Wednesday, December 11, 2013

Positive budget deal may trigger good FX plays

For quite some time I've been keeping a close eye on two currency pairs. As always the EUR/USD, and also the GBP/USD. For awhile the USD has sought reasons to strengthen, especially against the overvalued Euro which continues to hurt the Eurozone on a macro economic level. The recent budget deal made by republicans and democrats Tuesday night may be one of those reasons confidence in the US dollar will return. It would reflect on the EUR/USD and the GBP/USD which are both, according to my analysis, trading in overbought territory.

An upswing in the US dollar index is likely as a result of this deal, which is a positive sign that the bickering between the parties have come (somewhat) to an end. Skeptics may disagree, but I think that the US dollar is looking everywhere it can to gain some strength. Many of the major players in the currency markets expect the EUR/USD to weaken in 2014, the question - as always - is when this will happen. Regardless, I don't see the Euro trading above 1.40 by the end of the year and already gearing up for a good short entry as soon as the US markets open today. Thursday is going to be an important day due to Draghi's speech, which always seem to make the pair a little more volatile.

Stochastics are once again in overbought territory. Click chart for a larger version.
As far as the GBP/USD goes, it recent break through 1.64 seems like an indication to me that it's having trouble holding on to the 1.64 levels. Every single time it comes close, it seems to struggle and retreat, now with the US dollar index strengthening, it may trigger further downward pressure.

GBP/USD on its way back to 'normal' 1.60 levels?
This week is an important week for the two currency pairs due to speeches and major economic news. My play: EUR/USD: short around 1.3800, SL 1.3825, target 1.3650. GBPUSD: short around 1.64, SL 1.6425 target 1.6350.

Happy Trading!

+John van der Munnik

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