Following a recovery of more than 500 pips in a little over a month, EURUSD suddenly crashed from 1.1815 to 1.1570 last week, erasing half of its recent progress in just a few days. The selloff came after the Fed raised its benchmark interest rate for the third time this year on Wednesday and promised more hikes in the not so distant future.
Rates hikes by the Fed make the U.S. dollar more expensive, so it makes sense to expect the greenback to rise against its major rivals, including the Euro. However, we have seen plenty of counter-intuitive surprises before and decided to see if the Elliott Wave Principle will also confirm the negative EURUSD outlook. The charts below was sent to clients before the open on Monday, September 24th. As visible, while the pair was hovering around 1.1750, both the primary and the alternative Elliott Wave counts suggested a bearish reversal was on the horizon.
According to the primary scenario, a slump of roughly 100 pips could be expected to drag EURUSD down to approximately 1.1650 before the uptrend resumes. The back-up plan allowed for a much larger plunge in wave c) of an expanding flat correction, following a five-wave impulse from 1.1301 to 1.1734. The Federal Reserve was supposed to apply pressure on EURUSD and the Elliott Wave outlook was negative anyway. Conclusion: it was not a good time to be long the Euro. A week later, the updated chart below shows how the situation developed.
The crash we have been anticipating was postponed by a new swing high to 1.1815 on Monday, which only made buying EURUSD more risky. The following four days turned into a real nightmare for the bulls as the exchange rate lost 245 pips by Friday.
More often than not, the market does the exact opposite of what common logic dictates. This time, however, the Fed’s interest rate hike was the catalyst that validated our Elliott Wave analysis. The problem is the nature of the next catalyst is rarely known. Reading the charts through the prism of the Wave principle remains the best way to approach the market for traders, who want to stay ahead of the news.
What will EURUSD bring next week? That is the subject of discussion in our next premium analysis due out later TODAY!
