As it slips for a sixth straight day, the euro is fluctuating. Nonetheless, it’s the longest losing streak for the single currency since Apr. 6.
All this is happening ahead of Thursday’s ECB meeting. Bulls are worried about it whereas bears are eagerly anticipating the aftermath.
Consensus has the ECB holding rates, but indicating that downside risks have intensified, suggesting additional easing is on the table before the year is out. Popular opinion expects the common currency will be further pressured.
The ECB is concerned about the rising euro as they try to stoke economic growth in the eurozone after lockdowns, which were meant to slow the spread of COVID-19 in Europe. The euro’s current strengthening is expected to trigger another cut in the central bank’s inflation forecast, lowering the ECB’s target, which is now just under 2 percent.
However, the ECB plays second fiddle to the all-powerful Federal Reserve, which is trying desperately to reignite the world’s largest economy which has also been hammered by coronavirus lockdowns, via aggressive stimulus measures, upending the Fed’s decades-long inflation policy, and in the process deliberately weakening the US dollar.
Ahead of the Fed’s juggernaut, we believe there’s little European policymakers can do to alter their currency’s trajectory, since it’s priced against king dollar.
Of course, we don’t actually know what will happen. But the technical charts are forecasting better odds for a continued euro climb, despite what the ECB might wish.
The euro has indeed been falling for six consecutive sessions–from the top of a short-term rising channel since August, complementing the long-term ascending channel, supported by the 50 DMA in place since the May lows. In other words, notwithstanding the number of sessions during which the single currency has dropped, it still fits well within the uptrending pattern.
Note, the euro climbed from Aug. 11 through 18, which was also a six day run. Therefore, from a technical perspective, the current decline is considered nothing more than a corrective dip within an uptrend, both short- and longer-term.
Another key factor: the euro’s descent has been slowing, with repeated pushbacks against the bottom of the short-term rising channel. The 1.1800 level provides an ideal long-entry position, from a risk-reward perspective.
Conservative traders would wait for evidence of demand, with at least one long, green candle, then wait for its successful retest. Finally, they’d wait for the price to return to support, for a close stop-loss. All these hoops conservative traders must jump through might never materialize, of course, meaning they may well miss the trade. But that’s why they’re conservative…they only want the safest trades.
Moderate traders, like conservative peers, would wait for the long green candle and for the potential dip to follow, for a better entry, if not for demand confirmation.
Aggressive traders may buy at will, if they know and accept that each uptrend ends at some point, and even if it doesn’t, it may whipsaw. Therefore, money management is just as important, if not moreso. Here’s an example:
- Entry: 1.1800
- Stop-Loss: 1.1750, below the Aug. 21 low
- Risk: 50 pips
- Target: 1.2000 – psychological, round number, below the Sept. 1 peak
- Reward: 200 pips
- Risk:Reward Ratio: 1:4
Author’s Note: We’re referring to this as a trade sample for a reason. It is not guidance on a specific trade. To trade this asset (or any other for that matter) you must read and understand the post. We do not claim that this is the one correct way to handle this trade. We are merely providing the basic parameters for a coherent trade plan. Feel free to tweak the salient points to suit your timing, budget and risk temperament.
For example, a stop-loss at 1,1780, below the Sept. 4 low, renders risk-reward ratio 1:10. While that’s obviously a better ratio, you’ll walk away with nothing if the stop-loss is triggered before the euro makes its big move up. But that may well work for some traders.
What matters for profitable trading is consistency and statistics, not a single trade.