Day three: our EUR/USD trade

I have been looking at long EUR/USD positions on a close above 1.3833; however price action right now looks quite shaky.

I would now look to initiate long positions on a slight dip from here to 1.3720, while maintaining my view that a close above 1.3833 would see 1.40 come into play.

Stops on the position could be placed at 1.3560, while limits could be at 1.3990.

ECB member Ewald Nowotny’s has heightened my fundamental bias that EUR can push higher from here, although I also like long EUR/AUD and EUR/JPY as well. Mr Nowotny told the market that the ECB doesn’t have the tools to deal with the EUR strength, and clearly this says that rate cuts are off the table now. The prospect of another LTRO (long-term refinancing operation) also seems low, despite the levels of excess liquidity at the European banks falling below the key €200 billion level. The contraction we are seeing in excess liquidity could start having negative ramifications on European money markets (Eonia), which in turn could have the same effect on future growth, but for now this is being seen as a EUR positive.

The prospect of further fund inflows into Europe to buy European stocks (they seem to be the place to invest right now), but also on the on the perception that European banks are selling assets in preparation for next year’s ECB asset quality review (AQR) is also another EUR positive.

The key risk to my view would be an FOMC statement (out at 05:00 tomorrow) that gives a strong impression that the Fed could taper in December; this could see a vicious move lower. However, I see the probability that the Fed will detail a ‘let’s wait and see’ message, which keeps the USD from undergoing too much short covering.

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