Current Trends in the EUR/USD Currency Pair

At the moment EUR/USD is moving pretty much in line with the US stock market. The S&P goes up, the Euro goes up vs the US dollar. The S&P goes down, the Euro goes down. This relationship won’t last forever, but that’s one of the major themes currently in play for EUR/USD.

Explanation: Growth in the US stock market is seen as a sign of recovery. This means investors are prepared to take more risk, worldwide. Thus, they take their money away from the safety of US bonds and put it into emerging markets. In this process they have to sell US dollars, in order to convert them into other currencies and buy those local non-USD assets. This is the so-called risk trade. This situation has been creating downward pressure on the dollar.

The interest rate differential is another Cours EUR USD key parameter. You currently get an almost 0% return on the USD and 1% on the Euro. This is why the Euro has been rapidly appreciating, up until recently. Right now the market seems to be reassessing the prospects of this interest rate differential.

According to Marc Faber, a well known investor, “the Euro is overbought, the US dollar is oversold, and American and other equities are by and large overbought.”
Marc Faber has often been right.

Does that mean I am going be shorting EUR/USD tomorrow? Not necessarily. Marc Faber may be, and probably is, right. BUT his assessment may not materialize on Monday, October 5, 2009. It may not materialize next week or even throughout the month of October.

Tomorrow I am going to look at the news flow, “event risk” (any major reports, speeches, announcements). I am going to read my institutional research update for the day before the start of the trading day.

Once I have some guidelines in my head for what the EUR/USD price range could look like, I will look at the 1-hour chart, and determine the dominant trend on that time frame. If the 1-hour chart tells me the overall bias for EUR/USD is, say neutral to bearish, I will be trading in the direction of the trend, i.e., shorting EUR/USD.

But I am not going to short it at any level, whenever I feel like pushing a button. It’s a business, so I need a plan.

That plan is to find a good selling price (using 2,20 Bollinger bands, moving averages, and momentum indicators). I am approaching the market with a predefined set of ideas for the day.

It will be a little more difficult on a Monday, because everything is “new”. The market is not “reprocessing” yesterday’s news flow, price action etc. . . People are looking at how other people are positioning themselves.

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