Slowly but surely the Forex market enters normality as traders come back from vacation. A lot happened over the holidays, and the recent price action that followed the last NFP release tells us why the holiday period is a tricky one to trade.
Old traders know that there is a saying stating that the last week of the year and the first trading week of the new year don’t represent the true trend. Well, if we consider this being true, then the recent EURUSD failure at the same 1.2080 area, might be regarded as the second part of a double top.
If that’s the case, the measured move already was completed, while the today’s market reaction tells us the price action is still subject to a lot of uncertainty.
Inflation Data to Come
U.S. inflation data follows this Friday, with an interested forecast. While the headline inflation is expected to drop significantly, (0.1% from 0.4%), the market expects the Core CPI to rise from 0.1% to 0.2%.
If that’s the case, what would be the right number to follow? Traders know that the Fed focuses on the Core data (inflation that doesn’t consider the price of energy and transportation), but the drop in the headline data might offset the rise in the core one.
So, what to do?
As always, the key stays with the EURUSD. Being the most critical currency pair, most traders take clues from what it does during a trading week.
For this pair, the most critical days are Thursday and Friday. Typically, Monday and Tuesday small retail traders get to be tested to extremes.
If anything, on Wednesday a sharp move in the opposite direction follows, only for the real deal to come Thursday and Friday.
So far, the pair managed to trade following this pattern: squeezing bulls Monday and Tuesday, only to attempt a reverse on Wednesday.
What’s interesting is that the reversal today failed at, where else, the 1.20 level. This may be good or bad for both bulls and bears.
Reversal patterns typically form around psychological levels. If that’s the case, bulls have a problem.
On the other hand, if the pair keeps an eye on the 1.20 mark, it’ll use any excuse to trip stops above 1.2090.
If I were to choose,, I would argue for the second option, if the price keeps 1.20 in focus. A sharp move higher would be a good reason to buy some more.
Also published on Medium.