Trade of the Week | July 29 - August 3, 2012

My latest pick for currency market Trade of the Week (TOTW) wasn't even the biggest intra-day move on the world's most heavily traded currency pair [by volume] over the past five trading days. However, a net 140-pip rise on the EUR/USD is significant during any trading session, and the pair's price action following the July US employment report offered what was arguably the best year-to-date post-NFP trade.

As I mentioned in this post, Draghi's 26 July London speech, which included his "believe me" proclamation, sparked a euro short squeeze which lifted the EUR/USD currency pair to the 1.23 handle during that day's New York morning session. On the first and second days of August, the pair sold off sharply as markets expressed disappointment that this week's FOMC and ECB meetings did not yield new supportive policy moves. Consolidation is quite common among major currency pairs during a London session after such an outsized drop the previous day and before the scheduled release of the US non-farm payrolls report. During 3 August European morning trading, however, the green candles just kept coming on the EUR/USD 1-hour chart. As the sun was rising over the US east coast that Friday morning, the pair was less than a dozen pips shy of 1.2300.

One possible contributing factor behind the euro's pre-NFP rally: market shortsightedness. European traders and dealers who scanned the financial press before the start of Friday's London session found multiple articles describing an ECB poised to make an historic policy move. The Telegraph's Ambrose Evans-Pritchard, for example, wrote the following on his blog:

Mario Draghi has activated the ECB's monetary policy, risk, and market committees to draw up drastic plans. This will include open-market operations – ie bond purchases – that may be "unlimited" and may be "unsterilised" (ie QE net stimulus). The missile is being loaded.
Markets have tanked because they don’t get instant gratification, but I rather suspect that they have missed the point.

In a press conference conducted during the hour leading up to the NFP report's scheduled release, several comments made by Spanish prime minister Mariano Rajoy suggested that the country's government may be closer to requesting additional financial support.

At 8:30 a.m. New York time, markets got a sign of hope from the other side of the pond. The headline figure from the July NFP report beat the consensus forecast for the first time in five months.

From that point forward, a "risk-on" mood -- generally a EUR/USD positive -- prevailed in multiple financial markets. After making a brief dip during the first few minutes of typically high -- and often unpredictable -- volatility immediately following the NFP release, the euro rose to the occasion. A long trade entry in the 1.2245-50 zone was justified by at least two prospective sources of nearby support: the daily central pivot point, and the 15-minute 21 ema.