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EUR/USD (Forex): A Choppy Mess... How Much Longer?
Elliott wave patterns suggest a coming resolution to the EUR/USD's limbo.
If you've been frustrated lately by the lack of action in the euro-dollar exchange rate (EUR/USD) you're not alone. Since early June the pair has gone nowhere, but that's only the half of it: It has also swung wildly in the 500-pip range between $1.43 and 1.37, as the area circled on the chart below shows.
But here's what's interesting. While the EUR/USD has been unable to "commit" to a bullish or bearish side for two months, the U.S. Dollar Index, which is heavily weighted towards the euro, has just made a new low for the year. In the words of Jim Martens, Elliott Wave International's Senior Currency Strategist and editor of EWI's intensive Currency Specialty Service,
The dollar, as measured by the Dollar Index, dipped to a new low for the year. The new low does not come as a surprise, as two weeks ago we switched to the then alternate bearish triangle scenario. Since then we've been on the right side of the market and waiting for the new low.
Now that the expected new low in the DX is a reality, can we surmise anything about the future direction of the EUR/USD? Yes, says Jim:
The achievement of minimum expectations does not mean the dollar decline (from March) is complete. Looking at the underlying markets, euro and Swiss franc have not yet satisfied their objectives. That's a clear indication that $CHF, and the dollar, remains vulnerable to additional weakness going forward.
If you are wondering why that would imply additional USD weakness, take a look at this chart. It's the same chart as you see above, but with some Elliott wave labels on it (Currency Specialty Service shows it fully labeled right now):
See that pattern inside the converging lines? That's a contracting triangle, in Elliott wave lingo. One of the most common places within a larger wave pattern where contracting triangles appear is in wave 4 position. And if you know even the basics of Elliott, you know that after wave 4 comes wave 5, the final wave in the sequence.
Is that a guarantee of a new high for the EUR/USD? No. Elliott wave analysis works by selecting the highest of several future probabilities, not certainties. And based on the current pattern and the fact that the pair has gone no where for two months, the probability of a post-triangle thrust is high.