Short Eur/Usd at 1.3833

Another opportunity presents itself on the 30min chart. Here we observe a perfect bearish price channel. We could expect this trend to continue with resistance at the upper trendline. The downtrend should continue withoutly completely canceling out the big candle at 2:30pm EST. We will place the stop order at the previous support of 1.3885, which is now resistance. Remember, this breakout took place as soon as the Trichet speech indicated a possible rate cut. This was a significant event and unless there are no surprises we do not expect the move to be given back.

There were some negative U.S. economic indicators but they did not generate much of an immediate impact. So we have two resistance levels, at the upper trendline and at 1.3885.

30min chart

We place the limit order at 1.3770 and if this short-term trend continues we could remain alert to lower both the stop and limit orders.

UPDATE: closed at 1.3885 for a 52 pip loss at 1:27AM EST. Our limit order was barely avoided (1.3772 vs. 1.3770). The bearish price channel remained intact throughout the night as it flirted with the upper limit before breaking out. If our stop order was a tad more conservative we would have closed out at 60 pip gain.

Update: Wow, what a breakout!

As soon as Trichet started speaking, following the ECB decision to keep its rate at 4.25%, the euro/usd immediately broke below 1.3875 and dipped below 1.3800!  He is still speaking and indications of a future rate cut will drive this lower.  It would be a significant change to his policy and he has been very hawkish on inflation.  He also foresees economic recovery next year and this will boost European stocks.

Some significant statements from Trichet: inflation is elevated and a result of energy prices, inflation risks diminish but there are still threats, inflation will moderate in 2009. This is much better news regarding inflation and definitely helps the chance of a rate cut for the euro!

This is the position we discussed earlier:Break out of 1.3875 coming up?

Break out of 1.3875 coming up?

Right now the Euro/Usd is strongly testing the support of 1.3875.  This is the September 11 low and it appears that a breakout could be under way.  This could be an opportunity to short the currency pair in the short-term.  There is a strong short-term bearish price channel on the four-hour chart.  I would short and close the position before the U.S. open.

Remember that the ECB interest rate decision is coming up and although it is expected to be maintained at 4.25%, we could be seeing some traders discount a possible rate cut.  Even without the rate cut, there is a high chance of Trichet softening his stance on inflation.  That would add greater downward pressure.

Update: Position was opened at 1.3858 and closed at 1.3758 for exactly a 100-pip gain. Was pretty lucky in almost catching the very bottom.

Today’s biggest event risk – Fed interest rate decision

The currency market will be subject to today’s interest rate decision from the Fed at 2:15pm Eastern Time.  Until then it would perhaps be better to stay at the sidelines except for some quick intraday trade.  Looking at how yesterday’s trade oppportunity evolved for the Euro/Dollar, we could see that the currency pair continues to be highly conforming to the Fibonacci levels.  It consolidated near the 50% line before spiking up to above 1.43.  It eventually bounced up from the 38.2% line and once again at the 50% line and it will likely be a matter of time before it leaves these levels behind.

However, I believe that technical analysis should not completely disregard the fundamentals.  The latter could be complemented by the former by supporting one bias or the other.  As long as there is no other major movement (note that some key CPI data will be released), an interest rate cut by the Fed would be all we need (or a acommodative monetary stance) for the euro/dollar to start a considerable bullish move (at the wait for ECB statements).

Note: Yesterday’s trade opportunity would have produced a 52 pip gain.

Sept 15, 2008 – Fibonacci

Looking at Fibonacci levels on the intraday 15-minute chart, we could see that the currency pair is highly conforming to the support and resistance levels.

The big dollar rally is likely to have temporarily ended at the low of 1.3883 last Thursday when the true possibility of a Lehman fallout became more evident.  I expect the bounce to continue for several sessions as doubts will surge over these liquidity problems extending to other firms.  This bounce could end if crude oil continues to fall but I expect crude to stabilize sooner rather than later.  Looking at intraday trading opportunities, the euro/dollar found support at the 61.8% retracement level to the latest dollar-bullish movement.  It is currently consolidating at the 50% level, from which I expect it to head higher in the short-term.  I would open a long position at the current 1.4188 with a limit order at 1.4240 and a stop order at 1.4110.

Intraday trading opportunitiy - Fibonacci retracements