[Closed +49 pips] An Option to Trade Early in the Week
Trade details…
Sunday, 25 August, Week 35
This trade plan offers a comprehensive analysis of the EUR/USD currency pair, exploring its recent performance, influencing factors, and potential future trajectory. The plan examines the euro's recent surge against the US dollar, assessing the driving factors and potential for further upside. It also explores the technical aspects of the pair, identifying key support and resistance levels that can be used to develop a trading strategy.
The near-term outlook for the EUR/USD is captivating, with several pivotal events on the horizon that could significantly impact the pair's direction. This plan highlights these events and analyzes their potential impact, providing traders with a roadmap for navigating the uncertainty ahead. For the purposes of this trade plan, "near term" refers to a five-day outlook, "short term" refers to a six-week outlook, "mid-term" refers to a six-month outlook, and "long term" refers to a five-year outlook.
Understanding the Currency Pair
The EUR/USD currency pair, representing the exchange rate between the euro and the US dollar, is among the most actively traded in the forex market. Traders engage in EUR/USD trading for various reasons, including speculation, hedging, and arbitrage. Liquidity is typically high due to the large volume of transactions involving these major currencies. Factors like economic data, central bank announcements, and geopolitical events can significantly impact liquidity. The value of the EUR/USD pair is influenced by interest rate differentials, economic growth prospects, market sentiment, stock market performance in the Eurozone and the US, bond yields, and commodity prices, particularly oil.
Trading involves a possibility of losing money therefore all decisions in market speculation are undertaken at your own financial risk.
Recent Price Action and Influencing Factors
The EUR/USD has been climbing over the last five days and is currently in an uptrend over the last six weeks. The upward momentum observed in both the five-day and six-week periods suggests a consistent bullish sentiment surrounding the euro.
Several factors have contributed to the euro's recent strength. The US dollar has weakened following Fed Chair Jerome Powell's speech at Jackson Hole, where he hinted at potential interest rate cuts by the Federal Reserve. In Europe, central bank officials have also hinted at possible rate cuts, as shown by minutes from the July meeting. Eurozone wage growth slowed to 3.55% year-on-year in the second quarter from 4.74% in the first quarter. Although business activity in the Eurozone remained strong, especially in services, Germany’s PMI showed a contraction in economic activity for the second consecutive month.
Key events that have influenced the EUR/USD pair during the previous six weeks include the release of the Eurostat flash estimate for Q2 GDP growth, which was revised upwards from 0.6% to 0.8% for the EU, suggesting a slightly stronger recovery than initially anticipated. However, the German economy unexpectedly contracted by 0.1% in Q2, highlighting the uneven nature of the recovery across the Euro-Area. The release of the Eurostat flash estimate for July inflation showed a slight upward revision from 2.4% to 2.6%, indicating that inflationary pressures may be proving more persistent than initially anticipated. The German unemployment rate rose to 6% in July, the highest since May 2021, indicating potential weakness in the labour market.
Outlook
In the short term, the EUR/USD is likely to continue its uptrend, potentially testing the 1.13 level. Conviction in this outlook is moderate, as the pair's upward momentum could be challenged by profit-taking or a shift in market sentiment.
In the near term, the EUR/USD is likely to remain bullish, potentially reaching the 1.125 level. Conviction in this outlook is high, as the pair's recent strength and the potential for further US dollar weakness support a continuation of the uptrend.
▲: The EUR/USD could move up in the near-term if the US dollar weakens further following the release of economic data that supports the case for a Fed rate cut.
▼: The EUR/USD could move down in the near-term if the Eurozone economic data disappoints, raising concerns about the region's growth prospects.
Upcoming Pivotal Events
German Ifo Business Climate Index (Monday, 26 August, Week 35): This index provides insights into business sentiment in Germany, the Eurozone's largest economy. A better-than-expected reading could boost the euro, while a weaker-than-expected reading could weigh on the currency.
US PCE (Friday, 30 August, Week 35): The PCE is the Fed's preferred inflation gauge, and a weaker-than-expected reading could strengthen the case for a Fed rate cut, potentially weakening the US dollar and supporting the euro.
Trade Thesis: Capitalising on Euro Strength
Based on the current bullish sentiment surrounding the EUR/USD, a potential trade opportunity exists to buy the pair on a dip towards the 1.109 level. This level represents a previous support area and could act as a springboard for further upside.
A stop-loss order could be placed at 1.089, 200 pips below the entry level, to limit potential losses.
A potential profit target could be set at 1.1250, a previous resistance level that could be reached in the near-term.
A more ambitious profit target could be set at 1.1300, a level that could be reached in the short-term if the euro's upward momentum continues.
Overall, the trade plan presents a compelling opportunity to capitalise on the euro's current strength against the US dollar. Conviction in this trade is high, as the fundamental and technical factors align to support a bullish outlook for the EUR/USD.
Sources
Bloomberg
Newsquawk
Trading Economics
European Central Bank
Federal Reserve
U.S. Bureau of Labor Statistics
U.S. Census Bureau