Day four: our EUR/USD trade

I have been looking at going long EUR/USD on a daily close above key resistance of 1.3833; however the pair has drifted lower in recent days.

The ‘doji’ print on the daily chart of Friday seems quite significant now, however support came in at the 38.2% retracement of the recent rally from 1.3473 to 1.3882 at 1.3695. It is also worthy of note that EUR/USD found buyers below the February 1 low of 1.3711 and the fact the pair closed at 1.3736 is bullish as it shows a firm rejection of this key pivot.

Given the good support on the dip, I feel long EUR/USD positions could be profitable (the pair is trading at 1.3733 at the time of writing) and will exit the trade on a move to 1.3650 (just below yesterday’s low), while setting a potential profit target of 1.3990. I would allocate a small amount of capital on the trade and look to add to positions on a daily close above 1.3833.

Trading EUR/USD right now is tough because there are positive developments in play on both EUR and USD. On the EUR front there is a projected current account surplus this year, repatriation flows, while yesterday we saw the ECB’s lending survey highlight that overall credit conditions are easing slightly. At 21:00 tonight we get eurozone inflation estimates and the market is pricing in a 1.1% increase on the year. This is still well below the ECB’s target of 2%, so we could see some volatility in the EUR depending on the inflation print. The key risk for my trade is a CPI estimate below 1%.

On the USD side, the first thing I noticed was new US Treasury statistics that showed a huge improvement in the US deficit. In fact, the trend we have seen in the US deficit is remarkable, with it now standing at 4.1% of GDP, a huge improvement from last year (at 6.8% of GDP) and 13.3% back in 2009. On current projections there is a possibility that we see the budget deficit fall to 2% of GDP in 2014, which again is positive for the USD longer term.

The Fed meeting showed very little change from the September statement, although there were some noticeable omissions. Firstly, the Fed showed absolutely no concerns about the recent government shutdown and expressed no worry at all about the budget negotiations in January and February. It also removed the line around a tightening of financial conditions due to higher longer-term rates and thus seems quite content with where bond yields are right now. All in all I read the statement as dovish, but given the positioning in the market, this outcome was more hawkish than many were positioned for. The market expected the Fed to cut its bond-buying programme in March, however reading the statement I get the sense this could feasible come in January.

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