The Federal Reserve announced yesterday it is keeping the interest rate unchanged, a move that was largely anticipated. However, 2017 is still expected to see another rate hike with three more coming in 2018. Following the news, the dollar strengthened against its major rivals. The EURUSD pair crashed from above 1.2030 to 1.1860 in less than an hour.
Two questions arise. First, if the Fed’s decision was not a surprise, why did Forex traders buy the Euro ahead of the announcement and why was the following crash so severe? Second, and most important, could the market’s reaction to the news be predicted? Only the Elliott Wave Principle can helps us find the answers. Before the market opened on Monday, September 18th, we sent our clients the chart below.(some marks have been removed for this article)
Since the EURUSD was struggling to find direction, stuck between 1.2090 and 1.1820, we thought a consolidation was taking place. In the Elliott Wave world, consolidations usually take the shape of a triangle, so we assumed one was in progress. Triangles consist of five sub-waves, labeled (a)-(b)-(c)-(d)-(e) here. As visible, wave (d) up was still under construction and wave (e) down was supposed to come next. Therefore, the Wave principle suggested we should get ready for more upside in wave “c” of (d) first. By the time we had to send clients the Wednesday updates, the 30-minute chart of EURUSD looked like this.
Several hours before the FOMC decision, wave “c” of (d) had managed to lift the pair above 1.2000. The bulls’ problem was that it took the shape of an ending diagonal, which is usually followed by a “swift and sharp” reversal. Just in time for wave (e) of the pattern. So, traders bought the euro, because wave “c” of (d) was missing, but then sold it, because wave (e) had to occur. That is the answer to the first question. Today is Thursday, and here is an up to date chart of EURUSD.
The answer to the second question is that EURUSD’s behavior could be predicted by keeping an Elliott Wave perspective on the situation. Recognizing the larger pattern early on helped us recognize the smaller patterns it was made of in the process. In the end, it made all the difference.