EUR/USD: Risk Reward Scenarios Favor Short Campaigns

We saw some incredible moves in US yields and It feels like a watershed moment. The steepening of the US curve cannot be ignored, which has also led to the collapse in German vs US 10-yr bond yield spreads. Throw into the mix the struggles from other DM bond yields to keep up the pace of US yields, and the US iS much better positioned to import foreign capital as things stand. The jitters around Italy are also another factor taking a toll in sentiment towards the Euro.

The technical picture, volumes and correlations all point towards further weakness in the EUR/USD, especially after the sizeable bearish outside day, with a close at the absolute lows of the day (no-profit taking taken) after cracking a key level of weekly support at 1.15. Furthermore, tick volume saw an increase on the way down, which only vindicates further the notion of a trend continuation. There will be various market-type players looking to exploit the trend.

For example, in scenario 1, we look into a possible short trade for those momentum-type traders, making the assumption of a conservative target at the 50% fib projection of the latest structure breakout. Subject to one's stop size, this trade may offer the least reward, but at the same time, it guarantees that you gain exposure from the close of the daily candle, which based on the bearish close, may well see momentum traders keep pushing the price to exploit the void area available.

In scenario 2, a cade can be made to go short if one is appealed by swing trading strategies. Logically, one would be expected to place a stop above the latest swing high with some buffer. The entry would coincide with a prior level of support turned resistance, and at a key fib retracement (50-61.8%). This trade would offer a 2:1 risk reward approximately if aiming for the same 50% fib projection.

In scenario 3, it's one that judging by the close of the daily candle looks unlikely to materialize in the coming sessions. If some spike, as the one seen on Wed, leads to a retest of the liquidity area towards 1.1590, a very interesting proposition to engage in short positions could be considered. This type of trade would most likely appear to macro account and value-seeking traders, as it would come at a great area to accumulate shorts while taking out weak-handed players.

Note: Each scenario has been prepared without taking into account your objectives, financial situation or needs or trading plan. Before acting on any information or advice, you should consider the appropriateness of it having regard to your circumstances. Please read our Financial Services Guide and current offer document which is available to be downloaded from www.globalprime.com.au or hard copies may be sent by contacting us on the details provided on this website.