EUR/USD Weekly Outlook 6/8 thru 6/13 2008

Based on this week’s fundamentals, Fed, and ECB activities I believe the up and down price swings will continue as the market seeks equilibrium in the light of shifting fundamentals, changing monetary policies between the two central banks, and speculation about future interest rate differentials between the U.S. and Eurozone.

In addition, commodities will still be the flavor of the week as oil will open up at record highs and as gold is testing a sustained break of the $900 level. And if that wasn’t enough, we’ll have a G7 meeting in Osaka starting on Friday and Saturday. Oh and there’s also a three day Fed pow wow on inflation and monetary policy being hosted by the Boston Fed… Bernanke and crew will be in attendance and will be speaking on these issues.

Fundamentally, this week’s big data will be Fed and ECB speeches on monetary policy and inflation, consumer inflation data, retail sales data, and growth data. The other fundamental aspect to be mindful of is the G7. I expect the G7 to focus on the big flavors of the week – inflation, commodities, and the sharp rise in volatility in the markets. Although the G7’s bark has been worse than their bite, the markets will be waiting and watching with a relatively higher degree of uncertainty.

There’s been renewed talk of intervention after oil gained $11 on Friday which was the single biggest one day move for crude. I absolutely expect the G7 to intervene this week, but it will likely only be verbal intervention, mostly through the G7’s communiqué and through the post-G7 press conferences with members of the Fed, ECB, U.S. Treasury, and various international finance ministers. If there is to be any form of intervention prior to the G7, it will likely come during tonight’s Tokyo session or first thing Monday morning – prepare accordingly should this occur. You’ve been forewarned.

Both the Fed and ECB are not happy with the sharp rise in commodities, specifically crude, as they know this is leading to a sharp and almost unbearable rise in food, transportation, and overall consumer costs. Based on my study and knowledge of behavioral patterns of the Fed and ECB and more so of Bernanke and Trichet, I believe the two central bankers were in contact over the weekend about Friday’s market madness and we could see the Fed and ECB step up their jawboning game early this week.

Tomorrow:

Tomorrow’s biggest fundamental data release is Pending Home Sales which should print at or below market expectations. There are really no signs of relief in the housing market, but this is pretty much a foregone conclusion at this point. Any bigger upside surprise would have a positive impact on the USD, but tomorrow’s focus will be on Trichet and Bernanke and whatever possible jawboning is done during tonight’s Tokyo session.

First up from the Fed tomorrow will be Timothy Geithner. Geithner is the president of the New York Fed, which is the most important regional branch of the Federal Reserve System. The NY Fed is where the Federal Reserve’s 24/7 Forex trade desk is located and the NY Fed plays the most important overall roll in the Fed. Geithner is schedule to speak on the economic situation and you can be assured the markets will be watching.

After Geithner we get Trichet. Trichet is not schedule to specifically speak on monetary policy but I would expect him to use the opportunity to at least mention something about price stability and rates. Later in the evening we get Bernanke. Bernanke will be speaking specifically on inflation. Although Bernanke will be speaking before Frankfurt, London, and New York are open don’t underestimate the power he has and the power the market has to make a big move should he say something that would cause a reaction. Again, you’ve been warned…

EUR/USD:

It’s entirely possible we see more fallout from Friday’s madness. NFP, which printed better than expected, will still be in the minds of traders. The unemployment rate ticked higher than expected and this was one of the catalysts for oil’s big move on Friday.

As far as I see it, the only thing that will cap the euro’s gains at this point would be some verbal intervention or a sharper sell-off / profit-taking with commodities. If the market is hell bent on sending the dollar lower across the board on all the major pairs I believe it’s going to take a shock and scare to slow them down and to halt the dollar’s renewed downward slide.

I’ve seen traders talking about the fact that the euro gained 400 pips last week and that surely we must get some retracement. I personally cannot think this way. It really doesn’t matter to me that the euro moved 400 points last week because I know why it did what it did. The mindset of “it can’t go up any further” is not something that ever comes into play with my forecasting and my overall trading.

