From the May 4 top near $1.4950, the EUR/USD (the euro-dollar
exchange rate and the most actively-traded forex pair) has
fallen as low as $1.4050 on May 16.
In other words, the dollar has gained 9 full cents on the
euro in less than two weeks. That’s a huge move, and people
want explanations. And what the media offers boils down to “risk aversion,” in light of “the bad news from
Greece.” And that sounds good — until you check the timeline.
The latest wave of trouble in Europe started on May 3, when
Portugal asked for a bailout. If you think that event is
what pushed forex traders towards “risk aversion” —
think again. The euro happily gained against the U.S. dollar
the following day, May 4, pushing the exchange rate to that
high near $1.50.
And if you think the trouble in Greece pushed the EUR/USD
lower — again, please reconsider. Greece made a splash in
the news on May 9, when its credit rating was downgraded.
But by then the EUR/USD had already fallen
some 700 pips, to the mid $1.42 range.
So, as good and logical as all the mainstream stories sound
about “risk aversion” and “bad news from
Europe,” the timing of events doesn’t fit. What then
gave the dollar the strength — and at a time when almost
everyone expected it to only fall further?
Believe it or not (and it’s easy to believe it, because,
as this example shows, there’s no better explanation) the
news doesn’t set broad trends in forex. Collective emotions
of forex traders do. In early May, the majority was betting
against the dollar. When everyone places their bets and there
is no new money left to push the price further, it has no
choice but to reverse.
That’s why it pays to be extra cautious in the financial
markets when everyone takes the same side of a trade. True,
markets can stay overbought or oversold for a while, but
the reversal inevitably comes — and the stronger the one-sided
conviction, the bigger the reversal.
The advantage Elliott wave analysis gives you is this: Wave
patterns in forex charts track the collective mindset of
the market players. By anticipating the price points where
the Elliott wave pattern should end, you get a pretty good
idea of where the trend should stop and reverse.
See for yourself how it works — FREE —
during EWI’s Forex FreeWeek now
through May 26. Learn
more >>
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This
article was syndicated by Elliott Wave International and
was originally published under the headline EUR/USD: Falling on “Risk Aversion”? Let’s Look at the Timeline First.
EWI is the world’s largest market forecasting firm. Its staff
of full-time analysts led by Chartered Market Technician
Robert Prechter provides 24-hour-a-day market analysis to
institutional and private investors around the world.
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