Euro’s Sharp Rally Against U.S. Dollar In Focus

EUR/USD was trading near 1.1170 at the start of last week. The pair was close to levels last seen two years ago and most expected the slide to continue. But then, on June 4th, Fed Chairman Jerome Powell implied the Central Bank is considering interest rate cuts in response to trade issues.

By Friday, June 7th, EUR/USD was trading north of 1.1345. In general, lowering the interest rate makes the corresponding currency less valuable. So the euro’s sharp rally against the U.S. dollar following the news is quite logical.

What interests us is the fact that the stage was set for a surge in EUR/USD with or without Jerome Powell’s rate cut comments. The chart below shows that a bullish Elliott Wave pattern was already in place before the week had even started. (some marks have been removed for this article)

EUR/USD 2 Hour Chart

The pattern in question is called an ending diagonal. It consists of five sub-waves, labeled 1-2-3-4-5, where each wave is a three-wave sequence and waves 1 and 4 overlap. Ending diagonals occur in the position of the last wave of the larger trend and carry one single message: reversal ahead!

Since the ending diagonal in EUR/USD looked complete, it made sense to prepare for a rally, at least as long as the bottom of wave 5 at 1.1107 was intact. Five days later the pair was up by almost 180 pips.

EUR/USD 2 Hour Chart

1.1107 was never breached and Mr. Powell’s interest rate comments served as the little push EUR/USD needed to start climbing. In our opinion, if it wasn’t for him, something else would have sent the pair higher, since there was already a bullish setup in place.

EUR/USD and the Case Against Trading the News

Besides, hardly anyone expected Mr. Powell’s dovish comments. The truth is that all kinds of news and events from all over the world can be used to explain certain market movements. The problem is that following them all the whole time is practically impossible.

Even if it was possible, the trader would then be left with the equally difficult task to predict the market’s reaction, which is not always logical. And finally, in order to be able to profit from his/her news interpreting skills, the trader would have to perform the analysis in a matter of seconds.

You see why we are not big fans of news-based trading. We prefer Elliott Wave analysis instead. One of its main postulates is that the market absorbs all external information in the price patterns it forms. In other words, once a pattern has been formed, the catalyst usually takes care of itself. The sole job of the analyst is to correctly recognize these patterns.

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