Tuesday (April 22) brought another piece of bad news for the U.S. dollar: For the first time in history, the exchange rate between it and the euro, the currency shared by 15 of the European Union's Member States, went above one dollar and sixty cents.
The move was universally blamed on a hint by a European Central Bank official not to expect interest rate cuts any time soon. And that, goes the thinking, will keep "interest rates differentials [between the U.S. and Europe] wide and the euro attractive for opportunistic money market related inflows." (The Financial Times)
"Fundamentals"-based reasoning aside, from a standpoint of technical analysis methods (one of which is Elliott wave) this is an interesting moment for the euro-dollar – for two reasons:
Reason #1. Some analysts would consider the $1.60 level a "round number." Markets often act strangely at such junctures. Paradoxically, round numbers both attract and repel price action; in technical analysis lingo, round numbers will often serve as support and resistance levels. The theory of round numbers says that while a market may be slow to break through such level, once it does, it covers the distance to the next round number very quickly.
But that's in theory. In practice, when the Dow (the "round numbers" theory applies to many markets, not just forex) first broke though 100 in January 1906, it soon crashed back below 100 (41.22, to be exact). It took eighteen years before it blasted through 100 for good. The Dow first reached 1000 in January 1966. It took seventeen years before it blasted though that level for real.
Another case was the GBP/USD exchange rate (or "cable"), which first broke through its "round number," the $2 level, in September 1992. Then it fell hard, and it took cable fifteen years to muster enough strength to have another go at $2.
Round numbers do not figure into the Elliott Wave Principle. However, you could try and combine the two methods. When your market has reached a potential round number, try and identify where prices are in the wave pattern – and you may have a better idea as to how fast it may break through (if at all), and whether or not the break will be sustained. Which brings us to the second reason why this is such an interesting juncture for the euro-dollar.
Reason #2. Jim Martens, the editor of Elliott Wave International's Currency Specialty Service, says that the current wave structure in the EUR/USD,
"…appears to be taking the shape of a diagonal triangle. Diagonals send two messages. First, they typically unfold in the fifth wave position. That suggests the current movement is nearing an end. Second, diagonals signal underlying weakness; the internal waves all taking the shape of corrections."
Jim illustrates this point in tonight's (April 22; online now) Daily forecast for the EUR/USD with this chart:
What does this mean for you, a forex trader? One word: a potential opportunity. Get the complete details – wave counts, labeled charts and price targets – right now inside EWI's Currency Specialty Service.
*******
(Editor's note: Your Currency Specialty Service subscription also gets you instant access to a free 49-minute webinar on how to apply Elliott wave forecasts in your forex trading. The webinar, recorded live on March 25 by EWI's Senior Currency Strategist Jim Martens, covers topics such as:
-
How do I identify trade set-ups?
-
How do I set protective stops using Elliott to help me manage risk?
-
How do I set price targets using Elliott?
-
How do I identify a wave pattern in real time forex trading on my screen?
To watch this free 49-minute webinar now, subscribe to EWI's Currency Specialty Service and click on the "Video/Education" tab once you have logged in.)