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EUR/USD Holiday Rally Commentary – December 20, 2011

Hi all. Well so much for the Santa Clause rally everyone was hoping for. I guess there is still 5 days left until Christmas but things are not looking good with stocks dropping 100 points on Monday after the ECBs Draghi said the law forbids him from increasing government bond purchases to fight the crisis.

The Euro has seemed to hold its own through the malaise but is looking more set to fall than rise at this point. Some fund managers have said that the beginning of 2012 will be a “risk off” scenario as the crisis deepens in Europe and of course the Euro will follow to some extent. The test and failure to get higher than 1.3080 on the daily chart shows that the pessimism is not subsiding any time soon and any break and daily close below the 1.2900 level should clear the way for a substantial drop to 1.2600 and an eventual test of the lows at 1.2000

As for news to watch today there is German PPI numbers that are expected to drop a bit lower than last months. Consumer and business climate results are also expected to drop a bit. I have my doubts any of these will be market movers since any surprise upwards will be muted by the EZ troubles. An unexpected larger drop may create some movement but traders already know the slowdown has affected Germany so may already be priced in. The numbers I would be watching is the US housing data. If that is much better than expected it will most likely create more illusion of decoupling form Europe and could have a positive effect on stocks but will most likely send the Euro down. The more this thought of decoupling is bought into the Euro will diverge from the risk trade and the correlation with stocks will break down. To be honest I don’t buy the decoupling theory but the market just might for a time anyway.

As I type the Asian market has tried to test the recent highs from the US session at the 1.3020 level and failed tells me at the very leas,t the chop will continue or possibly break down lower as they tried yesterday. The more that 1.3000 level gets hammered on the closer it is to giving way. Will it happen this week? That I can’t say. I am still a little concerned about a short covering before the end of the year so be ready for anything. I will be looking for an accumulation area forming here and a small stop run to take a short for a small return. 20-40 pips. I am not holding hopes for the break lower before the end of the year.

Happy Holidays and be careful out there



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