For roughly one year, the euro currency has been caught in a firm downtrend that has paid well for anyone who has been short the currency. Starting around May 2016, markets began to view the next monetary policy actions of the European Central Bank (ECB) in more dovish terms.
There are a few different reasons to explain why this has been the case. Perhaps most important is the fact that the ECB continues to toy with the idea of increasing monetary stimulus programs in ways that are meant to generate annual productivity levels in terms of gross domestic product (GDP) numbers. If these economic trends are not able to correct themselves, it is like that the forex market will remain caught in these trends for most of this year.
Many forex traders have already started to remove the EUR/USD from its trading radar but if these trends continue it is more likely that opportunities to profit will start to become more numerous.
Eurozone Economic Data
This, by extension, is really meant to reduce much of the chronic unemployment that has been part of the region for the last decade. But since then, the ECB has started to pull back on these types of remarks as there has been little indication that earlier rounds of quantitative easing have been having the desired effect on the regional economy.
Chart: CurrencyShares Euro Trust ETF
In the chart above, we can see that the CurrencyShares Euro Trust ETF (FXE, Financial) has had almost no ability to rally over the last year. We have seen some minor areas of bullish retracement, but this type of activity has been even more reduced since the beginning of this year.
At the moment, a major area of resistance is now seen at the 105 psychological zone,which did manage to contain prices in the last instance of bullishness for the euro. We have not yet seen the FXE ETF reach the 100 mark, as this is the area that is most typically associated with parity relative to the U.S. dollar. This ultimately means that the medium-term trading range is defined by the 101.50 to 105 zone, and this is probably an area that will be used for range trading forex strategies over the next two to three months.
Investors will continue to watch for monetary policy clues from the ECB during this period. But there are relatively subdued expectations at the moment, and this means that there will probably not be many surprises in the currency over the next quarter.
Range trading strategies are preferred for assets that are tied to the value of the euro, and this includes instruments like CurrencyShares Euro Trust ETF and the euro/dollar currency pair. There could turn out to be opportunities in peripheral currency pairs, but most of the activity should be defined by these two trading instruments.
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