After grinding sideways all week in anticipation of GDP data and FOMC commentary, Wednesday proved to be quite anticlimactic for many as markets responded with a whimper. Stocks were anticipating for the Fed to reveal a more concrete QE tapering timeline; however, policymakers offered no new hints and markets responded with a contained sell off in the last hour [see also The Complete Visual History Of SPY].
Our ETF to watch for today is the CurrencyShares Euro Currency Trust (FXE, A), which could experience volatile trading as investors react to the latest ECB rate decision. Analysts are largely expecting for policymakers to leave rates unchanged at 0.50%, although the commentary issued after the rate decision itself may offer further insights.
Consider FXE’s one-year daily performance chart below. This ETF has been stuck in a range all year; notice how FXE has failed to hold above $132 a share while at the same time bouncing off support at the $127 level (green line) after each failed attempt. It was encouraging to see FXE peer above $131 a share (blue line) in early June of this year; however, selling pressures quickly returned and dragged it back down to virtually the same support level it had previously rebounded off. With FXE trading along resistance again, we feel that investors should hold off from jumping in long given the recent pattern at hand [see How To Take Profits And Cut Losses When Trading ETFs].
Historically, we would expect for FXE to decline in the coming weeks as it battles resistance and profit taking; nonetheless, we would advise conservative investors to avoid taking a short position at these levels because encouraging developments overseas may inspire a breakout that propels FXE past resistance with little warning [see How To Hedge With ETFs].
If the latest ECB outlook strikes a pessimistic tone among investors, the euro could struggle in the currency market on the day; in terms of downside, FXE has support around $129 a share followed by the $127 level. On the other hand, a surprisingly optimistic outlook may inspire a rally for European markets; in terms of upside, FXE has stiff resistance at $133 a share. As always, investors of all experience levels are advised to use stop-loss orders and practice disciplined profit-taking techniques.
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Disclosure: No positions at time of writing.