The EUR/USD currency pair plunged like a stone again on Wednesday. This time the trigger was the US inflation report, which came in 0.1% above forecasts. Judge for yourself whether the dollar deserved a 130-pip move on that basis. Interestingly, the Federal Reserve's year-end policy outlook did not materially change after this release. Many traders expected inflation to rise, and Fed officials have repeatedly said consumer-price growth should slow next year and that more than one rate hike is unlikely to be required. So the inflation report didn't change the policy picture, yet it triggered another dollar rally—because the market keeps using any excuse to buy the US currency. By Thursday evening and overnight, the euro somehow recovered to its starting levels, which is at least a light at the end of the tunnel. We still view any dollar strength as illogical and speculative.
5M chart of the EUR/USD pairOn the 5-minute timeframe on Wednesday, two sell signals and one buy signal formed. Each could have delivered decent profits to novice traders. The first sell signal was hard to trade in real time — price literally collapsed 90 pips in ten minutes. The buy signal in the 1.1132–1.1140 area was easier to work calmly, and this morning the price reached the nearest target 1.1198–1.1218.
How to trade on Thursday:On the hourly timeframe, EUR/USD retains a downward tendency that qualifies as a full trend, despite the recent trendline breach. Given recent events, we do not expect the euro to fall like a stone. But the market keeps buying the US dollar regardless of events, releases, or their content.
On Thursday, novice traders may consider new short positions on a rebound from the 1.1198–1.1218 area, targeting 1.1132–1.1140. Open long positions on a close above the 1.1198–1.1218 area, targeting 1.1267–1.1275.
On the 5-minute timeframe consider the levels 1.1011, 1.1088, 1.1132–1.1140, 1.1198–1.1218, 1.1267–1.1275, 1.1366–1.1377, 1.1461–1.1474, 1.1527–1.1531, 1.1584–1.1594, 1.1655–1.1665. On Thursday, the Eurozone will publish industrial-production data, and the US will release the Producer Price Index and Retail Sales. We do not consider these reports important, so market reaction may be muted. The euro will try to continue its recovery today.
Key Rules of the Trading System:The strength of a signal is determined by the time it takes to form the signal (rebound or breakout). The less time taken, the stronger the signal.If two or more trades were opened at a certain level based on false signals, all subsequent signals from that level should be ignored.In a range (flat), any pair can generate many false signals or may not produce any at all. Technical levels may be disregarded.On the hourly timeframe, trading signals from the MACD indicator should be acted upon only when volatility is high, and a trend line or trend channel confirms the trend.If two levels are too close together (within 5-20 pips), treat them as a support or resistance area.After moving 15 pips in the right direction, a stop-loss should be set to break even.What to Look for on the Charts:Price levels (areas) of support and resistance serve as targets for opening buy or sell trades or as sources of signals.
Red lines indicate channels or trend lines that show the current trend and the preferred trading direction.
The MACD indicator (14,22,3) — the histogram and signal line — is an auxiliary indicator that can also provide signals.
Important speeches and reports (listed in the news calendar) can significantly influence currency pair movements. Therefore, during their release, traders should approach trading with utmost caution, or exit the market to avoid sudden reversals against the preceding move.
Beginner forex traders should remember that not every trade can be profitable. Developing a clear strategy and practicing money management are key to long-term success in trading.