The EUR/USD Is Range Bound (And That’s Good News)
It’s no secret that the EUR/USD is range bound. Anyone can look at a chart and see that it has been trading sideways between 1.2200 and 1.2550 since the middle of January. What most people don’t know is what’s causing this trend in the face of mounting hawkish outlook for the FOMC. I mean, with the US economy expanding, tax reform boosting growth, inflation slowly increasing and the Fed set to raise rates the dollar should be shooting higher like a rocket, but it isn’t.
This is because of the ECB. Not because they are tightening, or even because they’ve indicated a need to tighten, but because the market thinks they will and sooner rather than later. Why, because of the US. It is a Catch-22 the market can’t get away from. The US is a leading economy, not in the sense of yay USA we’re number 1, but in the sense that when the US grows it leads the world in growth and when the US slows it leads the world into recession.
In this environment hawkish news for the US, bullish news for the market, signs of expansion within the economy, end up being a net positive for the rest of the world. Sure, it may lead the FOMC to raise rates but it will also lead the ECB and BOJ to raise rates too and that my friends is why the dollar is range bound. The dollar strengthens but then the euro strengthens right behind it, undermining any gains that may have been made. I would expect this to continue until there is a clearer signal from one of the central banks.
How Do You Trade A Range Bound EUR/USD?
So, how do trade this range bound EUR/USD? Very carefully but with patience profitably as well. The key s targeting support and resistance levels at the ranges boundaries and within the range itself. The boundaries can be traded in the expectation of reversal, targets within the range may be used for reversal or continuation to the next target.
The daily charts shows the range very clearly. The pair has just rejected the bottom of the range on news President Donald Trump was going to impose stiff tariffs on imported steel and aluminum. It is now moving up within the range with an expected target near 1.2550 over the next few weeks. The indicators are still a bit weak but consistent with a bounce at support and drift higher within the trading range. The risk is a possible resistance level at 1.2365 that may cap upward movement.
The hourly chart confirms upward movement from the 1.2180 support level but the move is losing steam. The MACD momentum indicators is showing a noticeable divergence from prices that may lead to an intraday correction. Until that happens, price action does look bullish and is supported by a trend following crossover in the stochastic. A move higher in prices would confirm the uptrend with a target near 1.2360 over the next few trading days. A move above 1.2360 would be bullish within the range with target near the top of the range.
Next week will be important for the pair. There is quite a bit of data from both regions with two major market moving events on the calendar. The first is the ECB meeting on Wednesday, the second is US non-farm payroll data on Friday. These will both move the EUR/USD, be ready for volatility, use your support and resistance targets for entries and exits, bot don’t expect the range to break until later in the month when the FOMC meets.