To trade the euro you need to understand this first

To trade the euro you need to understand this first

The euro is a political currency and forex traders often wonder why such a currency moves in the way it does, with today being a classic example. An agreement has supposedly been reached about future policy by the member states, yet the euro has fallen and the answer lies in the bond markets and in particular the bond spreads. It is the spread between the German bond and the Italian bond which will ultimately dictate the future of the euro with Italy now likely to be the next country to leave the union.

00:00

Introduction and webinar start delay00:00

The speaker apologizes for the slight delay caused by technical issues with GoToWebinar. They welcome everyone warmly, mention the beautiful weather in Hampshire, and express hope that attendees are enjoying good weather as well. The session is about to begin.

00:33

Trading disclaimer and audience overview

00:33

The speaker begins the webinar by emphasizing the importance of the trading disclaimer, warning participants not to use money they cannot afford to lose due to the inherent risks of trading. The audience includes Forex students, quantum users, and new visitors, and the speaker mentions that they will quickly cover the session content.

01:03

Volume Price Analysis explained

01:03

The speaker introduces David, who is present with them, and explains that they will analyze the forex market using volume price analysis (VPA). This method involves examining price action alongside trading volume to determine the authenticity of market movements. The speaker emphasizes that seeing VPA in action is the most effective way to understand it, noting that this approach is just one part of a broader trading strategy.

01:35

Factors affecting price action

01:35

The segment explains that while new traders typically begin with chart analysis, price action is influenced by other factors such as fundamental news and related markets. Additionally, recent years have shown the increasing importance of political developments, especially in relation to the euro.

02:06

EU summit and euro agreement

02:06

The speaker discusses the recent EU summit where leaders spent days negotiating and finally reached an agreement. Despite this, the euro has been declining in value, prompting an explanation of the factors that influence the euro’s performance and the potential existential threats it faces. The segment also briefly mentions Quantum users, traders who utilize specific market indicators.

03:13

Quantum indicators and market moves

03:13

The speaker discusses specialized tools and software developed for the forex market that track currency flows quickly and efficiently. These indicators showed promising movements and potential reversals as the London trading session began. The speaker also highlights a commentator named Mish Shedlock, recommending following him on Twitter for his insightful analysis, noting his accurate prediction of the UK election outcome, despite underestimating the size of the government’s majority.

04:19

Euro currency strength and deal impact

04:19

The speaker discusses the recent EU agreement on a coronavirus recovery plan aimed at supporting heavily affected countries like Italy, Spain, and Greece. Despite the headline news, the euro’s value has been fluctuating and even declining. This is attributed to political factors and market sentiment rather than just the deal itself. The debate involved whether aid would be grants or loans, with ‘frugal’ countries like Holland and Finland opposing unconditional support. The speaker emphasizes that understanding the euro requires analyzing political dynamics and the bond market, which plays a crucial role during crises.

07:05

Bond market’s role in euro stability

07:05

The segment discusses the critical role of bond markets in influencing entire economies, focusing on the yield spreads between Germany and Italy as a key indicator of the eurozone’s stability. Italy is described as the ‘Achilles heel’ of the European project due to its political and economic challenges, including occasional calls to leave the euro. Unlike before, Italy cannot devalue its currency independently as it is part of the eurozone, which lacks a unified debt structure, making each country responsible for its own debt. This fragmented setup leads to tension between countries with and without debt.

The bond market, particularly the spread between German and Italian borrowing costs, reflects these political and economic tensions. The segment also references a notable communication error by the ECB president concerning bond spreads, illustrating how political factors heavily influence the euro’s fate. Overall, the euro’s survival depends on political cohesion and the bond market’s response to the weakest member states.

10:04

Political tensions affecting the euro

10:04

The speaker discusses the political sensitivity surrounding the euro, particularly focusing on Italy’s role within the euro project. Despite frequent complaints from Italy, the country has historically aligned with the euro’s objectives due to significant investment in the project. Traders, especially those dealing with euro-dollar pairs, need to closely monitor political developments in Italy as they can impact the currency. Attention is also drawn to the bond market, with the German bund considered the gold standard, and the spread between German and Italian bonds serving as a critical indicator of the euro’s stability.

11:17

The speaker highlights a disconnect between the dramatic political headlines around the euro and the actual market behavior, noting that euro long positions at the CFTC have risen despite political tensions. This suggests cognitive dissonance in trading the euro, emphasizing that the euro is fundamentally a political currency. The bond market, rather than media hype, is the true gauge of the euro’s strength, and the success of the currency depends heavily on achieving a debt union among European countries, where all nations collectively bear fiscal responsibility.

12:27

The discussion turns to the fiscal tensions within the eurozone, contrasting the ‘frugal’ northern countries like Finland, Holland, and Germany, known for their prudent surpluses, with the southern countries often labeled as ‘feckless.’ The speaker defends the southern countries by noting that before the euro, they could devalue their own currencies at will. Since the euro’s inception, Germany has benefited the most by gaining export competitiveness through a relatively weaker currency compared to the strong Deutsche Mark.

13:35

Underlying the euro are significant political and economic tensions, especially between northern and southern Europe. The bond market remains the most powerful indicator of the euro’s viability and its ultimate survival. The speaker concludes with a reminder to stay vigilant about these political dynamics as the market transitions into the London open.

14:12

Currency strength matrix and trends

14:12

The market is showing positive momentum, exemplified by the Nasdaq rising strongly and the yen weakening significantly. The CSI indicator tracks currency flows and signals that the yen is reaching exhaustion, reflecting strong market sentiment and currency dynamics.

14:46

The currency matrix identifies the strongest and weakest currencies, highlighting the Aussie yen at the top, though without extremely strong readings. An upcoming upgrade to the indicator will provide rated momentum levels to better gauge the strength of buying or selling activity.

15:22

The matrix offers a quick snapshot of ongoing trends and potential turning points without needing to analyze all individual currency pair charts. The Aussie yen is not currently at an extreme but provides insight into market momentum and possible reversals.

16:00

The matrix is useful for traders seeking opportunities, signaling when momentum lines cross to indicate potential reversals or trend continuations. This tool offers an efficient way to identify trades without examining multiple charts in detail.

16:36

The hourly chart shows the Aussie yen is overextended while the yen remains weak. Traders can look at faster timeframes for signals such as crosses, exemplified by a possible cross in the euro dollar pair, which may benefit from positive news about the EU summit. These indicators provide valuable information even before detailed chart analysis.

17:12

Trading opportunities and focus on GBP

17:12

The speaker discusses using trader indicators to anticipate price action by observing line movements in currency pairs, focusing primarily on the British Pound and also mentioning positions in the Euro. They highlight a divergence seen in the Pound-Canadian pair and note that despite the Pound appearing overbought, currencies can remain overbought or oversold longer than expected. The speaker also mentions a potential reversal in the Pound-Yen pair and emphasizes the importance of combining indicator signals with chart analysis before handing over to a colleague named David.

18:17

The discussion continues about currency market movements, particularly the Pound-Canadian and Euro-Canadian pairs, suggesting the Canadian dollar may have room to move further. The speaker reiterates the value of indicators in understanding chart dynamics while signaling a transition to another presenter for further analysis.

By Anna Coulling – creator of volume price analysis