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Daily Forex EUR/USD, GBP/USD Commentary June 20, 2012

The EUR/USD has a failed first push to the downside and has gone back into a chopping price action of the 3rd push on Monday. Now that we are back in this range directional bias is open. It did make an attempt at the highs from Monday but was rejected  about 20 pips away which does tell me there was little interest in breaking to the topside. With the 4hr 200ema (black line) getting some respect. I do still feel that the overall direction will be down but with the FOMC news release later today during the US session there may not be much movement as the market waits for that. The chances for some more short covering going into the meeting is higher at this time. So today I will be looking for that mainly and want to see some manipulation to the downside for a long. However I wont be holding any positions going into the meeting.

The GBP/USD has made the second push longer term with yesterdays move breaking the recent highs and now having a higher probability for seeing the 3rd push. If we have a good manipulation to the downside to the 4hr ema which also coincides with the break out from the Asian session highs yesterday then I will be looking for the long here too. Here again I wont be holding a position into the Fed meeting as any sustained move will be dependent on the outcome. If they do add to QE then both the Euro and GBP will jump to the upside and since this move up as of late has been mainly due to pricing in more QE than any disappointment will make them fall off the proverbial cliff.

Forex News Today

The high impact news starts today with the Claimant Count Change and MPC Meeting Minutes from the UK which will give us a gauge on if or when they will be adding to their Asset Purchase Facility.

Later in the day is the all important FOMC Statement. Which will be when we find out if they will fire up the printing press. Then the markets will get itchy as the press conference gets underway a couple hours later. Be ready for some choppy moves during those times. The good thing for me is I will be in bed sawing logs.

Will they do it? 

As I noted yesterday Goldman thinks the Fed will print and is rather confident with this prediction so I decided to give you a different opinion today and these are the guys I agree with. Although Goldman is rather influential to the Fed (even though nobody will admit it) they have been behind the curve as of late so here is an excerpt from an article that shows that Soc Gen and a few other large banks dont think they will do it.

Ever since the beginning of the year we have been saying that in order for the Fed to unleash QE, stocks have to drop by 20-30% to give political cover to the Fed (and/or ECB) to engage in another round of wanton currency destruction. Because while on one hand the temptation to boost stocks is so very high in an election year, the threat to one’s presidential re-election chances that soaring gas prices late into the summer does, is simply far too big to be ignored. Yet here we are: stocks are just 4% off their 2012 highs, even as bonds are near all time low yields, and mortgages are at their all time lows. As such, even with the latest batch of economic data coming in simply atrocious, the Fed finds itself in a Catch 22 – it wants to help the stock market hoping that in itself will boost the “economy”, yet it knows what more QE here will do to the priced of gold and inflation expectations: something which as Hilsenrath himself said yesterday does not compute, as it runs against everything “Economic textbooks” teach. What is more important, is that the market, like a true addict, is oblivious to any of these considerations, and has priced in a massive bout of Quantitative Easing to be announced tomorrow at 2:15 pm. There is one problem though: has the market, by pricing in QE on every down day – the only buying catalyst in the past month have been hopes of more QE – made QE impossible? Observe the following chart from SocGen which shows 6 month forward equity vol. What is obvious is that due to precisely being priced in, QE is now virtually unfeasible, irrelevant of what Goldman and its “FLOW QE” model tell us. As SocGen simply states: “More stress is needed to trigger ample policy response.”

Naturally, SocGen is not the first to get this. Recall that this is precisely the logical espoused by both Citi a month ago which warned of XO crossing above 1000 bps first, and then Deutsche Bank this weekend saying a crash may well be needed to jar Europe out of inactivity like last fall. Not to Goldman though. Goldman is confident that the 4% drop in the S&P from its highs is enough to unleash an epic episode of monetization.

Today we will have the moment of truth.

Happy Trading



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