EUR/USD Weekly Outlook 7/27 thru 8/1 2008

July 28, 2008 at 5:30 am Leave a comment

By FX Insights Moderator

This week’s fundamental calendar will prove to further complicate things for the EUR/USD as we’ll be trading in very ill-liquid conditions with the addition of monumental economic data for both the euro and dollar. 

In my view I see the USD at risk this week as there’s more overall growth, manufacturing, inflation, employment, and consumer data coming out of the U.S. compared to Europe. 

Last week’s market conditions and real-time price action showed the first real effects of what it’s like to trade during the summer session. I expect the same exact summer session conditions to persist this week. 

Money flows are not at the volume that creates orderly market conditions and liquidity is extremely low which adds a level of uncertainty to overall price direction. The underlying fundamentals of the market will rule the day.

Last week we saw a dramatic sell-off in commodities. Oil has come down from high’s at the $147 level to test lows at the $120 level. Gold is off significantly from highs at the $975 level all the way down to the $920 level. I believe oil and gold are due for some upside retracement, but this will largely depend upon how the market’s decide to react and respond to this week’s fundamentals.

Despite the massive sell-off in oil, U.S. equities struggled last week and the euro was unable to sustain a break of the 1.5650 level and showed no signs of even being able to test the key 1.5600 level. This is to be noted. 

In my view the market is telling us they are not ready to move into an extended dollar long bias and they are ready to keep buying the euro as long as the dollar fundamentals remain to the downside. 

Should the USD fundamentals shock to the upside this will certainly serve to ease the market’s mind and give them greater comfort to buy dollars and sell euros. 

The continued turmoil in the U.S. financial sector is going to weigh heavy on the dollar. Over the weekend the FDIC had to take over two more institutions that went bankrupt. First National of Nevada and First Heritage N.A. were shut down and taken over by the federal government in a move that was mostly to prevent another scene of angry customers standing in line waiting to pull out every penny they have. 

Those are not the kind of images the government wants to be broadcast on the evening news. There will be more bank failures, this you can be assured of. And just wait until the banks in Europe start to fail… when those lines of angry customers form outside of European banks you better be short the EUR/USD… 

NFP:

So, we have low liquidty, sporadic money flows, choppy price action, and our favorite fundamental event: Non Farm Payrolls. NFP weeks are always different than the other weeks and you can expect the advent of Friday’s NFP to only make things even wackier. 

Economists are forecasting anywhere from a net job loss of -45K to as much as -82K. All of the banks do their own independent NFP forecasting which can make it difficult to gauge how the market will respond. 

The risk during an NFP week, especially when liquidity is low, is when the banks decide to position themselves for Friday’s NFP and Unemployment data. The moves you see on the run-up to NFP are almost meaningless to how Friday will playout. 

The point is, expect the unexpected this week because of the NFP factor and as we draw closer to Friday minimize your risk exposure, and please, do not try to trade NFP. 

EUR/USD:

I still have some euro longs open that I took last Thursday and I intend on keeping those open for now. Obviously the market’s not even opened yet but in my view I believe we need to make another run at the 1.5800-1.5850 level again. 

This week’s fundamentals certainly can provide all the fire power the market needs to push the euro back up to test the top of the range. As far as trading goes, I will continue to short the euro rises and I will continue to buy the dips. This gameplan has worked beautifully all summer long and I see no reason to change things up at this point, but I will be more cautious and likely on the more conservative side this week because of the liquidity situation and NFP. 

To be honest, I really have nothing groundbreaking or brilliant to say about the euro right now. For me, I’m mostly going to depend on what the real-time price action is telling me, what the market corrrelated variables are telling me, and what the outcome of each day’s fundamentals are telling me. 

The market will tell me what it wants to do, so I will be patiently waiting for the message. If I don’t like what I see or the price action is not behaving properly, I’ll sit on the sidelines and wait until I see my price. I can go days without taking a trade if I have to. 

Key Levels


Key upside levels: 

1.5732
1.5754
1.5777
1.5789
1.5804

Key downside levels:

1.5683
1.5662
1.5648
1.5622
1.5601

A repeated failures at the 1.5720 level will open the doors for sub 1.5700 testing. There will be stops sitting between 1.5740 and 1.5760 and then between 1.5780 and 1.5800. 

Don’t forget we have German Consumer Confidence which should print at or below expected and then Mishkin speaks later today. The market is severly ill-liquid which means we’ll likely see choppy price action and volatile price swings when London opens and through the NY session.

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