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Why The Euro's Late 2016 Crash Was... 2 Years in the Making

There are many reasons investors can cite for the euro's reversal... but only one of them is right

by Nico Isaac
Updated: December 30, 2016

Talk about ending the year with a bang!

Just when it seemed like the euro was going to make a graceful, no-splash exit from 2016 -- it up and pulls a dramatic swan dive. Case in point:

In late November, the euro suffered its longest losing streak against the U.S. dollar since its inception in 1999. Then, on December 20, the euro plummeted to a 14-year nadir against the buck -- to its lowest level for 2016 -- all before staging a modest recovery.

As for what caused the euro's crash?

Well, there are no shortage of fundamental catalysts to choose from, starting with:

  • The November 9 shock victory of U.S. President-elect Donald Trump
  • The November 19 pledge by ECB President Mario Draghi for "continued monetary support" (i.e., more stimulus) in the fight to restore economic growth across the pond
  • The December 14 interest rate hike (of 25 basis points) by the U.S. Federal Reserve
  • The December 19 deadly attack on Berlin's Christmas market, which further fueled the sense of uncertainty over the eurozone's political and economic stability

You could place any one of these events on the euro's price chart and label them bearish. But you'd also have to place them on the AFTER side of that chart -- as in, after the euro's downside breakout already began.

As for before -- well, there's only one factor that sufficiently identifies the euro's downside potential in advance. That is, the termination of a two-year long Elliott-wave contracting triangle.

The euro's bearish triangle set-up was first outlined by our October 2016 European Financial Forecast, with this coverage:

"The euro's wave structure itself stands at a compelling near-term juncture. In late August, European Short-Term Update editor Chris Carolan illustrated an approaching end to the euro's 20-month contracting triangle, a pattern that 'always occurs in a position prior to the final actionary wave in the pattern of one larger degree.'

"On Monday, Chris updated the picture and stated, 'This analysis calls for recent strength to top out below 1.135...' before the next leg down ensues.'"

Next, our November 9 Short Term Update confirmed the end of the contracting triangle and set the stage for the inevitable "thrust" lower:

"The [euro] spiked to 1.1300 at about 11:00pm last night and then reversed sharply during today's day session. We've adjusted the labels and marked last night's high as wave (E)... [The next move] should be a multi-month decline that draws the euro well below the 1.0462 low on March 13, 2015. It is underway now."

Flash ahead to today and the next chart captures the "after" shot of the euro's powerful, post-triangle crash.

As we enter 2017, one buzzword is swirling around the euro: parity. Elliott wave analysis provides a purely objective opinion as to whether this scenario will come to pass.

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