How to Trade the Euro's Next Move

Euro currency market
Joakim Leroy | E+ | Getty Images

It wasn't so long ago that euro investors were sitting pretty, with the currency buoyed by a sense that the debt crisis was receding.

But lately, the euro has been slipping and sliding on unsettling economic reports and Italian turmoil, falling a full percentage point last week. Now the upcoming European Central Bank meeting is only adding to currency investors' jitters.

"The market is starting to pressure the ECB into possibly cutting rates further," said Boris Schlossberg, a managing director at BK Asset Management.

Schlossberg told CNBC's Melissa Lee that "the euro zone remains in a quagmire," with a contracting economy and few signs of change. There is, he said, "no inflationary pressure whatsoever," which is giving the central bank policy flexibility.

(Read More: CNBC Explains: Inflation)

That's why Schlossberg thinks European Central Bank President Mario Draghi "could surprise with a 25 basis point rate cut," which is making him bearish on the euro. But that's not the only reason.

The market, Schlossberg said, is experiencing "a tactical change. The dollar no longer is trading as a safe harbor currency. It's starting to trade as a growth currency," moving higher on positive economic news.

With the U.S. economy in better shape than the euro zone's, that also bodes ill for the euro, Schlossberg said, so he wants to sell the euro against the dollar. The currency has found a little support right below 1.3000, he said, so he wants to wait and enter the trade if it breaks below the support level of 1.2950, setting a stop at 1.3100 and a target of 1.2750. He also suggests covering half the trade if the euro moves below 1.2900.

The ECB could always stand pat, Schlossberg said—but if there is a rate cut, or a strong nonfarm payrolls report in the U.S. on Friday, "that's going to push the euro lower regardless of whether it's going to be the euro component or the dollar component, and I want to get involved in that trade."

Tune In: CNBC's "Money in Motion Currency Trading" airs on Fridays at 5:30pm and repeats on Saturdays at 7pm.

Learn more: The essential vocabulary for currency trading is on Key Terms Dictionary. Top currency strategies are broken down for you in Currency Class.

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