EUR/USD Weekly Outlook 6/22 thru 6/27 2008

TRADERS:

It is imperative you realize this week carries a risk level of 10.

What does this mean and why? At the beginning of each week, based on what fundamentals are on the books for the week, I give the trade week a risk rating. This week's risk rating is a 10 out 10.

The reason this week is rated 10 is because we not only have an FOMC rate decision and rate policy statement, we have two speeches by Trichet, we have major consumer data for the EUR and USD. We have major housing data for the USD. We have key inflation data for the EUR and USD, and we have a market that is not behaving rationally but is making emotional, knee-jerk decisions that defy logic and lack any kind of common-sense.

Those ingredients make for the highest risk rating I can possibly give. Expect heightened volatility, wild price swings, and possible surprising price moves at unexpected times.

Plus, be on alert for whatever kind of news come out of the meeting with Arabic oil ministers. If they come out with a strong statement to crank up more production and put more barrells of crude into the world supply, I would suspect this would hurt oil and help the dollar...

Trade Plan:

There is so much risk ahead for this week that I'm going to start today's update by encouraging you to sit down tonight, clear your mind, and write down your risk mangement plan and trade plan for this week.

How do you do this?

First, study the calendar... study what's on the books for this week. Look at when the big events are happening. Think about all the possibilities that could happen if the Fed comes out hawkish, or if they come out dovish. What if Trichet turns dovish on raising rates in July?

What if Core Durables, Consumer Confidence, and the Michigan Sentiment all suprise to the upside? What if German CPI prints to the downside?

Then, you connect the dots back to how all those individual pieces of data could directly effect Fed and ECB rate policy. This week is all about fundamentals, economics, and most of all: interest rates.

Please don't be lazy and skip this process of coming up with a game plan for the week ahead. If you've never done anything like this, now is a great time to get disciplined.

Of course I will provide analysis and forecasting in the daily updates, but don't trust what I say -- those are my opinions based on the information I collect and gather. I don't always get it right -- I may get some of it wrong this week. That's why you need to do your own research and come up with your own game plan to manage your money.

And as you're formulating your game plan, think about what you're going to do if the worst case-scenario happens -- getting caught long at a top or getting caught short at a bottom.

What size are your entries going to be? How far are you going to space out your entries? Will you use a mental stoploss should the market move against you? Think about these issues... you need to step up your game this week.

Rates and Yields:

Obviously the biggest event is the FOMC. For the past three weeks the market has been making knee-jerk reactions based on interest rate speculation.

Right now Fed Funds Futures is predicting a 50bps rate hike as early as October. The 2-year yield has started to move above the Fed Funds Rate. This means the bond market is signaling that the Fed is definitely done cutting rates and is likely to move into a rate hike cycle sooner than later.

Yeah I don't think so...

But, it doesn't matter what I think, it matters what the market thinks. If you're serious about following monetary policy and rate policy like I am, do yourself a favor and watch the yield on the 2-year. If the yield keeps going up this will give you a great indicator that the market is thinking the Fed is hiking rates... and you know what that will do for the USD.

Also, watch the yield on the German Bund. If the yield spreads between Bunds and Bonds go up in favor of the Bund this will be better for the EUR vs. the USD. You don't have to watch them tick up and down in real-time, just glance at the yield every so often to keep up with where they're moving.

I think gold will come more into play this week than it has the past two weeks. All eyes must still be kept on oil, of course.

Tomorrow:

The biggest event tomorrow is the German IFO data which carries similiar significance to the ZEW data, but deals with various sectors like retail, wholesale, manufacturing, etc. I believe we could get some downside on this data. The forward looking outlook for growth, manufacturing, production, and the consumer is still weak to the upside in my opinion.

A downside print on the IFO data certainly carries a higher potential to bring the EUR/USD down.

We have zero USD news tomorrow. We do not have any Fed speeches this week other than the Fed activities on Wednesday.

EUR/USD:

Keep in mind we may see some big market players position themselves ahead of the FOMC. This is where those volatile price swings that I mentioned earlier will come into play. If a bank or hedge fund wants to get positioned prior to the FOMC they very well could use an ill-liquid time to perform these actions, so be prepared for that please.

Last week I called a 1.5640 topside by Friday and we were fortunate to see that play out as forecasted. Now that was great but the euro's gone back to sitting in a precarious spot -- the 1.5600 level.

We knew the euro was under value trading below 1.5600 but now could it be getting to close to an unattractive value? It's possible. So for me, this means I'm not likely to jump right in with a new long position.

My trading in the market will stay considerably scaled back at least until Wednesday. My entry size will be small and I won't be trying to hit a home run on a trade, but to make safe profits with minimal risk exposure.

Based on Friday's real-time price action I do believe we have the potential for more topside testing, but this will be dependant upon that upside momentum can sustain Sunday/Monday. And it will also depend on any geo-political events that might go down at the start of the week.

For example, suppose the Arabic oil ministers promise to raise production and then some oil cowboys hijack a platform, or cut a pipeline, etc. That would obviously send the crude market into a tailspin... so, this is the kind of stuff you have to be ready to deal with this week.

My trade plan for this week will be to add EUR/USD short positions on every 150-200 pip rise, unless the market tells me to do otherwise, this is my plan. I will still hold my best euro longs, but I'm definitely positioning my accounts with swing shorts on any rise up.

If the upside momentum ceases to exist and commodities do some correcting we could easily see a move back below the 1.5500 level. Should the markets cooperate and work together to devalue the dollar, I see no reason we can't push towards the 1.5750 level to test resistance and try to trigger stops.

And speaking of stops, this week the banks and brokers are going to be running stops and triggering stoplosses. This is their pattern during weeks like this. I know what they do and I'm not expecting anything differently from them this week.

OK, I think you understand what you're up against this week and how important it is for you to stay at the top of your game, not to overleverage your account, and not to take any dumb, knee-jerk trades.

Be smart, be patient