Few things seemed to spell trouble for the U.S. dollar early this week. On the contrary, on Tuesday, July 8, reports that the Federal Reserve "may extend securities dealers' access to direct loans into 2009" apparently helped the USD to erase Monday's losses over brewing trouble with Fannie Mae and Freddie Mac. "Bernanke's comments contributed to the turnaround to the dollar,'' said one currency strategist. (Bloomberg)
But then on Wednesday, the dollar gave back all of Tuesday's gains. And on the morning of Thursday, July 10, the REAL turnaround came: The EURUSD, the exchange rate between the euro and the U.S. dollar, shot straight up, giving the euro the lead.
What happened, you ask? To summarize, several of the latest U.S. economic reports have "added to concern the slowdown will be prolonged." Hardly a surprising conclusion, if you ask me…but as we said on these pages before, what determines the market's trend is not the news – it's currency traders' reaction to the news. And believe it or not, you can forecast their reaction just by looking at forex charts.
As early as 10 AM on Tuesday, July 8, an intraday update inside Elliott Wave International's Currency Specialty Service said this (some chart labels erased for this publication):
10:05 ET/14:05 GMT
[EURUSD] Last Price: 1.5680
[Above 1.5752] No change. So far the recovery from yesterday's low is in three waves, so we don't yet have confirmation that the larger trend has turned back up, although that is the belief. Ideally, prices will soon push above yesterday's high at 1.5752. The 1.5650 area needs to hold to maintain confidence in the bullish count shown.
It took the EURUSD two full days to work up the strength to break above the $1.5752 resistance level. Now that it has, is the sky the limit? Perhaps, but take a look at this intraday update from Thursday night (excerpt):
Posted On: Thu, 10 Jul 2008 22:26:00 GMT
Intraday
18:26 ET/22:26 GMT
[EURUSD] Last Price: 1.5785
...note that prices have stalled at the .618 retracement...
What the Currency Specialty Service analyst is referring to is that the July 10 rally, despite breaking above that important resistance level of $1.5752, so far has retraced an almost exact .618 of the decline from the recent high near $1.5900 – and stopped.
Coincidence? Not if you know your Elliott.
A .618 retracement is a Fibonacci ratio. Forex market follows Fibonacci numbers with surprising tenacity; they usually serve as price targets and support and resistance levels. Just another example of how an informed glance at a forex chart can help you see opportunities where others see random lines.
Where will the EUR/USD go next? Find out now inside EWI's Currency Specialty Service.