Following several very strong days that saw EURUSD appreciate from 1.1300 to 1.1734 between August 15th and 28th, the European currency is under pressure again. The pair is currently hovering under 1.1590 after a decline to 1.1530 yesterday.
As usual, it did not take very long for the after-the-fact explanations for the Euro’s weakness to emerge. The worsening emerging markets crisis, Italy’s budget announcement and China-related trade concerns are among the factors, which, according to other analysts, weigh on EURUSD’s recovery attempts.
Unfortunately, even those with just a month of experience in the financial markets know that such explanations are of little value for trading purposes, because by the time you finally know why the price is behaving the way it does, the move is already in the past.
Elliott Wave analysis, on the other hand, can help traders, who do not want to be late all the time. The chart below was sent as a mid-week update to our subscribers last Wednesday, August 29th, when EURUSD was still holding above 1.1670.
If it wasn’t for the Elliott Wave principle, 1.1670 would have looked like an excellent “buy-the-dip” opportunity. The problem was that the rally from 1.1300, albeit sharp and strong, looked like a complete five-wave impulse pattern, labeled 1-2-3-4-5. The sub-waves of waves 3 and 5 were also clearly visible.
The theory states that every impulse is followed by a three-wave correction in the opposite direction. So instead of joining the bulls near 1.1670, we thought it was time for a deeper pullback towards the area near 1.1500, where the support of wave 4 was positioned. The updated chart below shows how the situation developed.
It may seem very easy to attribute EURUSD’s 204-pip drop from 1.1734 to 1.1530 to the emerging markets crisis, Italy’s budget difficulties or the U.S.-China trade war, but we do not think it will satisfy anybody, especially since all of these factors were present when EURUSD was rallying a week ago. The sudden shift in the market’s attitude towards EURUSD can best be understood from the perspective of the Elliott Wave principle. A price chart and an eye for patterns are usually all the analyst needs to stay prepared.
What will EURUSD bring next? That is the subject of discussion in today’s premium update!