IS EUR/USD FINALLY READY TO GO TO PARITY 500 Pip Move
In this week’s article, I would like to discuss the Euro. Here at Platinum Trading, we have been saying for the past 2 and a half years that EUR/USD has no other option but to go to parity.
Well, if you have some experience in trading, you will agree that nobody has a crystal ball to know what is going to happen next in the markets. We can only do so much and the rest is down to the forex market.
SO HOW IS IT THAT WE CAN SAY WITH SO MUCH CONVICTION THAT EURO IS GOING TO PARITY?
Here at Platinum, we study the Fundamentals in detail. We trade raw technical price action in the charts but we build our case on the Fundamentals as well to get the perfect entries for our trades.
Fundamentally we have Central Bank divergence in the EUR/USD. What does that mean?
It means the central bank policies and the economies of the European Union and the United States, the 2 entities which form that currency pair, are moving in opposite directions.
While the FED (Federal Reserve) is increasing rates and the United States Economy is a hot cake, the ECB (European Central Bank) is stuck at negative rates and still trying to finish its QE (Quantitative Easing) program and the European Union economy is a mess. So to put it in very simple and easy to understand terms: The US Dollar strengthening (going up) and the Euro is weakening (going down).
Let’s break down what is going on in both Economies before we present a technical chart for you as it will make it much easier for you to understand in the end.
FED and the United States current Scenario:
After a long and slow recovery from the 2008 crash which started almost a decade ago now, the United States economy is finally booming. The labour market is at full employment, the inflation rate is rising and households are optimistic. Manufacturing firms and homebuilders are benefiting from increasing activity. The economy is poised for stronger growth in the year ahead of us.
The overall unemployment rate reached just 4.5% last Friday 7th April 2017, while unemployment among college graduates is only 2.4%. Average hourly earnings are on average 2.8% higher than they were a year ago. The tight labour market and rising wages are inducing some people who had stopped looking for work to return to the labour force, boosting the participation rate.
What can easily point us to that the economy is at full employment is increasing rate of inflation! The “core” consumer price index (which omits volatile energy and food prices) has reached an annual rate of 2.2%, unarguably higher than the 1.8% average during the past three years. During the most recent three months, core inflation rose at a 2.8% annual rate.
Household wealth is also increasing. The price of homes, the most important asset for US households, rose by 5% during the most recent 12 months. The rising stock market has caused the broader measure of net worth to increase even faster.
Since Trump was elected back in November 2016, the US Dollar has been enjoying a ride in the charts and as result of all that was mentioned already, Janet Yellen, the FED Governor, has decided it was time to act to control the increasing inflation and started increasing the Federal Funds Rates. The demand for US Dollar is on the high at the moment.
ECB and Europe current scenario:
Europe, on the other hand, is currently facing every problem a country, or in this case, a block of countries can face. The 2 major and most important are “The Greece debt problem” and most recent “Brexit”.
Populist voices in Europe have grown, and last June the U.K. vote to leave the EU surprised markets and the pound dropped to a more than 30-year low against the US dollar.
The EU and Greece appear to be getting close to an agreement that will free up another payment portion that will allow Greece to make a large debt payment to its official creditors that becomes due in a few months. Greece’s 10-year bond yield fell 19 base points to 6.86% last week. The yield peaked two months ago near 8.10%. It began the year near 7.10%. However, one key piece of the puzzle is missing: The IMF.
Blocking the IMF from participating in new lending to Greece could come at an awkward time for Germany given the national election in less than six months. Also, while there is awareness of the French presidential contest, few have focused on the legislative election in June. Neither of the leading candidates (Macron and Le Pen) commands a bloc in the current legislature. The French premium over German is elevated even if stable in recent weeks, but it is likely to persist for much of the second quarter.
In France, anti-EU candidate Marine Le Pen still ties with centrist Emmanuel Macron in leading the polls for the first election round, but Macron is expected to win by a greater margin in the second round. Meanwhile, in Germany, pro-Europe candidates lead the polls for the September chancellor election: Angela Merkel faces former European Parliament President Martin Schulz.
To add up to that bill, we have Brexit which is now officially happening. As I have said before in our Platinum trading floor, no divorce ends up well. Both parts want to be right and will do whatever they can to get out better off than the other part. Europe is under so much pressure at the moment and in the near future Euro as a currency seems to have only direction: DOWN
The EUR/USD trade:
Now that we have discussed a bit about the Fundamentals of the 2 economies involved in this currency pair, let’s look at what the charts are telling us:
From a technical perspective, we can gather that EUR/USD was consolidating between the prices of $1.1600 and $1.0500 for the years of 2015 and 2016 after a 3500 pips drop which started in May 2014. In December 2016, we finally manage to break free from that range but here at Platinum, we knew we would have a last attempt of this market to push prices higher. This was just the institutions playing their game to get a better entry level for their orders.
When everyone was thinking that the EUR/USD was breaking up, they got in. A lot of retail traders were caught up in that false break at the $1.0900. If you look at a weekly chart of the EUR/USD you will realise how important and strong that $1.0900 area is and a short from there would have been a must. This is a trade I am personally in and holding for much lower targets.
Discussing the chart above, if you missed the first opportunity at the $1.0900, we have another area that could offer a very good price for you to get in this move.
How to trade the EUR/USD:
From the chart above we can see EURO has now broken free from the small trap range/consolidation and managed to close below $1.0650 which has played a very important role before on this pair. WE will take this trade as BPC (Break, Pull Back and Continuation) trade as a re-test of that small trap range.
- Short the EUR/USD @ 1.0645 or nearest zone with a 40 pips stop loss and a target of 1.0515
- Place alerts on the major and minor support/resistance areas and match them with zones and go for 20/20 trade
Note that the target is very conservative as we want to guarantee our client’s bank money so they can have the confidence that it is possible to make it in trading. EUR/USD is a short trade and any rallies are opportunities to short the pair. We expect that this pair will test 1.0340 again this year and it won’t take very long for that. Also, note that there is management for every trade and you should be aware this example should not be followed blindly.
If you would like to learn how to trade like this or learn how we manage this trade and the others we place on our trading floor for our clients, make sure to get in touch.
THE PLATINUM WAY
We trade in an Institutional Way by letting the market come to us and being patient.Being patient will always be a virtue and it’s no different in the forex market. We can ensure using this style of trading your trading will make a turnaround as you will become much more consistent.
Have a beautiful day and an even wonderful week!
Live from the Platinum Trading Floor.