Early last week, the Euro spiked, driven by speculation that the ECB might begin the process of removing their excess liquidity programmes and raising interest rates, possibly as soon as June this year. This did not last long, however, as it has become very clear to investors that raising interest rates would be economically damaging and, anyway, European Central Bankers have absolutely no appetite for the recession that would inevitably follow.
Hence the rebound failed, leaving the door open to new lows for the move and maybe a test of the COVID lows of March 2020, around the €1.065 region.
However, as is the way in FX, very often the lows come in before “fundamentals” dictate that they should, precisely because investors are already positioned that way; thus, they can only (in this case) be buyers because they are already short.
Looking at the open interest charts, it is clear that a lot of dealers own short put option positions at strikes ranging from €1.09 down to €1.05, which they will attempt to defend prior to the May 6th expiry date of these options:
It seems therefore that there is a relatively low risk trade available in the next few days at or around 1.07.
The low point from March 2020 was €1.064, but in setting a stop loss, we should allow for the possibility of a small “false” break.
So, to prevent the risk of being stopped out prematurely, we shall set it at €1.055 initially, whilst looking to raise it as soon as is practical.
Obviously, the closer to the 1.055 level one can buy, the better the risk/reward ratio becomes, though realistically it may not fall below the €1.07 level for long.
The first resistance level, as seen on the chart above is €1.085, but that should not restrain a rebound for long- the next significant price point is over €1.11, which if achieved would represent a c. 4 Euro profit if the Euro can be bought around €1.07.
Given the up-side momentum being exhibited by the US Dollar at present, this seems eminently possible.