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Euro Posts A ‘Dead Cat Bounce’

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June 2, 2014 By: , No Comments

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Forex markets traded in recovery mode when we look at some sections of the investment environment but whether or not these price moves can be viewed as a true recovery is a question for debate.  The best example here can be seen in the Euro, where markets have made some progress after hitting new lows sub-1.36.  Forex traders that are focusing purely on their shorter term charts might start to view this as an encouraging bullish sign but when we view the moves in a broader context, there is still a significant amount of ground that will need to be made up before we can call this a true recovery.

Technical analysts call moves like this a ‘dead cat bounce.’  What is most important here for forex traders to remember is the fact that it can be easy to get drawn into the shorter term momentum and get caught in unsuccessful positions that are not based on the bigger picture.  As we head into the new trading month, one of the biggest mistakes that forex traders can make miss the dominant trend and place too much attention on shorter term price movements.

The Week Ahead in Forex Markets:  Beware of Building Momentum

In the week ahead, forex traders will to pay more attention to public commentaries that are released by the European Central Bank (ECB).  We have an ECB interest rate decision coming up soon and we are likely to see some vocal proponents (and maybe some opponents) of new policy measures that seek to add stimulus to the economy and create the potential for a stronger growth outlook.

There are many fundamental factors that support the need for added stimulus.  I have written in depth about the specific data reports that are most worrisome and the fact that the ECB will need to cut interest rates sooner rather than later.  So the bearish case here for the Euro is relatively clear, and there is very little reason to believe that the month of June (or even the summer as a whole) will be positive for activity in the EUR/USD.

Playing the pair will be easier said than done, however, as a good deal of the bearish momentum has already been exercised.  For these reasons, trade management is much more important and forex traders will need to wait for clear rallies in order to start selling again.  An important price level to watch comes in at 1.3720, as this marks a prior period of support.  Any failures here will go far to darken the outlook for the Euro and provide good risk to reward values for new short positions.

The catalyst for something this could be seen if we start to see more commentaries from voting ECB members, so it will also be important to remain cognizant of what is happening in the newswires out of the Eurozone.

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