The wave structure of the four-hour chart for EUR/USD is becoming more complex. There is still no question of invalidating the upward trend segment (lower chart), which began in January of last year. On the contrary, we have seen a full corrective A-B-C structure, which may have been completed. However, recent developments related to the Fed and its policy have once again affected the current wave structure. Let me remind you that the news background and wave structure often conflict with each other, making adjustments necessary.
The wave structure may now once again develop into a more complex pattern. Wave C has taken a three-wave form, while the next wave is identified as wave D. The entire trend segment that began on January 27 may now take the form of a five-wave corrective structure A-B-C-D-E. If this assumption is correct, wave D has been completed, and on August 21, EUR/USD entered the phase of forming wave E, whose low should be below the low of wave C — 1.1325. Now only one question remains: will the news background support the dollar strongly enough for the instrument to fall below 1.1325?
Demand for the US currency continues to rise with an empty economic calendar
The EUR/USD pair remained virtually unchanged throughout Tuesday, declining by the usual 15 basis points over the day. The range of movements was once again extremely narrow, but demand for the US currency continues to increase gradually. I still see no desire among market participants to take profits on short positions that were actively opened over the past three weeks. This means that the market expects the US currency to strengthen further and sees no reason to exit the market right now.
What could be the reasons for such persistent bearish sentiment? It is difficult to answer this question without coming up with various fanciful theories and hypotheses. I will only say that I do not consider Donald Trump's upcoming meetings with Xi Jinping or Masoud Pezeshkian to be reasons for the strengthening of the US currency. There were very few economic reports during the first two trading days of the week, and market participants received no important information. Therefore, the only reason for the strengthening of the US currency can be considered to be the market's growing expectations of tighter monetary policy from the Fed.
Yesterday, two Fed policymakers, Austan Goolsbee and Alberto Musalem, said that the Fed would probably have to continue raising the key interest rate to reduce inflation. At present, according to the CME FedWatch tool, the probability of at least one policy tightening by the Fed by the end of the year is 90%. Only one thing remains unclear. If the market was already expecting the beginning of a tightening cycle in the summer, then what is unexpected about the Fed's hawkish stance now? I will not hide the fact that Kevin Warsh surprised many people, including me, at the regulator's September meeting. At present, it can indeed be considered that the Fed has maintained its independence and that Donald Trump will not influence interest rates. Thus, policy tightening may continue, but how long will the dollar remain in demand based on this factor alone?
General conclusions
Based on the EUR/USD analysis, I conclude that the instrument remains within the global corrective trend segment A-B-C-D-E. If this assumption is correct, the decline in quotes will continue, with targets located below the low of wave C — 1.1325. I considered this scenario to be an alternative one, and if it had not been for the Fed meeting, it would have remained so — a backup scenario. However, the Fed delivered a surprise, and the market was left with no other options but to launch a new wave of US currency purchases. At the same time, however, new reasons are needed for the dollar to strengthen further. I do not see any such reasons at the moment. Therefore, a new upward, non-corrective wave may begin to develop in the near future.
On the higher timeframe, an upward trend segment can be seen, followed by the formation of a corrective A-B-C structure. This structure may take a five-wave form, but at the current point in time, I consider it completed. If this is the case, the formation of a new impulsive upward trend segment has begun.
Main principles of my analysis:
- Wave structures should be simple and easy to understand. Complex structures are difficult to trade and often involve changes.
- If there is no confidence in what is happening in the market, it is better not to enter the market.
- There can never be one hundred percent certainty about the direction of movement. Do not forget about protective Stop Loss orders.
- Wave analysis can be combined with other types of analysis and trading strategies.
