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EURUSD at 14-Year Lows: Don’t Blame the Fed

The sell-off was “in the charts” long before news of higher interest rates

by Vadim Pokhlebkin
Updated: December 19, 2016

Last week the euro fell hard. Headlines said:

“Euro tumbles to 14-year low against the dollar” (In-Depth-Telegraph.co.uk, Dec. 15)

The reason was plain to everyone: the Fed's decision to hike interest rates.

When interest rates go up in one country, it's assumed that assets priced in that country’s currency become more attractive to foreign investors. Since the European Central Bank is keeping the rates unchanged and the Fed is moving them up, the euro vs. dollar scale is now tipped in favor of the U.S. dollar.

But can you imagine another post-Fed argument against the dollar? Something like this:

“Higher interest rates make borrowing more expensive. Mortgage rates in the U.S. are already on the rise; what will happen to real estate prices when the Fed hikes rates three more times in 2017, as it’s already promised? Plus, businesses, spoiled by years of low borrowing costs, will now have to adjust to harsh realities of paying a lot more for loans.”

Why didn't we hear this argument? Because the dollar rose last week. Had it fallen instead, you bet your next mortgage payment we’d be hearing that higher interest rates are bad for the economy -- and the dollar. That’s the thing about “market fundamentals”: Often, you can use the same factor to explain both bullish and bearish market action, depending on which explanation fits best.

Rather than weighing one fundamental factor against another, Elliott wave analysts look at price patterns. Bullish or bearish, we say so -- regardless of the news; before the news.

In fact, one day before the Fed's announcement last Wednesday, our Senior Currency Strategist Jim Martens' Twitter feed said:

“It's widely accepted the Fed will raise interest rates -- but whatever the FOMC meeting outcome is, the dollar should strengthen.”

And last Wednesday, about 10 minutes before the Fed's announcement, Jim's Currency Pro Service posted this bearish EURUSD forecast (partial Elliott wave labels shown):

EURUSD

[Posted On:] December 14, 2016 01:54 PM

[Completing a corrective recovery - then lower] (Last Price 1.0641): The poke above 1.0667 satisfied minimum upside expectations, though wave 2 might still carry toward the 1.0740 - 60 area. Reaching the upper end would not be a surprise [around the time of the FOMC announcement at 2:00 PM ET] given the volatility that often surrounds these events.

Keep in mind, recent euro strength (dollar weakness) is viewed as corrective. The risk is to the downside.

This next chart shows you what EURUSD did next:

Elliott waves aren’t a crystal ball. But they are consistent in one aspect: helping you see which way the market’s collective psychology is headed -- regardless of the news; before the news.

Markets all around the world are at a critical juncture ...

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Today, worries are high. With a 21-page chart-filled report, 3 new market-focused interviews and more, the 2017 edition may be our most timely one yet.

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