EURUSD – Exceedingly choppy Euro price action versus the US Dollar (ticker: USDOLLAR) has forced similar indecision in retail forex trading sentiment, but the fact that crowds remain short leaves us in favor of further strength.
Trade Implications – EURUSD: It’s been a frustrating run of weeks for our purely sentiment-based Momentum2 strategy, and today’s extreme price swings serve as a perfect example. The strategy had bought into Euro strength from $1.3069 at 13:01 GMT as retail trader sentiment grew extremely net-short. A long position looked attractive as the pair briefly broke above key resistance at $1.31, but a significant reversal stopped us out in a hurry—Momentum2 is now flat.
Volatility prices on short-dated EURUSD options (our best proxy for market volatility expectations) spiked on the early EUR rally. Yet a decline in longer-dated volatility prices suggests markets are mostly content to keep EURUSD in a tight trading range. Given such choppiness, we put little weight on our mostly trend-following sentiment-based forecasts. Only a sustained break below $1.30 would turn us bearish.
--- Written by David Rodriguez, Quantitative Strategist for DailyFX.com
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