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Trading Diverging Monetary Policies: EURUSD In "The Sweet Spot"

FX:EURUSD   Euro Fx/U.S. Dollar
1183 6 8
There are occasions where central banks policies diverge, either by one being hawkish the other being dovish, or by one being less accommodative while the other leans to provide further easing, in general these diverging moments are cyclical habits of markets, they come in various and actually unlimited ways and tastes, where the divergence of central banks policies is just one example.

These occasions usually provide a great medium term trading opportunities and I like to call it the sweet spots. However; for those opportunities to turn out effective, short term price fluctuations triggered by surprising economic, political or geopolitical inputs should be discarded or ignored, as market will tend to correct itself in line with monetary policy.

Finally, those trading opportunities are mainly applicable under normal market conditions, thus in the times of turmoil and abnormal economic or political events; when the fear factor dominates the scenes markets tend to be irrational and derived by haven demand.

To clarify more; I will illustrate the idea by a potential real time example, the EURUSD:

The ECB: The recent ECB meeting triggered a major sell-off, as the central bank was extremely dovish, decided to be more supportive cutting interest rates, and hinted ready to do more if needed, as the ECB sights risks of deflationary pressures are the main threat to the EU.

On the other hand,

The Federal Reserve: I believe the FED is at the end of its easy policy cycle, the effect of government shutdown wasn't that harmful as earlier expected, jobs data are surprisingly solid within the past months, and the FED had already hinted that its starting tapering soon.

Technically Speaking, the EURUSD             has broken its four-month ascending channel, indicating further debasement in the near term, probably towards its main longer term ascending trend line, which if broken may signal further long term downside. Technical notes and targets are outlined on chart.


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GSteel
3 years ago
Excellent analysis and reasoning, here here.
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