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Outlook for the EUR/USD this week

The tricky trading conditions of last year, seem to have continued into 2011, with last week’s volatile price action with the euro summing up the current trading picture, with currencies swinging from bearish to bullish within a few days. Nothing new there you might say, which is certainly true, but last week’s price action on the euro was exceptional by any standards, with the single currency having its best weekly performance in two years.

However, despite this, the euro dollar along with many other pairs are currently range bound with the EUR/USD oscillating between 1.29 to the downside and 1.35 to the upside, closing on Friday evening at 1.3387, as the pair once again attempted to break out of this narrow range, where we have remained since mid November. The question now of course, is whether we are likely to see a breakout next week, and if so, what are the likely factors which could trigger such a move from this range?

Let’s start by looking at the fundamental picture for Europe, and next week of course sees the regular monthly meeting of EU finance ministers, who will once again be wrestling with the sovereign debt issues, but despite this, the meeting has the potential to generate some more positive news for the euro, provided the ministers are able to agree a permanent solution to this issue, and if so, would provide some additional momentum for the euro following last weeks surge higher. However, that said, there is also a strong possibility that no firm agreement will be reached ( or indeed one that the markets consider ‘firm’ ) and the meeting may be difficult, given the comments on Friday from the German Finance Minister who made it very clear that Germany was opposed to the ‘Euro Bond’ option, which is the most viable of the longer term plans on the table at present.

Meanwhile the bond auctions of course passed off relatively well last week, with Portugal’s debt auction oversubscribed with a yield of 6.7%, below the 7% target which has been suggested is the level at which a bailout package will be required, and coupled with Jean Claude Trichet’s hawkish comments on Thursday regarding the ECB’s concern over inflation in Europe later this year, all helped the euro higher and recover from the 1.2864 low at the start of the week.

From a technical perspective, the EUR/USD closed on Friday with a shooting star candle, which touched an intraday high of 1.3457 before closing lower, and leaving a third consecutive bearish candle at this level, where we saw the pair pull back in both December and earlier in the month. As such, this is now a potential area of strong resistance on the daily chart, and given the bearish signal, coupled with the recent failures at this level, this could indicate a potential turn lower once again, following the pattern of two weeks ago. However, for this to be anything other than a temporary reversal lower, one of the above factors will need to play in the background, and of course, there is always the potential for a shock, with one of the ailing nations such as Belgium defaulting on its loans.

In summary, a tough call next week, and one that could see whip saw trading conditions in a wide range, particularly on Monday with the US markets closed, and with the EU meeting getting into full swing. So for this week, tight stops, small profit targets, and momentum trading is the order of the day, rather than any longer term trend trading opportunities – no doubt those days will return, but not in the short term, and certainly not next week!

Why not join me in one of my FREE live training rooms – I look forward to seeing you there – Anna