… Taken from my Weekly Outlook Report February 22~26, 2010… After this analysis we saw perfect SELL entries on both EUR/USD close to 1.3700 and GBP/USD 1.5580 area… If you had a chance to read this report before the drop, you’d have been on the right side of the market.
Written on 02/21/2010 just before the risk aversion sentiment on Monday/Tuesday
Last week’s most notable news was probably the surprise rate hike by the Federal Reserve on its discount rate, from 0.50% to 0.75%, which raises the costs of borrowing from banks to other banks. This is not to be confused with the Federal Funds rate, which still remains at the current level of 0.25%.
This surprise discount rate hike, although may not change the big picture much, is considered as a precursor for things to come, and by that I mean the official Federal Funds rate. This is another attempt from the Feds to minimize the impact of the inevitable, the gradual rate hike and monetary tightening policy that is about to come.
Immediate market reaction pushed EURO to yearly lows, despite of fed officials comments that the FOMC is not about to hike interest rate. However, at the end trading on Friday, we saw a huge comeback on the EURO which made the EUR/USD pair at almost unchanged level from the start of the week.
I guess the obvious question is, how should we react to this news? I think the most direct answer is probably the correct one; despite of what anyone tells you, Forex market is driven by speculations, and now the speculation is for an earlier than expected rate hike from the FOMC, and it doesn’t really matter if FOMC hikes the rate, just the speculation is enough to move the market towards a bullish USD for the time being.
Therefore, I think our direction for further drop in the EUR/USD still remains true. As a matter of fact, we should be positioning for long USD on all of our trades as the long-term trend. And when we go against the trend, make sure to exercise caution as the trend is usually our friend.
One may argue that what took place on Friday with the rebound in EUR/USD may represent a certain degree of uncertainty, but I like to look at the context of the market. I’ve noticed that most of the rebound took place after the closing week of the European market, which is normally the case with a Friday trading day, combined that with a generally lower liquidity in the market and the tendency to take profit before the weekend, most of the rebound could be considered as normal order flows on Friday.
The real test should come on early Monday / late Sunday trading, which should start at the commencement of London trading. If there is support for European currencies, we should see this trend likely to remain true; however, it is my opinion we will have a great chance to enter on a SELL trade given the fact that both EUR/USD and GBP/USD have retraced significantly, giving us much better entries…
- SELL EUR/USD on significant up moves
- SELL GBP/USD on significant up moves
Another interesting trade that I’d like to focus on is the AUD/NZD trade, which once again approached to the significant highs close to the 1.2900 area. Of course anything above the 1.2800 could be considered as good entries, and I look forward (as I have entered myself) to stay in this sell trade for the next 2 weeks to 2 months, depending on how the market reacts:
- SELL AUD/NZD above 1.2800
As far as the USD/CAD trade that we’ve taken last week on swing trades, it still remains viable should the market push the pair above the 1.0400 this week. If it stays below the 1.0400, I’d stay away and wait for it to drop towards the 1.0200~1.0250 area…
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