Top Trade Idea for July 10th, 2013 – EUR/USD
This is one of the worst performing dollar pairs over the past week, and since giving up the 1.30 handle it looks extremely vulnerable. The fundamental back drop for the Euro continues to deteriorate:
The IMF expects Euro-area growth to fall by 0.6% this year, compared to an increase of 1.7% in US GDP.
The ECB has adopted forward guidance and expectations are rising that the Bank could confirm that monetary conditions will remain accommodative for some time. In contrast the Fed is tapering.
European banks are not disposing of dollar assets at such a fast pace as they have been in the last 2 years, which helped prop up the EUR during that time.
Although the Eurozone has a current account surplus, it looks like it may have peaked; in contrast the US current account deficit continues to improve.
While the medium-term outlook is euro negative, EURUSD is looking extremely oversold in the short term. Instead we prefer the patient approach. There are some big event risks coming up for this pair later on Wednesday: FOMC minutes and a speech by Ben Bernanke. If both are slightly more dovish than the market expects we may see the dollar sell-off in the short term.
Any move in EURUSD back to 1.2895 – 1.2910- a key resistance zone and top of the weekly Ichimoku cloud, could be met by selling pressure. The break below 1.2850 – the long-term trend support from November 2012, was a kick in the teeth for EURUSD bulls. A break below 1.2750 is a medium-term bearish development for this cross because this is a noted level where corporate hedges kick in. If corporates have budgeted for the EURUSD rate to be 1.30, at some point they need to hedge their positions, which is EUR negative. Below 1.2750 things could get ugly, key support zones include the 1.2660 low from November 2012 and then the July 2012 low at 1.2050. If EUR recovers and breaks above 1.3050 – the 50-day sma – this would suggest that the downside could take longer than we anticipate to materialise and we would abandon the idea.
About Kathleen Brooks
Kathleen Brooks is research director at FOREX.com. She produces research for FOREX.com clients. Her views on financial markets, economics and politics are regularly quoted in the global financial press and she is a familiar face to many as a regular on business TV including CNBC, Bloomberg, BBC, Sky News and Fox Business both in the UK and further afield. She also presents weekly webinars for FOREX.com and FX Street and has spoken at FX and finance conferences around the world including London, the Middle East and Australia.
Kathleen is the go-to person for clear, concise commentary on breaking financial and economic events. She detests jargon and believes that financial market knowledge should be easy to accumulate and available to all. As one of the UK’s most respected female commentators she is regularly contacted for her view on markets including FX, equities and commodities.
Area of expertise: Kathleen is an all-rounder with a great knowledge of global economics, finance and all markets, although FX holds a special place in her heart! She is also the author of Kathleen Brooks on Forex, available now on www.amazon.com