“Risk on” again as traders anticipate euro summit in Brussels (FXE)

Shutterstock photo

Shutterstock photo

Look to see overnight weakness in the U.S. dollar and the Japanese yen continue today ahead of the start of the euro zone finance ministers' summit today in Brussels.

Sentiment going into the summit is almost euphoric -- maybe too positive.

The NIKKEI index posted more than a 2% rally overnight. The Aussie and New Zealand dollars outperformed, posting as much 0.9% and 0.6% against the U.S. dollar.

The summit was originally going to concentrate on the disbursement of the next round of Greek aid, but skyrocketing bond yields and rising sovereign debit stress will likely force a broader focus.

Traders should be disciplined in their optimism for the simple reason that as yet concrete details on a comprehensive solution to stem off the crisis are slim at best.

With the euro the proxy asset for the European crisis and the "risk on" trade in general, the euro bounce that started this week is not surprising.

Still, short positions on the currency were recently at a 17-month high, per the CFTC.

Given the extent of the selling, traders are still speculating on continued turmoil in the euro zone here. The only change is that now they are protecting huge profits by taking some of their money off the table ahead of the summit in the off chance policymakers will finally get their act together.

If anything like the status quo continues, the euro should see renewed pressure to the downside after the two-day summit ends tomorrow.

Looking at the EUR/USD daily chart we see a strong evening star formation in last few days of October before the price action slid sideways. What initially looked like a morning star formation failed to set up, leaving the euro moving lower until this week's slight bounce.

Drawing a downward trend line from the top of the morning star on October 27 down across the tops of the candles, traders will see the euro retraced to the trend line and then traded down, giving the trend its third touch and strengthening implied resistance.

Traders looking to position stop orders can consider the placement above the trend line.

Those looking to short the EUR/USD again can draw a upward trend line across the bottoms of the last three candlesticks and look for a break in the line. Conservative traders will want to wait for a close below the trend for confirmation.

Bottom line: If the policymakers come up short, look for EUR/USD to retest the $1.2875 low as buyers of the U.S. dollar step back in. But beware in any short positions that will be crushed if policymakers somehow present a real solution.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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