A possible retrace on the Single Currency, but how far will it go?

  

After last week’s dramatic fall in the Euro (EURUSD), the pair has taken a breather and a retrace seems to be on the cards, driven perhaps by market participants who believe that the collapse was overdone.

The next big event in relation to the Single Currency is the monthly European Central Bank (ECB) statement, due next Thursday. It will be quickly followed by the delayed US Non_Farm Payrolls report, out the following day. Both of these have the potential to move EURUSD in a profound manner. There are two considerations: (1) Euro zone inflation is well below the “Close to but not more than 2%” target that the ECB has as a mantra, and (2) the Non Farm Payrolls report will cover the period that was affected by the government shutdown in early October.

So what are the implications for these?

(1) above will tend to allow the ECB to ease off on its monetary policy in some way (reducing the target interest rate is only one of them) and (2) will possibly mean that a low NFP figure will be discounted somewhat, while a large one will be seen as more positive than normal because it will have been so in spite of the shutdown.

All of these things, if they come to fruition, can only have the effect of lowering the EURUSD pair further. The upward trend is half broken (lower low on the chart above) and the fundamentals are pointing down, as discussed. For this reason we have set the OmiCronFX Silver Trigger routine on this pair, but with a high momentum trigger. This means that it has a bigger hurdle than normal to overcome in terms of market momentum in order to put on a trade. As the retrace gets larger we will loosen this criterion.

The horizontal lines on the chart are Fibonacci retracements. These correspond (but not the 50% level, which has been added by market traders) with a numerical series described by the medieval mathematician, Fibonacci, which is found in many places in the natural sciences. In trading it has value, as many similar indicators have, only because it is closely watched and therefore has a tendency to be a self-fulfilling prophecy (see the OmiCronFX Attitude Commentary “Euro indecision at a level that looks toppy to some”, which shows that this same pair made its recent turn at a precise 61.78% Fib retracement level as measured on the monthly chart).

And the daily bar for yesterday also forms a bullish pinbar (Pinbars are explained here).