4Xlounge Round Table – EURUSD (2012 Forecast)

Posted on Dec 30, 2011 in 4Xlounge Round Table Team

4Xlounge Round Table Trading Signals

4Xlounge Round Table Trading Signals

 

We get more emails and forecast requests for the EURUSD than any other currency pair (by a very large margin). Most of the large hedge funds want/need to know where this pair is headed. The all want a long term EURUSD trade signal. The EURUSD controls about 30% of all forex liquidity. Bottom line; as the EURUSD moves, so does the rest of the market. We (The Round Table Team) called a long term decline in the EURUSD a few months ago and we are holding to our forecast. Here’s why:

In our current global economic climate, long term forecasting is “foggy” at best. However, we have a few factors at play that help us forecast on a longer time table. The USD should continue to see gains in 2012 and the EUR should continue to see declines in 2012. The reasons are a combination of fundamental and technical. The outcome is a EURUSD moving closer to parody. Let’s take a closer look.

 

The Fundamentals

The US data is “flat”, but the EU data is getting weaker. Some would argue that the US data is improving (but it’s not). It doesn’t matter, the EU data and its related debt issues are getting worse. You can slice the data several ways, but one thing is for certain; the EU will need a weaker EUR moving forward. Why? Because a weaker EUR = cheaper EU debt. Chairman Bernanke has been playing the “weak currency / cheaper debt” game for several years. In addition (assuming you are a conspiracy guru like me), if the EU has long term plans to break-up their union (i.e. allow Greece to decouple and/or a full break-up of the EU), a weaker EUR would make the transition less painful.

 

If the EU does NOT break-up, they have a very long and painful recovery ahead of them. The recovery will put a lot of pressure on the EUR.

 

The China Factor

As China continues to browse the international sovereign debt garage sale looking for deals, their purchasing “power” should follow the fundamentals. China’s economy is another factor at play. The magic inflation number for China is 7% (based on their own internal reports). Anything less will probably result in civil unrest. Why do we care about China’s inflation? Because, their economy is cooling down. Sooner or later China will be forced to allow their currency to “devalue” (fancy word for saying “buy a ton of USD so they can eventually allow their currency to be regulated”). The short-hand of the long math is: a weak Chinese Yuan = a stronger USD and a kick start for the Chinese economy (i.e. the US can buy more goods and services from China).

 

The Technicals

I will no doubt receive some disagreeing emails about my fundamental forecast (I always do), so let’s stir the pot a little more and take a look at the technicals. Our Bigger Picture Barometer appears to agree with my fundamental analysis. The USD is pushing for a double top and the EUR is still pushing lower. In fact, the Big Picture shows a sideways consolidation for the EUR. This is VERY important. The sideways consolidation is a VERY strong indication that we will see lower lows before we see higher highs for the EUR.

 

EURUSD (2012 Forecast)

EURUSD (2012 Forecast)

 

EURUSD (2012 Forecast)

EURUSD (2012 Forecast)

 

EURUSD (2012 Forecast)

EURUSD (2012 Forecast)

 

The Trade

The EURUSD will NOT drop to parody in a straight line. We should see a consolidation period in Jan/Feb of 2012 before the next big push down. Remember, the currency market moves in cycles. Professor Fibonacci taught us how and why. Here are a few trade ideas/plans for the EURUSD:

  1. Plan 1 – Entering a long term short at these levels does not make sense, but… we caught some of the last pushes via our trading tools. I prefer the 30 Minute Power Bars and Trend Map to catch the short term swings. Remember to keep a tight stop on the swing highs in case the EURUSD decide to consolidate sooner than expected.
  2. Plan 2 – A long term trade makes sense, but only after a consolidation. I will use the Technical Dashboard Console (here). Remember, the time frames are (from left to right): 15 min, 30 min, 1 hour, 4 hour and Daily. I want to see a global value of 95 (green) or greater + a Daily value of 70 or greater. I will confirm with X Meter. Assuming the Technical Dashboard Console has met my criteria, I will enter with an X Meter 15 minute value of 12.5 (green) or greater. My stop will be 1.5x the 4 hour ATR and my target will be 3x the Daily ATR. The risk/reward should be about 12 to 1. Plan to be in this trade for at least 2 weeks.
  3. Plan 3 – If Plan 2 fails, I will use the Daily Power Bars to find an entry.

 

Play It Safe!

As always, do NOT increase your risk. Keep your leverage at recommended levels and follow the rules of entry for each system. Do not bet the farm on any single trade. Never risk more than 2% per trade. Remember, slow and steady gains will win the race. High risk = high loss and eventual margin call. If you have any questions, post them on our forum and I will be happy to answer them.