US Dollar weakens, trade the breakout.

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The FED’s got a lot of work to do to tackle the record high inflation, which accelerated to 7%, the highest since June of 1982. Energy is the biggest contributor to inflation with gasoline prices surging.

How long ago was 1982? It’s the year that the Lamborghini Countach LP500 S came out!

Photo: Countach LP500 S Credit to Craig Howell

On Thursday, Federal Reserve Governor Lael Brainard, in a hearing for her nomination to become the U.S. central bank’s vice chair, focused on the need to bring inflation under control. High inflation is by definition a devaluation of the currency. 7% yearly inflation practically means that one dollar buys 7% less goods than it did last year, which means that dollar is losing value.

7% yearly inflation practically means that one US dollar buys 7% less goods than it did last year.

However, Forex is traded in Currency pairs. When we trade EUR/USD, we trade two currencies against each other. Currently both EUR and the United States Dollar, suffer from high inflation, but most eyes are on the Dollar with a lot of economic indicators being released.

Let’s check out the Daily chart (each candlestick represents one Day).

Checking out the Daily chart we see that EUR/USD has been in a clear downtrend since April of 2021. That means the United States Dollar has been steadily gaining value against the Euro. However looking more closely we can identify a triangle formation that the exchange rate has been recently penetrated upwards at 1.13700.

However looking closely we see identify triangle formation forming that has been recently penetrated upwards [..] The current information shows us that we can execute a breakout trade, and try to ride the devaluation of the dollar, by Buying EUR/USD.

Triangle formations can be continuation or reversal patterns. It depends on if the penetrated resistance is with or against the trend. The current information shows us that we can execute a breakout trade, and try to ride the devaluation of the dollar, by Buying EUR/USD.

Entry : Let’s see the 1 Hour chart and find a good entry. Unfortunately the current price is a bit too high for my liking.

I would prefer to let EUR/USD retrace to the area of the green circle, closer to the Trendline formed the 1 hour chart, and enter on a better price with a Buy Limit Order. This way we will acquire more Pips if the trade is successful and to risk less Pips if the trade is not successful. Any price between 1.14100 and 1.14350 makes sense depending on the trader’s risk appetite.

Exit: Our thesis is that that EURUSD broke out, it may start a new trend, and we are trying to ride it the current sentiment about high inflation. Three Good exit strategies for this kind of trading assuming that we got into the trade are:

  1. [Stop Loss / Take Profit] A moving average crossover. I’ve drawn a Yellow 24 period moving average (average exchange rate of a Day in the 1 hour chart) and a Blue 120 period moving average (average exchange rate of a Week in the 1 hour chart). When the Yellow moving average crosses the Blue again, the trend is over. It’s a less sencitive Stop Loss, it won’t be triggered that easily, but we will lose a bigger part of the trend, if we use it as a Take Profit
  2. [Stop Loss / Take / Profit] When the price of EUR/USD crosses the Blue moving average (more aggressive). We will lose a smaller part of the trend, but it will trigger easier than the crossover if used as a Take Profit.
  3. [Stop Loss / Take Profit] When the price of EUR/USD crosses the Trendline (very aggressive). Will be hit easy both as a Stop Loss and a Take Profit.
  4. [Take Profit only] An abstract highest price Take Profit at 1.19 will allow us to get about 400 pips from this trade, while risking a lot less. This price can be reached sometime in the first of second quarter of 2022.

Click below to read more daily market analysis by Myrsini Giannouli in our TopFX website.

Market Analysis and Trade Ideas by Myrsini Giannouli

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