EURO-dollar has had an aggressive move lower from the November high of $1.5411 to a low of $1.3531 last week. Looking at the longer-term charts the $1.35 – $1.37 region is fairly significant. We would expect to see a short to medium term bounce from these levels, driven primarily by investors taking their profits. Although structural problems still persist for the euro, investors seem to be tiring of shorting the currency.
There has been some interesting price action in the euro against the Japanese yen and sterling. This suggests that investors are being more picky about which currencies to go long on against the euro. There could be some opportunities for profits to be made by going long the euro versus the US dollar at current levels, to benefit from any short-term rallies. FairFX is offering a price of $1.3640.
The euro has been through a torrid time in recent weeks, especially against sterling. However, the euro has shown some tentative signs of strength during recent trading sessions, and this strength could grow in the short-term. Drivers of euro strength include yesterday’s better than expected reading for the ZEW survey. This measures German investor confidence, and suggests that the wave of contempt for the euro could be abating. Also, if Greece can orchestrate a swift bail out of Greece that is palatable to the rest of the Eurozone and does not lead to fears of moral hazard, this would be positive for the euro. Of course, any signs of infighting–or if Athens pushes back against proposals to cut the deficit–could damage sentiment in the short-term.
Whatever happens now, it looks like volatility will be the only constant when trading the euro in the coming weeks and months. If traders are a little wary of the many risks affecting the euro, but still feel bullish on the single currency, then one alternative to consider is an options trade. The option will never go below zero, so the full risk is known from the start, and it can prove a useful way to avoid getting shaken out of the position by a short term burst of volatility. The current IG Index price for a euro- sterling £0.8700 call, expiring 26 February, is 60. This will show a profit if euro- sterling is above £0.8760 by 3p.m. a week on Friday.