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Economic reports create fertile ground for traders.
Like Friday’s payrolls report for September.
U.S. employers created 254,000 jobs during the month. That blew past economist expectations of 150,000 jobs.
Naturally, the stock market reaction gets most of the attention during moments like these.
But if you really want to take advantage, another market arena dwarfs everything else.
The global currency market often sharply reacts to economic news as well. That’s because data like interest rates can play a big role in currency movements.
In this case, strong jobs reports make it less likely we’ll see another big rate cut in November.
And those changing expectations can have a big impact on the dollar.
Given that the currency market trades $7.5 trillion every day, that means there’s plenty of trading opportunity.
Over my 40-year career, I’ve traded nearly a trillion dollars’ worth of currencies.
And I’m watching a key trade setup following the jobs report…
The U.S. Dollar Is Testing a Key Level… Again
The U.S. Dollar Index (DXY) can help you spot trading opportunities.
DXY tracks the dollar’s performance against a basket of currencies like the euro and Japanese yen.
And going back to the start of 2023, DXY has kept testing a key chart area multiple times. That means it may be building a potential trade setup.
Take a look at the chart below.
The shaded area on the chart shows the 100 support zone. DXY has tested this zone at least six times going back to the start of last year.
And more recently, you can see DXY rallied after its latest test (see the arrow).
That rebound picked up steam following Friday’s payrolls report.
Now, DXY’s reaction around this zone has delivered trading opportunities in the past.
So when I see this key level coming into play, my attention turns to a certain currency pair…
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Watching EUR/USD
No other currency has a greater bearing on DXY than the euro. It makes up 58% of that basket.
That means the euro has a major impact on movements in DXY.
DXY is bouncing off support once again. So it’s time to pay attention to what’s happening with the EUR/USD currency pair in the chart below:
When the line is rising, the euro is strengthening against the dollar.
And when the line is falling, that means the dollar is strengthening against the euro.
As DXY rallies off price support around the 100 level, the EUR/USD is moving lower. It tested resistance at 1.12 (the shaded area and arrow).
But with the price retreating from that level, that could be a trading opportunity to watch.
Take another look at the chart.
The pullback in EUR/USD has taken the currency pair down to a price support level (the dashed line at “1”). That same level produced a rally last month.
Also, the Relative Strength Index (RSI) is dropping back toward the 40 level at “A.”
An RSI reading of 40 often represents oversold conditions during an uptrend.
You can see with the dashed line that the RSI has held over 40 since the EUR/USD uptrend that started in June this year.
The recent EUR/USD momentum looks extended to the downside, coupled with price support coming into play.
So it’s time to be on the lookout for a mean-reverting move higher.
Regards,
Larry Benedict
Editor, Trading With Larry Benedict