July 24th 2012. The Eurozone is trembling in an unseen debt crisis. In the same time the Euro barely manages to stay above 1.20 against the US dollar, after a sell-off of almost 30 cents in just a little over a year. Concerns about the survival of the whole European Union are growing alongside with the panic. The leaders of the member countries, financial institutions like the International Monetary Fund, European Central Bank and the European Commission, as well as the financial ministers of the countries gather together almost every day, trying to put the situation under control.
May 8th 2014. Almost two years have passed. The Euro is in the vicinity of 1.40 against the dollar, recovering by nearly 20 cents. No-one is talking about the European Union falling apart. The Institutions seem to have returned to their usual rhythm.
May 11th 2014. The prestigious “Financial Times” published the first part of an article called “How the Euro Was Saved”. The material offers a comprehensive look into the most important meetings, talks and decisions during 2012, which, according to the author, prevented the catastrophe in the Eurozone.
For the purposes of better visualization let’s put these three dates on the daily chart of the EURUSD exchange rate.
As you can see, Financial Times’ article comes as a natural conclusion of the Euro’s 2-year rally. From its very title you can sense the optimism about the future of the European currency. Analysts and expert share the same belief that the worst has been left far behind. There was no shortage of forecasts, where 1.45 and even 1.55 are mentioned as Euro’s target by the end of the year. But what has happened with EURUSD after the top of 1.40? Was the Euro really saved, as claimed by the Financial Times?
The chart below shows how EURUSD is trading now, as well as the path it traveled to reach these levels.
As visible, EUR, currently trading around 1.27, is in a state of “free fall” against USD. In just five months EURUSD lost 13 cents of the previous rise. Is it just an ironic coincidence, that the European currency crashed again right after “How the Euro Was Saved” came out of print?
Our answer is “no”. The world realized that the Great Recession is imminent only after the bankruptcy of Lehman Brothers in September 2008. Truth is that the crisis began almost a year earlier – in October 2007. Now, EURUSD offers the same kind of delusion. Relying on lagging economic data, economists lag in their forecasts as well. It turns out, that just when they become confident in a trend, it is time for it to reverse. We would like to remind you of the encouraging advice economists were giving in 2007 on buying stocks and real estate. Now, 7 years later, those who listened to them can tell you about the catastrophic consequences they were forced to live with.
Economists can be very helpful, when analyzing the present situation, in order to provide the best possible solution for the “now” moment. However, the present situation will not last forever. It also gives no evidence of future developments. That is why economists are often unprepared for sudden changes in market trends.
So, could successful forecasts be made at all and if yes – how? There are plenty of methods allowing that. The one we use is called the Elliott Wave Principle. This is the method we used on March 30th 2014, when we predicted that EURUSD should reach 1.40, but then we have to prepare for a major reversal.
EURUSD has been trading according to this forecast so far, but how low we should expect it to fall? In order to answer this question we have to move to a bigger time frame chart, showing all price action since 2008.
The weekly chart suggests that we are in the middle of wave C of a big A-B-C zig-zag correction, where wave B is a triangle. If this is the correct count, rates around 1.15 are highly probable. This means that EUR USD could lose another 12-14 cents. If the Market decides to fulfill this scenario, the events of 2012 may reoccur. The Eurozone could be shaken once again, maybe even harder.
Is Europe ready?