A Forex View From Afar

The Forex repricing process

The euro (Eur/Usd) fell the most in 8 years today, dropping almost 300 pips, as the market cannot, or will not, see past what the ECB are doing at the next meeting, and sentiment swing that a cut may be coming if oil prices continue their slide.

The market is now in a major re-pricing process, and moving on from the initial stage reported three weeks ago where distribution of short dollar positions was seen to be happening. A higher European interest rate means buying the Eur/Usd pair will pay out in overnight swap interest, making it more attractive to hold long positions, but now the decimation of the intrinsic value of the pair eats into that process. As the market sees less probability of an interest rate hold the asset (our case the euro) is sold lower until all the excess orders are taken out, and right now it looks as though institutional orders still have not been found as support in any great number. The speculator’s job now will be to discover where the sell orders are on the dollar, and from there possibly bounce the euro in a contrarian move to regain 23.6% of the lost ground. It is odds-on that the bounce higher will be a Fibonacci move, but finding the bottom is a fool’s game right now.

The euro’s story does not end here. More and more releases indicate the Euro-area may have a hard landing in the second and third quarter, the sentiment and economics are dropping hard, and in turn, this will impact the currency’s valuation.

The longer-term outlook seems to be that the market will still stay in a range, as the bad news coming out of the Euro-area will start to be seen as fair value, and the US economy will not be able to show real growth signs. This does not mean the market has now found a bottom, since more adjustments will come from the economic releases in the following weeks. The question is at what value the market will find the equilibrium point; we will see it as a four hour chart reversal, possibly as a MACD crossover, a Stochastic read, a Support area bounce, or a trend-line break. Whatever is used to signal a reversal it is very important to keep out of the minutia when attempting to catch a falling knife, and as such trying to trade a chart time-frame lower than 240 minutes could be a very inappropriate decision. We need confirmation from a big time-frame that the buyers have had to step in.

Next week, the Euro-zone will have another rough fundamental test; on Thursday the GDP numbers are expected from the Euro-area, and Germany, and both estimations point to a contraction. Get the gloves ready to catch that knife.

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