The U.S. dollar continues to tumble against most of its rivals. The selloff is especially obvious against the Japanese yen, with the USDJPY pair declining from as high as 114.35 to as low as 109.56 as of today. The first possible explanation for the dollar’s plunge that comes into mind, is the United States withdrawal from the Paris Climate Agreement, announced on June 1st, 2017, by President Donald Trump. Unfortunately, using the news to explain market movements post-factum is not going to help us in trading. That is why we sent the following Elliott Wave chart to our clients before the market opened on May 22nd.(some marks have been removed for this article)
Instead of waiting for an announcement, event or something else to force the market in a certain direction, we prefer using the Wave principle, because it often allows analysts to anticipate the direction of the next move way before the news people would later use to explain it spreads. In USDJPY’s case here, the above-shown forecast was made nine full days ahead of Trump’s withdrawal announcement.
According to the Elliott Wave theory, every impulse is followed by a three-wave correction in the opposite direction. Once the correction ends, the trend resumes in the direction of the impulsive pattern. As visible, two weeks ago the 30-minute chart of USDJPY was already showing a five-wave decline between 114.35 and 110.23, which meant more weakness should be expected once wave “y” of the corrective recovery was over. The updated chart below shows how the situation developed.
Wave “y” took the pair up to 112.12 to complete the entire w-x-y double zig-zag retracement on May 24th. From then on, USDJPY fell under bearish jurisdiction. The United States withdrawal from the Paris Climate Accord might be a political, diplomatic and environmental disaster, whose exact proportions are yet to be seen. From an Elliott Wave trading point of view, however, it was almost completely irrelevant, since the dollar was supposed to tumble against the Japanese yen anyway.