How to effectively trade this week’s ECB announcement
The Euro has been among the weakest currencies since the start of the year amid the political and existential risks that will be surrounding the Euro area this year.
However, the main drivers of how the Euro trades in the next few months will probably continue to be Dutch and French polls on the Presidential elections. Huge existential and political risks are looming over the EU this year, and as a result, the Euro remains a sell as long as those political risks exist. A short-term sentiment driven bounce in the Euro will be a good chance to enter short at better levels, particularly against the US Dollar.
With that in mind, the ECB should keep monetary policy unchanged at their meeting this Thursday. Although inflation reached the 2% target last week, the ECB is unlikely to start talking about tapering the QE program just yet, as political risks combined with a fragile recovery are unlikely to respond well to monetary tightening. In addition, the ECB can cite the undershoot of inflation for several years as a reason for not rushing to tighten monetary policy.
All this supports a weaker Euro in the next several months and long-term traders should look for opportunities to position short on the Euro.
So, how do we trade the ECB this week?
The current Euro sentiment in the market is very bullish. However, it’s not so much because of the core fundamentals, but rather it’s likely to be a short-term relief bounce after the sharp slide in February.
Taken this into consideration, any rebound in the Euro on the ECB announcement will be unlikely to last long, especially given that Netherlands’ and French’ election campaigns will start soon which will bring the political risks to the surface again. If another country votes to leave the EU after the UK we could see a similarly sharp drop in the Euro to the one we witnessed in the British Pound last June after the Brexit vote.
So, what are good price levels to take trades in the EURUSD this week?
Technical picture EURUSD:
The double bottom formation on the daily chart suggests that a break higher is more likely followed by a move to 1.07 (which is the resistance trendline of the 6-month bearish channel). However, longer-term any rallies in EURUSD should be sold, and the 1.07 area is a very good place to do so.
EURUSD daily chart- in a 6-month downtrend
A closer look at the daily chart shows that the pair is already pressing on the resistance trendline, hence a bullish breakout is most likely here in the near-term.
EURUSD Daily chart zoomed in – The recent bearish channel (in blue) will likely be broken this week, but resistance is near at 1.07 – 1.0730
Now, let’s see how we can trade the pair from the long side this week.
If the bullish breakout of the channel (in blue on the chart) materializes, then that will be a great opportunity to enter long with a tight stop and target the 1.07 resistance trendline as we said earlier.
EURUSD 4h chart – Going long on an upside breakout can yield 100 pips
This trade can potentially yield a profit of 100 pips. The stop loss should be placed right behind the broken trendline of the channel. The trade would be invalidated if the price returns back inside of the broken channel.