Potential long-term trade EURUSD
There are two events which could send the EURUSD currency pair down in the long term. These are the elections in the Netherlands and the interest rate decision in the USA. But why are these events outstanding and what does EURUSD have to do with it? These are the questions we want to explain to you in detail.
Elections in the Netherlands
What do the elections in the Netherlands have to do with the currency pair EURUSD?
Since the Netherlands is part of the Eurozone, its policy also has a certain impact on the euro as a common currency. Looking more closely at the direct influence of the Netherlands on the euro, one must generally state that the influence is relatively low. But here it is not so much about the direct influence, but rather a signal effect, which starts from the election result.
Unfortunately, it is feared that the election will be won by a right-wing populist party, the Partij voor de Vrijheid (PVV, English: party for freedom) and its figurehead Geert Wilders. If this happens, it is not a good sign for Europe, and secondly, other right-wing populist parties in Europe will feel even more backwind. These include Marine Le Pen from the French National Front (FN) and Frauke Petry from Alternative für Deutschland (AfD, English: Alternative for Germany). Both in Germany and in France there are still elections this year.
EUR drops when Wilders win
If Wilders wins on 15 March, this will strengthen other right-wing populist parties across Europe. The right-wing populist and nationalist tendencies weaken Europe as a whole, and therefore also the common currency: the euro. As a result, the euro is likely to fall in value against other currencies.
Interest rate decision of the Fed
Also on Wednesday, 15 March, the Fed (Federal Reserve Bank) will announce its interest rate decision. A hike of the interest rate is expected on a broad front. But why is this important for EURUSD? The FED is raising interest rates as expected and is also announcing further interest rates this year, which should lead to a further strengthening of the USD. Currently, as shown in the following chart, more than 84% of the market participants in the futures markets are expecting a hike in interest rate of 25 basis points:
So it is more than likely that the interest rate will be raised, but how does the picture look in the long term? Is it just a snapshot or will there be further interest rates that will strengthen the USD in the medium term? In order to answer these questions, one must be aware of the way in which we have to classify the current interest rate. Currently, the Fed Fund Rate is 0.50 - 0.75%. Since the number alone does not contribute much to a classification, we take a look at the development of the last 10 years:
It can be seen clearly that the Fed Fund rate has been on the ground for a very long time and has recently been raised. This can be explained, among other things, by the subprime crisis. In general, it is much easier to say that the Fed uses the key rate to control the economy. If the economy goes badly, it lowers the interest rate to stimulate investment. In a booming economy, it raises the interest rate to throttle it. Let us now look at the assessment of market participants until December 2017:
If interest rates rise, the USD rises
If the FED on Wednesday actually raises the interest rate and announces further hikes of interest rate, we will see a rising dollar in the medium-term.
EURUSD as short trade
If we now summarize both events, it soon becomes clear that a short position in the EURUSD might be a good idea in the medium term. Since the macroeconomic analysis will fully come into effect only in the medium to long term, now might not be the perfect time for a new position. Instead, one could wait for the details of both events and then enter when the final direction is clear after volatility calms down. You don’t have to act immediately when Wilders wins or further key interest rates are announced.
How could a trade look like?
The exact entry into a trade, which is designed for several weeks or even months, is not particularly decisive. This trade is primarily not chart-based, but rather fundamental. For this reason you can also enter the market with a market order, but of course you can also set a limit for getting started.
The question of stop loss is never to be answered with a clear here or there. It depends heavily on personal trading style. We think that there are two SL levels. The basis of both levels represent resistances, which have already proven more or less successful in the recent past. One SL is 1.0850 and can be called as conservative SL. The other SL is 1.0680 and is more aggressive. Please note that the distance between the entry and the SL has a direct influence on the optimal position size. The further away the SL is, the smaller is the position size and, of course, the closer the SL is at the entry, the greater the position size can be chosen to maintain the self-imposed maximum risk.
If you look for a good take profit, then you have to switch into the weekly chart since EURUSD is currently listed near the 14th year low. We have identified 3 possible targets, which you can also use with the concept of scaling-out:
- 1.0000: This take profit is based on the presence of the psychologically immensely important brand. At 1.0000 we have parity and almost every market participant is paying attention to this price level.
- 0,9550: This take profit is created by pure chart analysis from the years 2000 and 2002. This range of courses served as resistance and support and will continue to be of great interest in the future.
- 0,8550: This admittedly very ambitious take profit is also fed by chart technical parameters.
We hope you like our trade ideas, maybe you would like to discuss them with other traders in our forum:
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