EUR/USD: Heading for a Bumpy Ride
The FOMC's (Federal open market committee) decision last Thursday to leave interest rates unchanged gave Euro new momentum against the US dollar. EUR/USD jumped from 1.1304 to 1.1437 after the release. However, Yellen (Federal Reserve Chairwoman) has left open the possibility of an interest rate hike before the end of the year. Her statement was rather dovish, and called for stronger economic data in the coming months for the Fed to raise interest rates.
EUR/USD has tailed off this week trading at 1.1104 lows. Looking ahead, Draghi (European Central Bank President) is delivering a speech today at 13:00 GMT thus we are likely to see a spike in volatility as markets react to his comments. From the US, any economic data not showing an expanding economy may cause the pair to rise. Both initial jobless claims and durable goods orders, out Thursday 12:00 GMT, are expected to show worse results. Friday’s US Gross Domestic Product (GDP) will be end of week price driver, forecast is for 3.7% growth q/q.
If you think US data will disappoint and EUR/USD will move higher over the next week, you may buy a Call option which gives you the right to buy the pair at a set price (strike) until a future date (expiry) for an amount of your choice. On the other-hand, if you expect data to be strong and EUR/USD to fall you may buy a Put option, which gives you the right to sell at a set price until a future date.
Overall we could be heading for a bumpy ride as results are set to be mixed. The next FOMC meeting is October 21st. Some analysts are calling an interest rate hike at the next meeting, but the FOMC voted 9 to 1 against raising rates and since there is only one month until the meeting I doubt they will turn their decision so rapidly.
If you do not want to take a view on market direction but you think EUR/USD will become more volatile over the next month, then you may buy a straddle strategy. This is a position where you buy both Put and Call option with the same strike price and expiry date. If EUR/USD price moves sharply in either direction you may profit. In this position your loss is limited to the premium paid for the options and you cannot get stopped out.
Looking at the day chart we can see since May 15th this pair has been in a sideways market, with most of the price action between 1.0808 and 1.1485. Price is trading on the Ichimoku cloud at 1.1120 which acts as a support level. On the topside, the near resistance level is 1.1190 (23.6% fibonacci retracement level) followed by 1.1240 (38.2% fib level).
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