Last week we talked about why we moved away from our original AUD/USD trade and looked to move to a EUR/USD short trade based on new information released from Europe. Anyone who has read Europe’s economic reports the past several weeks knows the news has been less than stellar. Weeks ago there was the announcement of a positive resolution on the Greek debt issue. Then Greek protests nixed support for that plan and helped to destabilize the European Union. Serious debt issues facing other nations like Portugal and Ireland only added to the fire. These were all issues that might have been overcome until Italy jumped into the fray.
Italy proved to be a huge problem that could not be easily dealt with. The news of Italy possibly needing a bailout has caused a lot of panic. Italy is too big to fail but they are also too big an economy to bailout if it comes to that. Rumors of Italy’s potential problems even led to Germany and France discussing trimming the Euro-Zone. This instability has hurt the Euro considerably and all but eliminated the Euro’s chances of gaining strength over the US Dollar in the short term and maybe even in the long term. Because of this further weakening of the EUR, we need to assume that the EUR/USD currency pair is going to continue to drop.
We talked about entering short on the EUR/USD if the price for this currency pair drops below 1.3143. While we have not seen that mark yet, the downward trend of the EUR means it might only be a matter of time. Having the false “good news” of a Greek debt deal resolution a few weeks ago crash and burn was bad enough. Add in Portugal, Ireland, and now Italy, and the stage is set for disaster. France and Germany discussing the split of the Euro-Zone only further complicates the matter. For whatever struggles the USD might be experiencing due to lackluster job creation or other economic factors, the situation in Europe is far worse.
What does this mean for our trading opportunity? First and foremost always remember our 1.3143 mark. This is the value that indicates a likely strong trend downward. If we do not cross below this value then we do not jump into the trade. That trigger point is the most important part of this trade because it is a significant support level and a failure to hold that level is very bearish.
We will keep watching the major news reports to see if there are any major economic reports that further strengthen the US Dollar. We were also looking at any economic reports showing more pessimism with the Euro-Zone. Aside from the normal economic reports that come out regularly, we also want to carefully follow any news of further European debt issues.
The idea behind our trade is that the EUR is going to continue to weaken while the USD will be stronger in comparison. The news stories regarding Europe’s debt at this point are not good. As long as these issues are still taking place, there is little chance that the EUR is going to gain in strength against the USD. A split of the Euro-Zone counts as bad news as does any news of another bailout or rejection of austerity measures by any afflicted European nation.
As these news reports continue to raise strong pessimism against the EUR, it’s also important to watch for positive US economic reports. These will have the same effect since a stronger USD will also results in the EUR/USD dropping. A high GDP or jobs report for the United States will help to get us towards our desired entry point just as much as another negative debt report coming from the Euro-Zone. That 1.3143 entry point is key. It does not matter what fundamental news reports get us there.
The recent failed bond purchase plan in Germany only strengthens the belief that Europe’s debt issues might already be out of control. Germany attempted to sell debt bonds as a way of raising money but in a completely unforeseen twist, the sale failed. This unexpected result has caused many economists to believe the Euro-Zone cannot survive in its current form. If they’re right, then it’s only a matter of time until we hit our entry point and pounce for the kill. But right now is time to lie in wait.
In summary, as the EUR/USD continues to drop in value, we are preparing for the perfect point for a short sell which is 1.3143. All indicators seem to be that the United States can remain stable or increase in strength while the Euro will continue to weaken as the worst has yet to come. When the time is right, you will want to jump on this trade. That time is going to be sooner rather than later, so keep an eye on the charts and sell short in at that 1.3143 mark. Use a stop loss of 1.3203.