By Vadim Pokhlebkin
Last Friday morning (Feb. 1), right after the release of a disappointing U.S. employment report, the euro rallied and the U.S. dollar fell. "Dollar Approaches Record Low Versus Euro as U.S. Loses Jobs," promptly reported Bloomberg.
But just minutes later, the dollar reversed and the EUR/USD exchange rate plunged. The fall was fast and deep; by Friday night, the dollar stood over 100 pips stronger against the euro – despite that morning's bad economic news.
Strange? You can say that again. But what happened next was even stranger.
On Tuesday (Feb. 5), the dollar again took the upper hand and pushed the EUR/USD down – this time, close to 200 pips. Why? Apparently, because of the "expectations that the European Central Bank will remain hawkish" on interest rates (The WSJ).
Wait, I thought that Europe's higher interest rates were helping the euro by "attracting more foreign investments"? Isn't that how the analysts' mantra went for the past year, as the dollar was losing to the euro? But now, suddenly, higher interest rates are hurting the European currency?
And let's not forget – Tuesday's (Feb. 5) USD rally also came against the spooky backdrop of a 370-point plunge in the DJIA (on top of Monday's losses). Aren't crashing U.S. stocks another bad sign that is supposed to send forex traders dumping the dollar?
And yet, the buck is three full cents stronger today than three days ago.
If you've traded forex long enough, you've seen similar "anomalies" before…although, truth be told, there is nothing anomalous about it. Currency exchange rates, like any other liquid market, are moved by fear and greed of the people who trade them. And because those two powerful emotions can (and routinely do) override the crowd's rational impulses, the conventional "if, then" logic doesn't always apply. The media tries to assign logic to price fluctuations in retrospect, but…try and find it in the EUR/USD's recent moves, for example.
That's why it pays to keep an eye on emotional profile of the markets. Elliott wave analysis lets you do just that.
Here's what this means in practice. Five minutes before that bad jobs number came out last Friday morning, Elliott Wave International's Currency Specialty Service published this intraday update for subscribers:
08:25 ET/13:25 GMT
[Market Insight] A slew of data is due today. The short-term chart of the Dollar Index shows a sloppy slide to a potential double bottom. That would mean a dollar rally on the news… EUR$ reveals a similar potential double top.
And late on Monday night, two hours before Tuesday's 200-pip slide in the EUR/USD began, Currency Specialty Service published this intraday update:
23:10 ET/04:10 GMT
[EURUSD] Last Price: 1.4814 No change: Near term focus is on price falling below 1.4788 towards 1.4661.
Bottom line: Stop looking for logic where there is little of it. You can have our latest forex forecasts on your screen in seconds – just look below for details.