The Nature of Risk

The most important currency pair might be getting ready to break lower from its bearish technical consolidation.

Where to go from here?

The most-traded Forex pair has been digesting a historic waterfall decline for the past more than half a year. In March, the sentiment got so negative towards the Euro that everyone was convinced it will hit parity with the greenback in days. On the back of that sentiment, the common currency quickly rallied 10% and since then the pair has been trading in a narrowing consolidation pattern. The only notable deviation from the pattern happened near the stock market mini-crash late August when the Euro spiked to almost 1.18 in a frantic short-squeeze panic. After that, it took only two days to get back in the pattern making this a “beautiful” bull-trap, although not so beautiful for those bulls who got trapped there…

During the current stock market rally, which is supposed to price in a more dovish FED, the Euro tried to break above the upper resistance line but up until now it was always pushed back aggressively.

What’s next? Well, the question mark in the title of the post is to be taken seriously here, as central bankers are talking/acting/panicking all over the place. The best clue we have that the long-term trend is still down and the consolidation looks clearly bearish. And as we are at the top of the pattern, now it could be a good idea to enter a short position; even if the euro finally rallies, a relatively tight stop can be used. My best guess is somewhere above 1.15 with a first target around 1.09 to 1.10 giving traders a fair risk/reward ratio. Retesting and even breaking the lows is a distinct possibility as the dollar remains the least ugly of the currencies out there.

Looking at the other side, the most bullish scenario would be a quick drop breaching the 50-day MA, followed by a violent snapback that can be so familiar for Forex traders who are used to the stop-hunting raids of big players.

All in all, I wouldn’t bet the farm on either of the sides, but I am slightly leaning towards the bearish outcome because of the fundamentals and my utmost respect for trends… Anyway, remember that Forex markets are very choppy and that leverage is NOT your friend.

Have a great weekend!

StockMate