Predicting the Fed rate hike is not the same as predicting the market’s reaction to it
The benchmark interest rate of the Federal Reserve is now 1% after the central bank hiked by 25 basis points on Wednesday. And while the Fed rate hike was virtually guaranteed, the Forex market’s reaction to it came as a surprise to a lot of people. Common economic sense suggested the dollar should rise against other major currencies, but what we saw in reality was exactly the opposite. EURUSD and GBPUSD rose sharply, while USDJPY and USDCAD plunged following the Fed announcement, leaving news-interpreter scratching their heads in bewilderment. If it was not the Elliott Wave Principle, we would be quite surprised by the market’s reaction on Wednesday, as well.
Below you will see 4 before-and-after charts of EURUSD, GBPUSD, USDCAD and USDJPY, showing two things: first, you do not need to wait for the Fed, in order to get an idea of where the market is going, and second, you could sometimes be weeks ahead of the news. The first pair of charts is of EURUSD. The “before” chart was sent to clients ahead of the market open on Monday, March 6th.
As visible, while the exchange rate was hovering near 1.0615 two weeks ago, we thought a significant recovery should follow, because the decline between 1.0828 and 1.0493 has been limited to just three waves. In addition, the 61.8% Fibonacci level was expected to act as a strong support. Two weeks and one Fed rate hike later, EURUSD climbed to 1.0782 so far.
GBPUSD is even more interesting. Leaving the Fed aside, the pair had another logical reason to crash in the face of the just-approved activation of Article 50 and Brexit. However, it appears the market does not care about logic.
The first chart of GBPUSD, sent to clients before the open on March 13th, shows that according to the Wave Principle, the pair was likely going to decline to the area near 1.2100, but as long as 1.1987 was safe, a bullish reversal was supposed to occur. The “after” chart allows us to see that GBPUSD fell to 1.2109, where the bears suddenly went out of power and made way for a rise to 1.2398 as of today.
The next pair of charts visualizes USDCAD’s post-Fed plunge, that was actually predicted during the weekend. In other words, three trading days before the Fed rate raise.
USDCAD was calmly trading near 1.3460, but once Janet Yellen started speaking, the bears woke up to cause a selloff to 1.3276, from which the pair has not yet recovered. Instead of buying, that triangle in the position of wave B warned us to be careful. As the theory postulates, triangles precede the last wave of the larger sequence. Here, the last wave is labeled as C, and it seems to have terminated at 1.3534. Hence, our negative outlook.
And last but not least – USDJPY. This pair has been a real headache even for experience Elliott Wave analysts, since it has been moving within a range between 111.60 and 115.50 for over two months. Fortunately, a pattern emerged just before the Fed rate hike, which allowed us to prepare for the 160-pip slump that occurred on Wednesday.
The pattern in question was a leading diagonal, followed by a three-wave a-b-c correction, developing between the parallel lines of a channel. The channel’s upper line fulfilled its role as a resistance, discouraging those, who have been expecting the dollar to skyrocket against the yen after the Fed rate hike.
As it turned out, even if you know what the news will be, you might still not be able to correctly interpret them, simply because the market does not follow the same logic as we humans do. In our opinion, that is because each one of us has its own logic that usually differs from someone else’s. The good news is that with the help of the Elliott Wave principle, we could get an idea of what the irrational crowd is about to do, sometimes weeks in advance.