DailyFX.com - Euro Continues to Offer Range Trading Opportunities

Euro Continues to Offer Range Trading Opportunities

Fundamental Forecast for Euro: Neutral

  • Euro seems likely to hold in tight range as long as this level doesn’t give way
  • One-sided retail crowd positions versus the US Dollar and Japanese Yen warn of bounce
  • Have a bullish (or bearish) bias on the Euro, but don’t know which pair to use? Use a Euro currency basket.

The Euro finished near four-month lows versus the Dollar, but the lack of volatility in recent markets makes it unlikely it breaks significantly lower. We’re watching key event risk for a potential breakdown.

A relatively empty European economic calendar leaves focus on the upcoming US Federal Open Market Committee meeting, and any surprises from the Fed could force major USD pairs out of their recent trading ranges.

It’s almost a given that the FOMC will taper their Quantitative Easing purchases by a further $10 billion through their decision. Thus instead of the actual decision traders will focus on official statements, changes in Fed inflation and growth forecasts, and the press conference to follow the announcement. Of particular interest is whether the Committee hints at the timing of future interest rate hikes.

Interest rates are especially important for the Euro as traders have sent it to multi-month lows on the widely-expected European Central Bank rate cuts. The fact that the US Federal Reserve is headed in the opposite direction helps explain why the EURUSD trades near key lows. Yet clear uncertainty in Fed forecasts leaves ample room for disappointment and potential for Euro volatility.

Any major FOMC surprises could ultimately force the Euro out of its recent range versus the Dollar. Yet FX options markets show volatility prices continue to trade near record-lows, and recent price action offers few clues on when volatility might return. Even a sharp two-day sell-off in the US S&P 500 and broader global equities wasn’t enough to drive the safe-haven US Dollar above key resistance versus the Euro.

The lack of volatility and conviction thus keeps us focused on buying the Euro near support, selling near resistance. Our Senior Strategist warns that a close below $1.3520 could spark a larger decline, but until then watch for the Euro to remain in a tight range versus the Greenback. - DR

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