Potential Price Targets For The Release
As German policy makers expect to see a rebound in the growth rate, expectations for a more robust recovery could prop up business confidence, and rise in the IFO survey could spur another run at the 100-Day SMA (1.3311) as the data fan improved outlook for the euro-area. However, the slowdown in global trade paired with the ongoing weakness in private sector consumption may weigh on business sentiment, and a dismal confidence report could spur a bearish breakout in the EUR/USD as it dampens the scope for a sustainable recovery. In turn, we may see the euro-dollar give back the rebound from 1.2973, and the pair may ultimately fall back towards the 23.6% Fibonacci retracement from the 2009 high to the 2010 low around 1.2630-50 as the fundamental outlook for the euro-area turns increasingly bleak.
A look at the encompassing structure of the euro sees critical resistance at the confluence of former support dating back to January 10th 2011, the 100-day moving average, and the key 61.8% Fibonacci extension taken from the October 4th and January 13th troughs at the 1.33-handle. A break above this level risks substantial dollar losses with topside daily resistance seen at 1.3380. Daily support rests with the 50% extension at 1.3165 with a break here risking euro losses to the 38.2% extension at 1.3040. Note that the slope of the daily relative strength index offers little in the way in of directional bias with a break above RSI resistance dating back to October 27th likely to fuel the euro with enough momentum to breach key resistance at the 1.33-figure.
Interim support rests at the 23.6% Fibonacci extension taken from the February 9th and 20th crests at 1.3210 with subsequent floors seen at 1.3185, the 38.2% extension at 1.3160 and 1.3140. Soft resistance stands at 1.3250 backed by 1.3275. A breach above our Fibonacci reference point at the 1.3290 negates this setup with such a scenario eyeing topside targets at the 2012 high at 1.3320, 1.3350, and 13380. Although we expect to see an uptick in the IFO survey, the euro remains well capped by the 1.33-figure with a breach above the 2012 highs eyeing subsequent topside targets.
How To Trade This Event Risk
Expectations for a fourth straight rise in the IFO survey instills a bullish outlook for the single currency, and the market reaction may pave the way for a long Euro trade as the data raises the outlook for future growth. Therefore, if the gauge for future expectations advances to 102.0 or higher in February, we will need a green, five-minute candle subsequent to the release to establish a long trade on two-lots of EUR/USD. Once these conditions are met we will set the initial stop at the nearby swing low or a reasonable distance from the entry, and this risk will generate our first target. The second objective will be based on discretion, and we will move the stop on the second lot to breakeven once the first trade reaches its mark in an effort to lock-in our winnings.
In contrast, the ongoing weakness in private sector activity paired with the slowdown in global trade may drag on business confidence, and dismal IFO survey could spark a bearish break in the exchange rate as it continues to carve out a top in February. As a result, if the report falls short of market expectations, we will carry out the same setup for a short euro-dollar trade as the long position laid out above, just in the opposite direction.
In the data front, German IFO index is due in Europe and labor market and housing results are expected in the US.
At the moment, the cross is gaining a modest 0.02% at 1.3258 with resistance levels at 1.3293 (high Mar.21) ahead of 1.3295 (Upper Bollinger) then 1.3306 (MA100d) and 1.3322 (trend high Feb.).
On the downside, a breakdown of 1.3186 (low Feb.21) would expose 1.3179 (MA21d) then 1.3115 (low Feb.17) and 1.3040 (Lower Bollinger).
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