Friday, September 07, 2012
Has Mario Draghi Saved the Euro?
The Euro: Saved? By Elliott Wave Currency Forecasts
At the September 6 European Central Bank meeting, the ECB president, Mario Draghi, repeated several times that, “The euro is irreversible.” That could be taken several ways, but assuming he meant unlimited support for the EU currency, here is what's interesting.
Last time Mr. Draghi said the ECB would do "whatever was needed to save the shared currency" was on June 30. Do you remember what the euro did afterwards? It fell like a rock!
Just look: On June 30, EUR/USD stood near 1.2670. By July 25, it fell to near 1.2050 -- a 600-pip drop in just three weeks. (In everyday terms, that was a 6-cent loss by the euro against the U.S. dollar.) This chart shows you the size and speed of the decline; Mr. Draghi's June 30 promise to support the euro is circled in red:
This brings up several interesting questions:
1. Why did the forex market not believe Mr. Draghi's promise on June 30?
The answer is in the chart above. As you can see from the Elliott wave labeling, on June 30, EUR/USD had only finished 4 waves of the 5-wave Elliott wave sequence. Wave 5 down was due next -- and wave 5 down we got; it took EUR/USD to 1.2052.
2. Why did EUR/USD believe Mr. Draghi this time, judging by the (tepid) 40-pip rally after the Sept. 6 statement?
To answer that, you need to see how we have labeled the rally in EUR/USD off that wave (v) low you see above. In short, on September 6 EUR/USD has had some "unfinished Elliott wave business" to the upside.
3. Will EUR/USD traders keep believing that the ECB will make good on the promise?
Well, again, your answer comes down to the type of the Elliott wave pattern EUR/USD has been "drawing" on the chart since that 1.2050 low. If the Elliott wave pattern of the rally has been impulsive, then EUR/USD has more to rally -- and Mr. Draghi's promise will look solid. But if EUR/USD's rally pattern off the July 25 low has been corrective, then it's likely that Mr. Draghi will be just as disappointed in the days and weeks ahead as he was after his June 30 promise to support the euro.
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