EUR USD WEEKLY TRADING STRATEGY FOR WEEK BEGINNING 4th June 2012

THIS WEEKS KEY DRIVER’S:

§  Any comments of Fed officials suggesting QE 3, especially Bernanke.

§  Eurozone and Euro area Services PMI on Tuesday.

Hence overall trend for this pair is determined by “risk on” and “risk off” sentiment of markets.

Fundamentals:

This week seems to be critical for the financial markets, last week’s weak's employment figures from US suggested that the problems of the Eurozone seems to have spread into the US economy. Last week USD gained versus all its counterparts but Japanese yen until Thursday, however Fridays dismal NFP report resulted in dollar negative, bringing the probability of QE 3 back again on the table.

Next week we have speeches from Fed officials throughout the week, which could create additional volatility in the market as any comments even accepting the slowdown of the US economy could be considered in favor and could result in weak US Dollar.

However the possibility of the QE 3 is under question, as currently despite of dismal US fundamentals the current flow of investment into the safe haven US Treasuries has fuelled the dollar demand. Now currently 10 year US treasury stands 1.45% which after adjusting for inflation shows yield of -0.60%. This means that the investors are paying the US government to park their funds at the time of this financial uncertainty.  This seems to be another argument against the feasibility of QE 3.

German bund and Swiss bond yield dipped below positive territory last week. Growing Eurozone uncertainty has resulted in repatriation of Japanese funds resulting 3yrs bond yield lower than 1 year for the first time. Analysts have argued against the Euro stating the CFTC report stating record short position in the single currency since the inception of the currency and may be the currency has been oversold as all the poor information now reflects in the price. However arguing to this, analysts suggest that the the CFTC report is not widely received by broad audience, we may see further short positions in the pair.

Current trend is highly correlated with the activity (or inactivity) of the ECB. Any decision made by ECB could result in the movement in favour of the Euro as the market players will interpret as a positive signal and would result in the "risk on" mood of the market. However, deteriorating banking situation in Spain and possibility of Greek exit from the Euro could result in further weakness for the Euro (provided the inactive ECB). As seen from previous instances in Ireland, Portugal and Greece, ECB has always been an 11^th hour helping hand and analysts across the market suggests that the worst is not over yet . This could mean that further weakness in the single currency is underway.

However technicals contradict the fundamentals. US Dollar index suggests that the bull run is losing its steam and is due for a dip. My trading model suggests to go long on this pair as the left leg formation on Friday was against the week’s trend. 

Technical’s:

·         Support and Resistance levels:

R3 – 1.2490

R2 – 1.2450

R1 – 1.2390

Now – 1.2325

S1 – 1.2300

S2 – 1.2230

S3 – 1.2200

Summary:

Overall, due rising probability of QE 3 in the US there could be a wave of dollar negative before the Greek election in 2 weeks time as logically nothing can rise straight up and is subject to correction. Fridays left leg formation signalled the above argument and hence this week I will go long on the pair in Asian market and ride the wave in the Asian time as they are yet to act on weak employment report from the US.

Take profit and Stop Loss is according to the above levels.

Note: Less leveraged position of this week as risk in the market is very high.