Trade Team Update

For being the last day of the quarter the market's were relatively quiet. Typically they euro will win the day but this wasn't the case this go around for the end of the quarter...

The euro did make some decent early morning gains as oil made a new all-time high inching its way to almost $144. In addition, we saw Eurozone CPI print hotter than expected at a staggering rate of 4.00%

So the question on the minds of traders is why did the euro drop? Based on what I saw within the price action, and based on past price action patterns I've seen play out under these types of market conditions, today's 100 point correction from top to bottom was purely driven by profit-taking and some stoploss triggering below the 1.5750 level.

Fundamentally, nothing has changed... today was the last day of the quarter which means book squaring is the order of the day. Had it been a "normal" day, the euro would have likely risen to the 1.5850-1.5880 level on the back of that hot CPI data.

That CPI data, which is a full 200bps higher than the ECB's target inflation rate of 2.00% upped the market's odds to 95% of an ECB rate hike of 25bps on Thursday.

I don't base my probabilities on what the market thinks or says, but before this morning's data I was running a 68% probability of an ECB rate hike and based on the data I've upped the probability to 74% of a rate hike.

In addition, ECB's Jean-Claude Junker went on record to tell the market's the ECB is hiking rates on Thursday... he really didn't beat around the bush at all.

Tomorrow:

We get some more big data tomorrow, namely German Retail Sales and ISM. With Chicago PMI printing a touch to the upside there's a decent probability we see a USD+ positive print on the ISM data, and of course the inflation component to ISM should be well to the upside.

To be honest, I don't give a crap about tomorrow's data because all I'm focused on is the ECB and NFP for Thursday.

Sorry if you were looking for some better fundamental analysis for tomorrow but I don't have any to offer. It's the last thing on my mind... my whole focus is on Thursday at this point.

EUR/USD:

Tomorrow's market action will probably be the last bit of volatility we see until Thursday's circus side show... this means if there's any trades you want to get out of to protect your account against Thursday's monumentally high risk, you might want want to act on that.

Many traders have asked what my overall bias is on the EUR/USD... still bearish on the euro. I have not changed my bearish euro views at all even though we've scratched and clawed our way back to test the 1.5800 level.

As you know from reading the updates 1.5800 was a level I was targetng and expecting us to reach before Thursday. And I still believe we'll test that level again before Thursday...

That 1.5820-1.5840 level is absolutely critical... the bull vs. bear battled waged heavy this morning as the bulls were trying to push it high and get through 1.5840, but they lost and were beat back after the profit-taking kicked into high gear.

A test of at least 1.5800-1.5820 should happen within the next 12-20 hours in my opinion. I will likely add a new euro short on the next move above 1.5800 and I'll do this even in the face of a pending ECB rate hike.

First of all, there's no guarantees of a hike and even if the ECB does hike, there's no guarantee it will be a ful 25bps hike... it could be some crazy number... who knows...

Oh, the other question I keep getting asked is why I'm so bearish on the euro... it's for the same reasons I've been explaining all year: fundamentals. Fundamentally, the euro is over valued and there is no economic or fundamental justification for the euro to be trading at these levels.

Of course we know exactly why it's up here but there's no fundamental basis for this. The economic situation in Europe is quite bad and will only detiorate as the year drags on.

The ECB cannot cover up these fundamental issues for too much longer... they've done a good smoke and mirrors job due to their absymal inflation situation, but just as we've seen happen in the U.S., you can only sweep so much dirt under the rug for so long...

The ECB should probably be considering a 50bps cut but this won't happen at least until the fourth quarter or sometime early next year. If the ECB hikes on Thursday this should give the euro a temporary boost but it won't likely take us to astronomical levels.

I'll be shorting the rises... this is my game plan and I'm not changing it at all. There's a correction that's looming on the horizon and I'll keep positioning myself to profit handsomely from this correction that should be comign sooner than later.

Overall, as long as we maintain an upside break of the 1.5750 level we should be able to test at least 1.5790 or better.

If we do get a clean break of the 1.5800 level watch the price action very closely and look for signs of diminished upside momentum and for the market's inability to push through the 1.5840 level.

As I mentioned yesterday, keep an eye on the USD Index. 72 is a key support level. Should the ECB rock the markets on Thursday and the USD Index tests the 70 level and then breaks below, the USD Index will be trading in a "heads will roll" zone. On the upside, keep an eye on the 74/75 level as they've been pretty solid resistance.

That's all for now... I do expect some heightened volatility tomorrow, so be smart with your trades and don't overleverage. If you want to square up and flatten out your account before Thursday's big risk events you may want to get a game plan together for how to do this should we get some good up and down movements over the next 24-hours.