EUR/USD: From 2-Year Highs to 2-Month Lows. Press “Pause” on the “Fed Pause.”

The euro’s “month of pain” was anything but for those focused on the right, Elliott wave, point.

by Nico Isaac
Updated: June 07, 2023

I recently rejoined my pre-pandemic yoga class and right away I knew the biggest lesson I would be learning was that of humility. 3 years without regular stretching and I now have the balancing abilities of a newborn kitten. My teacher, noticing this, reminded me of the Sanskrit word "Drishti," which means point of focus.

Basically, until you can master your inner vision, you rely on your outer vision. You pick a fixed point in the room to gaze at while engaged in tree pose and other steadying postures. Your attention is drawn away from your own wobbly legs and onto the Drishti, helping you to stabilize.

It reminded me of how "fundamental" analysis is supposed to work in financial markets. Traders and active investors set their attention on events outside the markets they follow to achieve a balanced outlook of where prices are headed. If you follow commodities, you could focus on weather patterns that might affect crop conditions. Or if you invest in individual stocks, you may watch a data Drishti like earnings for directional clues.

Currencies are no exception. In the world of forex, nothing is off limits as a potential Drishti for price moves. Take, for instance, the recent performance in the world's most heavily traded currency pair, the euro/U.S. dollar.

On May 3, EUR/USD experts were laser-focused on one single "fundamental" event. Well, not so much the event itself as rumors of it happening; the Federal Reserve pressing "pause" on their uninterrupted 10-hike-long streak of rate boosts since March 2022.

On May 3, the day of the Fed's widely expected final rate hike for 2023, a modest quarter-point increase, Bloomberg wrote:

"The euro will likely advance to its highest level since 2021, as the dollar is set to weaken with the Federal Reserve signaling a pause in rate hikes and the European Central Bank continuing to tighten policy, according to Deutsche Bank AG."

In the weeks that followed, the Fed "pause" predictions continued unabated across news sources from CNBC, Bloomberg, Yahoo! Finance and Fortune, the latter saying on May 25, "Chair Jerome Powell signals a huge shift is coming... the Federal Reserve will likely forgo an increase in its benchmark interest rate when it meets in June."

And yet, while the experts remained focused on a halt to rate hikes, a supposed bullish catalyst for the euro, EUR/USD did the exact opposite. In fact, the euro plunged 3% against the dollar in May.

It makes me dizzy just thinking about it. Not because the euro went down when the "fundamental" script called for it to rise. Markets are volatile, forex being the king of wrenching moves. But because in that script, that point of focus didn't provide a way for traders to adjust safely to the alternate outcome.

This is where our May 8 Currency Pro Service intraday updates stand out from the conventional crowd. We presented a bullish wave count for EUR/USD -- however, it hinged on prices staying above a key price support level. From Currency Pro Service:

"The price action from 1.1096 so far looks corrective, and we will stick with the wave (b) triangle while 1.0942 is intact. Printing below this level will dismiss the triangle and suggest wave B has already peaked."

On May 10, EUR/USD's sharp fall raised the red flag on the prospects of further upside. Currency Pro Service wrote:

"A battle is going on circa 1.10; however, from our perspective, the bulls are running out of options to keep the uptrend intact.

"We will give the still-unfolding wave B precedence while 1.0909 is intact. Printing below this level will dismiss a wave (b) triangle and call up the alternate count to preferred status."

And from there, EUR/USD continued its descent, plunging below cited support and onto 2-month lows on May 31.

Never mind that on June 3, Bloomberg was back to focusing on the central bank for EUR/USD direction: "Look to the Fed 'Pause' for relief."

When it comes to trading, the goal isn't to fall and fumble through top-and-bottom picking. It's to achieve an objective and balanced stance from which to assess high-confident set-ups. And to be equipped with clear levels of support and resistance to minimize risk.

As we've just shown, not all Elliott wave interpretations correctly anticipate price direction. But the focus on risk-management price levels help cushion any blow and help traders roll with the punches. All without so much as a glance at the news headlines.