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Written by Terri Belkas, Currency Analyst

Normally, the release of US Non-farm Payrolls takes center stage in the forex markets, as the figure tends to spark significant volatility and can shape interest rate expectations for the Federal Reserve. However, Wednesday’s FOMC rate decision may steal the limelight, as futures are currently pricing in an 82% chance of a 25bp cut to 2.00% and an 18% chance that the Fed will leave rates unchanged.

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There are signs that European banks are not in the clear quite yet, and if anything, have been less than forthcoming about their problems. As the Euro struggles to break 1.60, traders are wondering what could cause the next big move in the currency. If European banks are forced to reveal larger than expected losses, we could see a major reversal. Read more

Bottom Line A sea change in market psychology is underway. Even amid the
arrival of repeatedly negative economic data (joblessness up, housing activity
down), yields and equity prices rose sharply last week. Fed speakers, including
erstwhile doves Yellen and Rosengren, seem to be in unison, calling for an
abrupt end to the Fed’s aggressive monetary policy stance. Read more

EUR/USDReady to resume ascent?Last week, we noted EURUSD price action had presented an inverted hammer candlestick, signaling a possible bearish reversal. That view has now been confirmed - the pair tumbled the following day. Our entry below 1.5800 yielded over 500 pips in profit, though our profit target of 1.5320 was narrowly missed by 20 pips (EURUSD reached a low of 1.5340 last week).Having completed the expected retracement, we now find the EURUSD at trend line support, with a Hammer reversal pattern waiting to be confirmed by a bullish candle. If that materializes, we will look for the bullish trend to resume. Those traders that have not taken profit on our suggested short position should do so here. With the long term bias still favoring the upside, we will re-enter long at trend line support with a tight stop in place should the pair break down further. Our initial profit target will eye the top of the most recent bullish run to 1.5740. However, we will keep a close eye on the pair’s momentum and adjust the profit target contingent with the price action.

EUR/USD Trading Strategy

1. If the Hammer formation is confirmed with a bullish candle, long EURUSD near 1.5380 (trend line support).

2. Set stop near 1.5270, just below the wick low of the 03/06-03/09 consolidation.

3. Set the initial profit target just below 1.5740, giving a favorable risk-reward ratio (risking 110 pips to gain 360).

The deep declines in the Yen crosses have been a big story so far in 2008. However, one cross that has held up is the CHFJPY. Both currencies strengthen as market participants become risk averse, therefore the Swiss Franc and the Yen tend to move in tandem. But markets are dynamic and change quickly; the CHFJPY might be the next Yen cross to take the plunge.

Over the last 20 years, 101 has proved formidable as resistance on multiple occasions. Specifically, major tops have formed in January 1987, August 1992, and October 1998. These tops led to declines of no less than 2,000 pips (2,270 to be exact). A similar top may be in place at the July 2007 high of 101.84.

In August 2007, the CHFJPY broke below a 7 year support line. The rally that ensued over the next 3 months tested the trendline as resistance. With former support now providing resistance, the CHFJPY may be ready to plunge.

This is a close up view of the down-up sequence since July 2007. The decline from 101.85 to 92.15 is only in 3 waves but could be wave A of a flat correction. The 3 wave advance is a classic B wave. Risk is tight at 101.85 and targets for a few months out are the 100% and 161.8% extensions of 101.85-92.15/100.72 at 91.02 and 85.02. A new high (above 101.85) is not out of the question before a plunge occurs; but this is why we use stops.

Tell us what you think about this report: contact the strategist about the article at jsaettele@dailyfx.com

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