The U.S. dollar rallied strongly against the euro in intraday trading on August 14, pushing the exchange rate down to $1.4780 – the level it hasn't seen since February. What's behind such a persistent show of strength on the dollar's part?
As usual, it depends on whom you ask. The mainstream media forex analysts blamed the August 14 EURUSD decline on the fact that "crude oil fell and a report showed Europe's economy contracted for the first time since the 15-nation currency was introduced almost a decade ago." (Bloomberg)
If that's true, that means that in order to catch Thursday's drop in the EURUSD, you needed to know ahead of time what oil was going to do that day, and also what that European report was going to say. So, instead of trying to predict one market – the EURUSD – you now have to watch, and correctly forecast, three.
And even then you weren't guaranteed success. The dollar could have easily lost on Thursday, after the news. Can you imagine a headline saying, "Falling oil prices send the U.S. dollar down, indicating slowing U.S. consumer demand and continued economic weakness"? And, "The U.S. dollar slides as a key European report indicates the EU's economy is still growing faster that the U.S."?
That's the beauty of fundamentally-based explanations: You can spin them any way you want, using the same factors to justify both the market's rallies and declines.
But there is a way to simplify your forecasting process. In Jack D. Schwager's excellent “Market Wizards,” one famous trader summarized his success this way: “Listen to the market, it will tell you everything you need to know.” In other words, don’t let the economic data confuse you. Watch market sentiment; track momentum; look for repeating patterns in the charts, etc.
That's exactly the process Elliott Wave International's Jim Martens, the firm's Senior Currency Strategist and editor of Currency Specialty Service, used when he posted this intraday forecast for subscribers on the morning of Thursday, August 14 – about an hour before the EURUSD began to fall in earnest:
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Thursday, August 14
09:17 ET/13:17 GMT
[EURUSD] Last Price: 1.4900
[Correctively ranging, then lower] We've argued that the EUR$ decline is stretched, but given the opportunity to recovery, all it has managed is to consolidate. Barring a breakout above 1.4979 the risk is to the downside, in a thrust from a triangle.
You see, prior to the August 14 decline, the EURUSD moved sideways all week – in an Elliott wave pattern known as a "triangle." Triangles always end in a violent price spike – exactly what we saw on Thursday.
Also, triangles always appear in a wave 4 position, before the market spikes in the final, terminal wave 5 thrust. Wouldn't it be ironic if, despite "falling oil prices" and reports of "contracting European economy," the EUR started to gain soon?
Where is EURUSD going next? Find our now, inside EWI's Currency Specialty Service. Details.