How To Trade the Euro's Lows

From the desk of Steven Strazza @Sstrazza and Ian Culley @IanCulley

Currency markets are reacting to the war that’s broken out in Europe.

In the past four trading sessions, the Russian ruble has dropped more than 1,000 pips against the US dollar.

And, with fear growing that these initial days of fighting will turn into a protracted conflict, weakness is striking the euro as well.  

Let’s take a look at the EUR/USD cross and outline the levels we’re monitoring in the coming weeks and months.

Here's a daily chart of the EUR/USD going back to the pandemic lows:

After completing a large distribution pattern last September, the EUR/USD pair has been consolidating for the past several months and trading in a range between 1.1483 and 1.1121.

However, as of this writing, it’s undercutting the lower bounds of this continuation pattern and printing fresh 20-month lows. 

A decisive close below the January low of 1.1121 suggests the path of least resistance is lower for the euro. We want to be short against those former lows with a downside target around 1.0771.

We’re also keeping an eye on momentum. The 14-day RSI is printing a potential bullish divergence. We want to see momentum roll over and hit oversold as confirmation of this pattern breakdown. 

To be clear, we can only be short the EUR/USD cross below the January lows.

If it breaks back within its current consolidation, this forex pair is off-limits, as more trendless action is likely. This wouldn’t surprise us one bit, as forex markets have been characterized by failed moves since last year.

Remember, risk management is job No. 1.

With the current volatility running through the market, it’s as important as ever to not chase breakouts and respect stops.

Thanks for reading!

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