The Euro's nearly 5-month long rally vs. the U.S. Dollar has taken a breather lately, as many traders re-evaluate their positions ahead of next week's FOMC meeting and, perhaps, a potential announcement as to the size and scope of the second round of quantitative easing (QE) by the Federal Reserve. The recent leg of the up-move for the Euro took its value from around 1.2600 to recent highs near the 1.4150 area, as FX traders feared additional debt purchases by the Fed would spark further weakness in the beleaguered greenback. However, comments from Fed governors recently, lowering the possible extent of any QE, have taken some of the luster out of holding long Euro positions -- especially heading into U.S. mid-tem election results and the aforementioned Fed 2-day meeting. A report on German retail sales released on Friday was viewed as a disappointment by many, with September sales down 2.3% vs. August. This data along with a moderately supportive Chicago area purchasing manager's report which posted its 13th straight month of economic expansion gave traders more ammunition to sell the Euro vs. the Dollar. Trading action is expected to remain choppy until traders see the outcomes from next week's events in the U.S., as well Friday's release of the monthly unemployment report for October.
With several major events taking place next week, it seems doubtful that the Euro will remain sequestered in its recent 400-pip range, but the question is really, "In which direction will the next major move occur?" Some traders who expect a large move in the Euro could choose to explore the purchase of a strangle in Eurocurrency futures options. An example of such a trade would be buying the December Euro 1.4200 calls and buying the December Euro 1.3700 puts. With the December futures trading at 1.3906 as of this writing, this strangle could be purchased for about 0.0290, or $3,625 per strangle, not including commissions. The premium paid would be the maximum potential loss on the trade; with the position profitable at option expiration in December should the December futures be trading above 1.4490 or below 1.3410.
Looking at the daily continuation chart for the Eurocurrency futures, we notice that since the lows were made back in June of this year, the Euro has traded in a pattern of a sharp up-move then a period of consolidation, then another sharp up-move, and now a second period of consolidation. Both consolidation patters appear to be forming "bull flag" patterns, which are usually viewed as continuation patterns that resolve themselves in the direction of the previous trend -- which in the case of the Euro favors another move higher. The 14-day RSI has moved back into neutral territory, with a current reading of 58.14. Support for the December Euro is seen at 1.3688, with resistance found at the recent high of 1.4156.
Mike Zarembski, Senior Commodity Analyst