This has been a frequent question on EWI's Message Board for months:
"What happens to the dollar if the U.S. credit rating gets downgraded?"
That seemed impossible -- that is, until April 18, when the Standard & Poor's ratings agency downgraded the U.S. credit outlook to negative. Too much bickering among the U.S. policymakers about the country's future fiscal course, they said, too much disagreement to really solve America's debt problems.
The U.S. dollar, of course, promptly collapsed following the announcement.
Well, not exactly. The above scenario is what the dollar "should have" done, by the logic of "fundamentals." But instead, the dollar gained that day.
It's the euro, the dollar's main competitor, that lost on April 18. The EUR/USD, the euro-dollar exchange rate and the most actively-traded forex pair, fell hard after the news: down over 250 pips in a matter of hours.
How in the world can that be?!
"Fundamental" analysts can rationalize this move all they want. But the fact remains that the dollar did the opposite of what the conventional logic said it would. Why?
We at EWI will never tire of saying that the financial markets are not rational. They are emotional. Market participants react to the news not in a linear way ("good news: market up; bad news: market down") but in a way in which fear and greed, the markets' two main emotions, prompt them to.
Elliott wave patterns in forex price charts track and forecast market emotions. Our intensive Currency Specialty Service brings you updates on the EUR/USD and other currency pirs 24 hours a day.
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