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FX EUR/USD, GBP/USD, USD/JPY Daily Commentary May 16, 2012

The EUR/USD weakness I have been harping about the past several days came out in a big way yesterday with the 150 pip fall from the highs. Of course it was helped by the Greeks finally admitting they couldnt get a government together and will be having another vote next month. I tend to agree with most out there thinking this will mean an end to Greece being in the Euro and there will be substantial turmoil in the markets to come. The Syriza Party is gaining in the polls in Greece and even though they have said they want to stay in the Euro it will be very difficult since Merkel and new French president Hollande have stuck to their guns on Greece sticking to the original deal they made for the bailout and renegotiating the deal to satisfy Greece wont happen.

The charts paint a rather bleek picture at the moment and with the drop yesterday having blown through and closed below any substantial support. The next level it has any chance for a reversal is the 1.2620 level lows from January this year and is only 100 pips away. Today I do expect more of the same and a probable test of those lows. The only thing that could change that will be some substantial good news coming from Europe to the effect of another round of LTRO or full blown money printing by the ECB. The chance for LTRO is greater than any ECB QE as Germany will have a fit if the ECB doesnt at least try to cover up their printing with the LTRO acronym.

The most likely scenario today will be an attempt to push out shorts to the upside but this will probably be limited as traders may just find any pullback a reason to add to positions for the long haul. If the SM cant find buyers to sell to they will just continue the push and there will be some profit taking at those daily lows but how much remains to be seen.

The GBP/USD was not shy about sharing in the plunge yesterday either. I would have expected some stall considering the doomed nature of the Euro but this move was pure USD strength and there was no fight from the markets on it. This pair is coming up on some daily break out support at 1.5960 so there is a possibility for a turn here but I am having my doubts on that to say the least. A break of this support will open the door for the next 100 pip drop to the daily 200ema where it found heavy support for the better part of a month at the end of March and beginning of April. The same may be true for the GBP/USD as the EUR/USD though. The USD strength may prevail today and we only get a minimal manipulation up before the move down continues. Its hard to tell but thats what I will be looking for during the London session.

I chose to cover the USD/JPY today even though I dont trade it and only use it to help me trade the GBP/JPY and EUR/JPY. The reason is to highlight that this move we saw yesterday was not a risk off move but a decoupling move. Meaning that the US can some how avoid any effects of the Euro Zone crisis and recession and still maintain growth even if it is at a snails pace. What we had happen was the Empire State Manufacturing Index had a very significant surprise to the upside and shows that the possibility is there for the US decoupling. I doubt this is actually true but what I think and the market does often differs even if I eventually get proven right and only had the timing off.

The way we see that the move was not risk based is looking at the move on the USD/JPY. When a risk off scenario is playing out we will see that the USD/JPY drops right along side the EUR/USD and GBP/USD showing that even though traders are fleeing to the USD from risk currencies they are also fleeing the USD for safer currencies like the JPY or CHF. This did not happen and the JPY and CHF weakened with the Euro and GBP. How long this will last is a mystery and will depend on US data coming in the future or any news of more LTRO or QE by the ECB so it could last a few days at least.

Forex News Today

Scheduled releases today are fairly busy. The big ones start with UK Claimant Count Change and Unemployment Rate. Later in the day BOE Governor King speaks and releases the Inflation Report. The ones to watch will be King and his report. This may give clues to any potential additions to the Asset Purchase facility and if he does hint in that direction the GBP will be hurt.

The Euro Zone starts with their CPI figures and Core CPI is expected to decline slightly. If there is a bigger drop than expected there it will open the door for a rate cut from the ECB at their next meeting and there is a Mario Draghi speech later in the US session that he may drop hints at.

The US has  Building Permits, Housing Starts, Capacity Utilization Rate,  Industrial Production and Mortgage Delinquencies. The housing data coming out good will be a plus for the decoupling scenario playing out longer as will better than expected Industrial Production. As long as these dont disappoint dramatically the USD strength will continue for the days to come.

Happy trading


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