What if the Fed raises interest rates? What if the DJIA falls (or rallies)? What if China "dumps" the U.S. dollar? How would each of these factors affect the dollar, the euro, the pound?
Too many forex traders based their trading strategies on "fundamental" analysis, namely the complex web of interconnected economic and political "what-ifs" that supposedly set trends in currencies.
Well, Friday, January 28 gave us another good example of why the "fundamental" logic is a poor forecaster: Too much depends on how you interpret the data.
At 8:30 AM, the U.S. Commerce Department reported that in Q4 of 2010, the U.S. GDP grew at 3.2%. It was better than the 2.6% growth in Q3, but below economists' expectations of 3.5%.
Question: Is that bullish or bearish for the U.S. dollar?
That depends on how you look at it. On the one hand, it's bullish -- because the economy did grow in Q4, and faster than before. On the other hand, it's not growing as fast as we'd like it to. Ask ten forex traders -- "Bullish? Bearish?" -- and you'll probably get ten different replies. The answers really amount to how you feel about the dollar. In other words, take a lucky guess.
Of course, any forecast involves some guesswork: No one knows for sure what the future holds. The question is: Do you want to gamble with wild guesses, or do you have a method that allows you to focus on probabilities rather than just possibilities?
Elliott wave analysis is a probability-based method. Wave patterns in forex market charts allow you to make probabilistic assessments of the next move. You also know price points where your forecast is wrong -- handy if position risk management is one of your priorities.
Based solely on the recent Elliott wave pattern in the EURUSD, EWI's Currency Specialty Service posted this daily forecast -- the night before the U.S. GDP number was released (some Elliott wave labels erased for this article):
Update For: Friday
Posted On: Thu, 27 Jan 2011 20:21:59 GMT
EURUSD Last Price: 1.3736
[down a whole bunch real fast] Key Levels: 1.3637
Sharply lower prices are anticipated. This should occur from little if any above the 1.3759 Thursday high. Fellow Wavers, get bearish. The rally from early January looks impulsive but mature, ending in a diagonal triangle. The diagonal triangle is one of the 13 known Elliott wave patterns. On the morning of January 28, the EURUSD quickly lost over 100 pips, as expected. To find out how far the euro may tank, read our latest intraday forecasts now in the Currency Specialty Service.