Trade Team Update

If you were like me and expecting to see 1.5600 today, you can thank the Brits for taking that off the table...

I'm going to explain what happened to the euro today... it's more of a rare and uncommon occurance, but it happens, I've seen it happen at least twice in the past, and today makes the third time I've witnessed this...

This morning UK retail sales clocked in at a record 3.5% month-over-month gain which was the highest since 1986. So, the market gets a major upside shock and of course this sends the cable up against the dollar, naturally. At the same time it sent the cable up against the euro, naturally.

This fundamental shock also sent the dollar up against the euro... this is why we dropped back to test the key 1.5460 level again today and our march to 1.5600 was stopped dead in its tracks.

How can this happen? It's a purely knee-jerk move that is directly connected to monetary policy, specifically interest rate policy. Here's how this whole thing works...

The Fed and BOE are very similar as far as monetary policy is concerned... they are like the two evil twin brothers of central banks. The relationship between the Fed and BOE are not at all like the relationship between the Fed and ECB. Afterall, the BOE had a major role in establishing the Fed, so you can see the obviously close link here.

Basically, the market saw this hot retail number and speculated on the BOE raising interest rates and this sent the cable soaring. This also got the market thinking along the same lines for the Fed... so, we get euro profit-taking, short positioning, stoploss triggering, and a 120 pip drop.

Now this doesn't mean you need to watch every UK news release if you're a EUR/USD trader... I'm just explaining what happened today and that while it's more of a rare occurance it can happen nonetheless.

It also didn't help that oil was weak to the downside and that gold sputtered out after making a decent move up. Fundamentally the news was bad for the dollar today as we forecasted.

Chief Liar Paulson came out with guns blazing to promote more government regulations, more Fed oversight, blah blah blah... basically he wants to give more powers to central bankers to manipulate and price-fix the markets. Sounds like a wonderful idea to me...

Tomorrow:

The only piece of data is German PPI which should print EUR+ based on the continuing strength of commodities. The most important event is a speech by Trichet. I do not have information telling me he's specifically scheduled to speak on monetary policy but I would expect him to say something about price stability, rate policy, etc. I do not believe we'll hear anything damaging to the euro, but these things cannot be predicted and speculated on, so be ready for the unexpected.

EUR/USD:

As far as the euro is concerned, I don't care what happened today. In fact, this move down just gave me another buying opportunity to get in at a better entry. This latest move is not shaking me out...

I am still euro long in the short-term, euro bearish overall, and still expecting to see my 1.5640 target hit. Sure it might not happen tomorrow, but I'm not taking it off the table until the price action and the underlying fundamentals of the market show me otherwise.

I took profits on my 1.5521 short this morning and will likely short the next rise up. I'm holding all euro longs open at this point.

The 1.5460 area is a very important key level spot. It's proven to be solid support after being tested and rejected several times this week. Now, it is imperative this level does not sustain a break in order for us to regain some topside momentum.

I would like to see the euro move above the 1.5520 level as we get into the Tokyo session. I posted some key levels after Wall St. opened this morning and these levels have not changed under present market conditions.

The first upside level of 1.5514 was hit to the pip twice and rejected twice sending us back down below the 1.5500 level. So for now these are our key levels to watch out for:

1.5514
1.5527
1.5544
1.5561
1.5582

Key downside levels:

1.5488
1.5458
1.5444
1.5421
1.5404

It's important to note that we'll be wrapping up this week and heading into next week with a mega FOMC on the horizon... if this event does not fit well with your personal risk appetite, don't trade tomorrow and get your account flat as we close out the week... don't take any new trades tomorrow and just sit on the sidelines.

As always, please practice strict risk and money management disciplines under these market conditions.