Market Overview

How to Trade the Congress Debt Limit Debacle

It has been an extremely volatile year in the currencies markets, most notably in the EUR/USD. On this date last year, the euro hit a 52-week low versus the dollar at $1.248, as worries in Greece escalated and investors flocked to the “safety” of U.S. currency.

From that point on, fiscal fears in Europe waned (at least mentally), while debt worries in the U.S. escalated. The dollar went from its 52-week high of $1.248 versus the euro on July 6th, to its 52-week low of $1.49394 on May 4th.

Since then, the EUR/USD has been going back and forth, as the U.S. debt crisis has been dragged out due to the indecision and relative inaction in Washington D.C. Over the past two days, the EUR/USD has lost 1.7%, as buyers have begun to accumulate dollars upon Congress's cancellation of its July 4th recess to work on a potential deal.

The move suggests that investors are betting that American leaders will come to some form of agreement over the debt ceiling in the near term. If you take a look at a one year daily chart of the EUR/USD, you will see that the recent surge in the dollar is pushing the currency towards the key resistance level of $1.40 – an area that has held firm on four occasions since March 28th.

ACTION ITEMS:

Bullish:
Investors who believe that Congress will come to a deal on the debt ceiling before the “deadline date” of August 2nd might want to consider the following trades:

  • A debt deal would bode well for investors in the U.S. dollar and may provide the momentum necessary to break the key $1.40 level. A break below $1.41023 in the EUR/USD would provide an excellent entry point for bullish dollar investors, as a run at $1.40 would more than likely happen quickly. The stop out price would be a break above $1.45781, which was the highest point of the euro's last run.
  • If you prefer ETF's, take a look at the PowerShares DB US Dollar Index Bullish (NYSE: UUP). A break above $21.68 would provide bullish confirmation, while a break below $21.01 would serve as a clear exit point

Bearish:
Investors who believe that no deal will be reached by Congress and the dollar will plunge may consider these alternate positions:

  • If Congress fails to reach an agreement, the U.S. Dollar will more than likely get crushed. A good entry point to buy the EUR/USD would be a break above previous resistance at $1.45781. If the euro breaks that level, it may look to make a run at its 52-week high of $1.49394.
  • If you prefer ETF's take a look at the PowerShares DB US Dollar Index Bearish (NYSE: UDN). A break above $28.81 would provide bullish confirmation, while a break below $28.15 would serve as a clear exit point. If it breaks above $28.81, a run at the 52-week high of $29.33 appears likely.

Neither Benzinga nor its staff recommend that you buy, sell, or hold any security. We do not offer investment advice, personalized or otherwise. Benzinga recommends that you conduct your own due diligence and consult a certified financial professional for personalized advice about your financial situation.

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