How Far Will the Euro Fall?

11/04/2013 9:00 am EST

Focus: CURRENCIES

The euro weakness we have seen last week was not that surprising, says Vadim Pokhlebkin of ElliottWave.com.

On Tuesday (Oct. 29), the EUR/USD traded above 1.38. On Thursday (Oct. 31), it fell as low as 1.3538. That was an almost 300-pip drop in two days. What happened?

Well, that depends on whom you ask. The conventional explanation is two-fold: a) the Fed, and b) a new inflation report out of Europe (or, more like a DEflation report).

There is also an Elliott wave angle.

chart
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EUR/USD
Our original outlook was for a return to support in the area of the fourth wave of one lesser degree to 1.3741. Lacking evidence to the contrary we'll stick with it.

The pair indeed followed lower. On Wednesday, the day dominated by the Fed news, EUR/USD looked like this:

chart
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EUR/USD
Immediate objectives under the bullish view lie at 1.3799 and 1.3818. I'd expect the rally to extend above 1.3832 at a minimum.

If you know Elliott, you understand why Jim Martens, our Currency Specialty Service editor, was looking for one more rally attempt on Wednesday. On the chart above, you see a fairly clear “five up, three down” Elliott wave sequence. The (a)(b)(c) correction looked completed, and Jim was reasonably expecting a new push higher—at least above the previous high of 1.3832.

But instead, EUR/USD sold off sharply. By Thursday afternoon, the chart looked like this (partial Elliott wave labels shown):

chart
Click to Enlarge

The inability to rally despite the short-term bullish pattern strongly suggested to Jim that his original view of a top in EUR/USD was correct.

The only question now is—how big of a top was that?

By Vadim Pokhlebkin of ElliottWave.com

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