EUR/USD Weekly Outlook 7/27 thru 8/1 2008

This week's fundamental calendar will prove to further complicate things for the EUR/USD as we'll be trading in very ill-liquid conditions with the addition of monumental economic data for both the euro and dollar.

In my view I see the USD at risk this week as there's more overall growth, manufacturing, inflation, employment, and consumer data coming out of the U.S. compared to Europe.

Last week's market conditions and real-time price action showed the first real effects of what it's like to trade during the summer session. I expect the same exact summer session conditions to persist this week.

Money flows are not at the volume that creates orderly market conditions and liquidity is extremely low which adds a level of uncertainty to overall price direction. The underlying fundamentals of the market will rule the day.

Last week we saw a dramatic sell-off in commodities. Oil has come down from high's at the $147 level to test lows at the $120 level. Gold is off significantly from highs at the $975 level all the way down to the $920 level. I believe oil and gold are due for some upside retracement, but this will largely depend upon how the market's decide to react and respond to this week's fundamentals.

Despite the massive sell-off in oil, U.S. equities struggled last week and the euro was unable to sustain a break of the 1.5650 level and showed no signs of even being able to test the key 1.5600 level. This is to be noted.

In my view the market is telling us they are not ready to move into an extended dollar long bias and they are ready to keep buying the euro as long as the dollar fundamentals remain to the downside.

Should the USD fundamentals shock to the upside this will certainly serve to ease the market's mind and give them greater comfort to buy dollars and sell euros.

The continued turmoil in the U.S. financial sector is going to weigh heavy on the dollar. Over the weekend the FDIC had to take over two more institutions that went bankrupt. First National of Nevada and First Heritage N.A. were shut down and taken over by the federal government in a move that was mostly to prevent another scene of angry customers standing in line waiting to pull out every penny they have.

Those are not the kind of images the government wants to be broadcast on the evening news. There will be more bank failures, this you can be assured of. And just wait until the banks in Europe start to fail... when those lines of angry customers form outside of European banks you better be short the EUR/USD...

NFP:

So, we have low liquidty, sporadic money flows, choppy price action, and our favorite fundamental event: Non Farm Payrolls. NFP weeks are always different than the other weeks and you can expect the advent of Friday's NFP to only make things even wackier.

Economists are forecasting anywhere from a net job loss of -45K to as much as -82K. All of the banks do their own independent NFP forecasting which can make it difficult to gauge how the market will respond.

The risk during an NFP week, especially when liquidity is low, is when the banks decide to position themselves for Friday's NFP and Unemployment data. The moves you see on the run-up to NFP are almost meaningless to how Friday will playout.

The point is, expect the unexpected this week because of the NFP factor and as we draw closer to Friday minimize your risk exposure, and please, do not try to trade NFP.

EUR/USD:

I still have some euro longs open that I took last Thursday and I intend on keeping those open for now. Obviously the market's not even opened yet but in my view I believe we need to make another run at the 1.5800-1.5850 level again.

This week's fundamentals certainly can provide all the fire power the market needs to push the euro back up to test the top of the range. As far as trading goes, I will continue to short the euro rises and I will continue to buy the dips. This gameplan has worked beautifully all summer long and I see no reason to change things up at this point, but I will be more cautious and likely on the more conservative side this week because of the liquidity situation and NFP.

To be honest, I really have nothing groundbreaking or brilliant to say about the euro right now. For me, I'm mostly going to depend on what the real-time price action is telling me, what the market corrrelated variables are telling me, and what the outcome of each day's fundamentals are telling me.

The market will tell me what it wants to do, so I will be patiently waiting for the message. If I don't like what I see or the price action is not behaving properly, I'll sit on the sidelines and wait until I see my price. I can go days without taking a trade if I have to.

Trading:

I'm involved on another trading site where people can watch one of my live trade stations 24/6. They can see every trade that's opened and every trade that's closed on that particular account. That account's usable marging has never fallen below 96% and the average weekly ROI is over 2%. Since June the account has gone from $57K to $70K while maintaining a usable margin of 96% or better.

That account has euro shorts in the 1.5300's and euro longs from above the level we're at now. That account banks daily profits, it can easily withstand anything the market throws my way, it can safely hold trades in drawdown while waiting for the market to come back, and at the rate it's going, the annualized ROI will be over 100% which is seven times better ROI than anything Wall St. can produce.

Why am I telling you all this? That particular account is a live, viewable lesson in patience, timing, and strict risk and money management disciplines. 2% weekly ROI is modest but the key is that it's consistent and that account is unexposed to the risks of the FX market and is not at any risk of a margin call and never will be. The market can't beat me, the broker can't chase me, and there's no negative emotional connection to that account, to the market, and to trading it.

I'm not doing anything special with that account and none of that makes me a great trader but the point is I firmly believe traders can achieve those kinds of modest results and keep themselves from a margin call situation if they would only learn to be patient, learn to be strict risk managers, and learn to time the market to their advantage.

So, let me close by saying to practice strict risk and money management disciplines this week and to be smart.