Here's what's interesting. After Tuesday's (Feb. 10) much-awaited U.S. bank rescue plan announcement, the DJIA fell sharply. Why? Apparently, because the plan's details failed to convince investors that it would actually work.
You would think that after a reaction like that, the U.S. dollar would also be in a free fall – yet the buck has actually gained since Tuesday. Against the euro, it gained close to 300 points, sending the EUR/USD down from $1.3040 on February 10 to $1.2740 on February 12. Guess why? Apparently, for the same reason: if the plan is useless, the dollar becomes "a safe haven."
But imagine for a moment that the dollar fell after the "disappointing" plan came out. Then, would you be surprised to hear something like, "The dollar is falling because global investors doubt the U.S. banking bailout plan"? Of course not; that would also be a perfectly reasonable explanation.
My point? The same news event – the announcement of the banking rescue – can be offered to explain both bullish and bearish action in the USD. That's why, as we've said on these pages before, trading currencies on "fundamentals" alone will often get you into trouble.
Forex markets are not logical; they are emotional. As this example shows, how traders interpret a news report is determined by how they collectively feel. If they feel bullish on the USD, they will buy it – because it's a "safe haven." If they feel bearish, they'll sell it – because "the U.S. economy is falling apart." So then, the real question is – how do you know if forex traders are feeling bullish or bearish?
Enter Elliott wave analysis – a method based on studying and predicting the shifts in collective market psychology. Take a look at this forecast EWI's Currency Specialty Service made on the evening of Tuesday, February 10:
Update For: Wednesday
Posted On: Tue, 10 Feb 2009 23:09:00 GMT
EURUSD [Last Price]: 1.2911
[Lower, into a bottom] The potential triangle leaves EUR$ vulnerable to a thrust below 1.2707.
As you can see, the forecast doesn't even mention the stimulus bill passed earlier that day. Instead, it talks about a triangle formation in the EUR/USD chart – an Elliott wave pattern that usually resolves in the direction of the previous trend; in this case, down, which is exactly where the market went.
Elliott wave analysis helps you bring clarity to ambiguous situations in a way that the news simply can't. To get our latest intensive, directional forex forecasts, try our Currency Specialty Service. Here's what you get.