Europe was barely making its way out of the pandemic when Russia added war, inflation and energy extortion to the continent’s growing list of worries. Germany, the EU’s main economic engine, is almost certainly headed to a recession due to its immense reliance on Russian energy resources. As a result, the European currency fell to lows last seen more than 20 years ago. EURUSD dropped below parity in July, 2022. By early September, the pair had breached the 0.9900 level, as well.
Then, the ECB finally decided it had to act more decisively to tame inflation. The EU’s central bank raised it benchmark interest rate by 75 basis points on September 8th, sending EURUSD up sharply. Four days later, the bulls were on the verge of exceeding the 1.0200 mark. Unfortunately for them, the August CPI report came in worse-than-expected on September 13th, sending the pair plunging again.
A Glimpse Beyond the Obvious in EURUSD
On the surface, it may seem that EURUSD is driven by entirely external news and events. The pair climbs after the ECB hikes rates. Then it drops following the news of higher US inflation. In reality, however, Ralph Elliott discovered some 90 years ago that “the habit of the market is to anticipate, not to follow.” It was his method of analysis, known as the Elliott Wave principle, which helped us stay ahead of EURUSD ‘s reaction to both ECB and CPI.
The chart above was made available to Elliott Wave PRO subscribers on Wednesday, September 7th. It demonstrates how, by correctly recognizing patterns, traders can stay ahead of more than one price swing or news item.
The most important part of this chart was the five-wave impulse to the downside between 1.0369 and 0.9901. According to the theory, every impulse is followed by a correction. So, this pattern meant the following choppy sideways development must be part of some sort of a corrective structure. The recovery to 1.0090 was clearly corrective. However, it was also too small and shallow in respect to the preceding impulse pattern. Furthermore, the decline to 0.9864 looked like a simple a-b-c zigzag with an ending diagonal in wave ‘c’.
Merely Catalysts
This led us to believe that EURUSD was in the middle of an a)-b)-c) expanding flat correction, whose wave c) was yet to occur. On the other hand, once a correction is over the preceding trend resumes. With that in mind, we wrote that “wave c) up can now be expected to lift EURUSD towards 1.0200, before the downtrend resumes.” The updated chart below shows EURUSD ‘s path after one jumbo rate hike by the ECB and one disappointing US inflation report.
Similar Elliott Wave setups occur in the crypto, commodity and stock markets, as well. Our Elliott Wave Video Course can teach you how to recognize them yourself!
The pair was already surging when the ECB’s rate hike gave it another boost on September 8th. Wave c) naturally took the shape of an impulse, marked i-ii-iii-iv-v. On September 12th, wave ‘v’ reached 1.0198. As expected, a bearish reversal quickly followed. The next day, the August CPI report shattered the bulls’ hopes and dragged EURUSD down by over 200 pips. As of this writing, it still hasn’t been able to recover.
In conclusion, the ECB’s interest rate decision and the CPI report are not the reasons why EURUSD moved the way it did. They were merely catalysts of moves for which the stage was already set. Successful traders know that by the time the news is out, it is already too late. They’ve learned to stay ahead of it instead. That is where Elliott Wave analysis can help.
What will EURUSD bring next week? That is the subject of discussion in our next EW PRO analyses due out late Sunday!
