Trade Setup of the Day: Straddle EUR/USD (February 19, 2013)

EUR/USD has been trading cautiously so far as the pair is currently consolidating into a pennant on the 4-hour time frame. With the euro zone printing weaker than expected GDP for Q4 2012 and consequently getting buried deeper in a recession, it seems that the path of least resistance is south.

The pair has also formed a head and shoulders pattern on the 4-hour time frame, suggesting a selloff if the neckline around 1.3300 breaks. Take note that this is a strong level as it was a former resistance turned support and also in line with the rising trend line connecting the pair’s lows.

The catalysts for this week include the German ZEW economic sentiment figure for February. This report is due today and could show a downside surprise as euro zone’s largest economy reported an economic contraction lately. Also scheduled for this week are ECB head Draghi’s speeches and the release of the European Commission’s economic forecasts. Italian elections are also coming up and the ongoing political troubles and risk of a hung parliament could also weigh on the euro.

For those who don’t want to commit to a direction and would rather wait for momentum, setting a buy order above the pennant might also work if the economic releases and events turn out better than expected. After all, expectations may have already been long priced in so the slightest amount of good news could allow the pair to resume its rally.

By Kate Curtis from Trader’s Way