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2 Euro Trades to Consider...and One to Ignore

Kathy Lien

The most compelling euro trades don’t involve the ever-popular EURUSD, and instead focus on pairs like EURGBP and EURNZD, where persistent euro weakness can yield more favorable profit potential.

Outside of the excitement in the British pound (GBP), which soared and then retraced after a surprising UK unemployment report, it was a quiet morning in the foreign exchange market. Currencies, equities, and commodities had little reaction to last night's speech from US President Barack Obama, and with no major US economic data scheduled for release for the third straight day, it should be a quiet trading session barring any surprise developments in the Syrian conflict.

September has been a month of breakout moves in currency pairs like GBPUSD, USDJPY, and AUDUSD, but the follow through has been weak. This lack of extension highlights the level of hesitancy in the markets, as investors eye the recovery in currencies and equities with caution. There are clear signs of stabilization in China, but the outlook for both the US and Europe is dimmer.

EUR/USD: Stocks have rallied because the Federal Reserve is poised to taper asset purchases, whether only symbolically this month, or in a delayed December move, but the motivation is an unimpressive US recovery.

At the same time, weak economic data from Germany and France could be followed by lower growth expectations. According to Les Echos, a daily French financial newspaper, the government plans to cut its 2014 growth forecast from 1.2% to 0.9% and leave the 2013 forecast unchanged at 0.1%. In addition, the European Central Bank (ECB) is saying that Greece will need another aid package.

Italy’s political wildcard also poses an ongoing risk for the euro (EUR), and in the latest developments, the Senate sub-committee has delayed its vote on Silvio Berlusconi until Thursday, although the difficult nature of this decision means that more delays are possible. EURUSD may not be affected in a meaningful way, however, because the risk of holding the US dollar (USD) offsets the risk of holding the euro.

While no major surprises are expected in Thursday's US jobless claims report, Friday's US retail sales numbers are expected to be less-than-satisfactory, leaving EURUSD to trade in its existing range.

EUR/GBP: Instead, we are looking for euro weakness against both the pound and the New Zealand dollar (NZD). Today’s UK unemployment report was quite strong, with jobless claims falling more than expected and the unemployment rate dropping from 7.8% to 7.7%. Persistent improvements in UK economic data will make it difficult for Bank of England (BoE) Governor Mark Carney to convince investors that the outlook for the UK is grim.

For EURGBP, 0.84 is a very important support level which we expect to be broken in the medium term, with a potential move down to 0.82 possible after that. If Carney remains dovish, we would view that as an opportunity to sell EURGBP at a higher level.

See also: A GBP/USD Surge That Could Happen Again

EUR/NZD: Today’s most exciting event risk will be the Reserve Bank of New Zealand (RBNZ) rate decision. While the central bank is not expected to change interest rates, a strengthening local economy, improving outlook for Australia and China, and lending restrictions that could cool the housing market could prompt some optimism.

See related: The #1 FX Event Risk That’s Not Syria

The only area of concern is the level of the currency, although the kiwi is off its highs versus the Australian dollar (AUD). As a result, we are looking for further strength in the New Zealand dollar that should eventually drive EURNZD towards 1.60.

Of course, if we’re wrong about that and RBNZ Governor Graeme Wheeler decides to remain cautious, the pair could rally before heading lower over the longer term.

By Kathy Lien of BK Asset Management

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.
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