With so many column inches and air time being devoted to tomorrow’s key interest rate decision by the ECB, and in case you’ve been on another planet, the decision is whether the bank will move to cut interest rates and move to negative rates in an effort to head off looming deflation. However, given the bank has been signalling this for some time the markets may well have already factored this into the current eurodollar rate which has declined sharply since testing the 1.3993 region five weeks ago, to trade at time of writing at 1.3616.
Against this background, and for us as forex traders there are several take away issues that we need to consider, and to do so the weekly chart of the eurodollar is the place to start.
The first point to make is this: for the past two weeks the eurodollar has been in an extremely tight trading range as it awaits tomorrow’s news. Second, it is extraordinary to think that so many traders focus solely on this pair when there are so many other opportunities to trade in more volatile and active pairs. Just to put this into context the range last week was from 1.3668 to 1.3585 (just 83 pips all week). So far this week the range is even tighter with a high of 1.3647 and a low of 1.3582 (65 pips). Of course, given the importance of tomorrow’s news these range are likely to explode, but the point is this, the last 8 trading sessions has seen no volatility and this is also reflected in the volume profile for the pair which has been falling steadily. Tomorrow, no doubt will change all this, and it goes without saying that the two tiny doji candles on the weekly candles are reflective of the current malaise for the pair.
From a technical perspective the consolidation phase for the eurodollar is extremely well defined and one that has been in place since the start of 2014 with the pair first testing the 1.3998 level to the upside, and testing the extremely strong platform of support in the 1.3486 region, as shown by the double support line. If we see a bearish reaction to the downside, then the 1.3486 should hold, and if so, expect to see the euro bounce back in much the same way as during January 2014. Conversely, if the market has already factored in tomorrow’s decision 1.3713 is the first short term target, with the 1.3903 level the next major resistance point. As always, volume will confirm any price move across all the timeframes and give us the insight we need as traders to take new trading positions with confidence. It as at times like these that volume price analysis really comes into its own, validating and confirming what is happening on the chart.