsize the trade. We could have shifted the stop higher but as a whipsaw reaction is possible 1.0674 should withstand it.

08/12/16 UPDATE: EURUSD is trading at 1.0796 at the time of this writing. We are closing 30% of the long trade at market price and shift the protective stop to 1.0730.

Please click on the chart to enlarge:

EURUSD Daily Chart 08/12/16

EURUSD Daily Chart 08/12/16

We would rather have the take profit triggered at the statement and not during the press conference. Details on the QE may be mentioned in the statement or during the press conference. If the Mario Draghi extends the QE without tapering our stops are likely to be triggered but as they are above the entry in both EURUSD and EURGBP we will end the trades with a profit. Both trades are expected to end today.

08/12/16 UPDATE II: The ECB did not provide any details in the statement, which means we are heading into the press conference. EURGBP tested the resistance we highlighted on the chart, which is why we decided to exit the trade at market price (0.8504). We are leaving EURUSD in the market although it did test the resistance we highlighted as it is a daily entry.

08/12/16 UPDATE III: Draghi affirmed tapering was not discussed at the meeting, which is the key reason behind EUR recent selling. EURUSD triggered the stop at 1.0730, we have ended the trade with a profit.

EURUSD Trading Signal: ECB Monetary Policy Strategy

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EURUSD Trading Signal: ECB Monetary Policy Strategy