This is a dangerous mindset to have in this market. The fundamentals of the market are still in favor of the euro and should the market correlated variables continue to move against the dollar it’s not going to matter much that we’re “due for a retracement”. Please don’t fool your mind into thinking this way.

I’ve also heard traders talking about the euro going back to 1.6000++. This is not an area I’m personally targeting at this point. The markets got shocked on Friday and when the markets get shocked we see shocking moves. As soon as this shock wears off, the next shock will likely determine where the euro goes next.

With all the Fed, ECB, and G7 activities happening this week I do expect the markets to get another shock or multiple shocks. Let’s remember that one of the roles of central bankers is to price fix markets and manipulate markets through monetary and rate policies. Well, those master price fixers will be on center stage this week. Once again, you’ve been warned…

As far as trading goes I will continue to follow the exact trading game plan until the market shows me otherwise. If you read any of my updates you will know that I’ve been buying the euro on the dips and shorting the euro on the rises.

I do have euro shorts that are in drawdown and I’ve already received some negative feedback about this and even some saying “I’m on the wrong side of the market.” This is stupid. I’m following a game plan that I’ve established for my trading. I have open shorts at 1.5552 and 1.5745 – I’m simply shorting the rises. I’m still net euro long all the way down to 1.4595 and I still have open shorts at 1.6011 and 1.5804.

Do you really think I’m concerned about two small shorts in drawdown when I’ve got open longs and shorts well in profit that are feeding me healthy equity? In addition, because I’m still net long on the euro those two shorts didn’t even cost me any usable margin to take the trade, which is even better.

If traders cannot understand these concepts they have zero business being in the Forex market. If people want to criticize my trading and mock my trading style, do it out in the open in our forums or chat and don’t let me hear about it second hand. Or, leave the community and don’t follow what I say and I do in this market.

I can have trades that go into several hundred pips worth of drawdown and not even blink an eye because I am following a strict game plan and I am managing my risk with the precision of a surgeon. My accounts are not overleveraged therefore it is not an issue. Traders that get themselves overleveraged and make stupid trades are usually the first ones to whine and moan when the market doesn’t initially go their way.

I’m a patient trader and all traders need patience to survive this market. A negative entry is not a loss until it’s closed out for a loss. This is another simple concept that seems to be misunderstood. I don’t always look at the day-to-day moves but I’m also looking at the bigger picture based on the underlying fundamentals of the market. If you cannot or do not understand that this is a factor in my trading, either leave or don’t follow what I say and do.

Now as far as the EUR/USD is concerned as I said earlier it’s next moves will largely be dictated by what commodities and equities do and by any possible verbal intervention from the Fed and ECB. When the market closed on Friday price action was still clear to the upside and we could see more initial gains when the market opens later on.

I absolutely, positively will not take on any new trades when the market opens and will likely wait until at least London opens before I do anything. I’m heading into this week with an extreme amount of caution. It’s just a feeling, but I think somebody is going to run their mouth between Sunday and Tuesday. I can’t speculate on who it will be or what they will say, but it’s just a gut feeling I have.

Overall, I’m still bearish on the euro and will keep shorting the rises. The next big upside hurdle the euro will have to overcome is sustaining a break above 1.5824. After that the euro will have to sustain a break of the 1.5850-1.5870 levels. On the downside the euro should find support around the 1.5740 level. Below there should be support around the 1.5680 level. Again, the whole market could change with a few choice words or actions…

If you’re an undisciplined risk and money manager I hope you got a needed wake up call last week. It is absolutely imperative you do not over leverage this week. It is critical you do not take dumb knee-jerk trades and that you establish a solid trading plan to manage your risk and manage your entries.

Those of you who are of the mindset that the euro “can’t go up any higher” need to reevaluate your way of thinking. There is no such thing as “can’t”, “never”, and “always” in this market. If you think the market “can’t” do such and such, the market’s already got you beat so you might as well close down your trade station and invest in municipal bonds.

Be smart.