The wave count on the 4-hour chart for EUR/USD is becoming more complex. There is still no question of invalidating the upward phase of the trend (lower chart), which began in January last year. On the contrary, a complete A-B-C corrective structure has emerged, which may have already been completed. However, recent events related to the Federal Reserve and its policy have once again affected the current wave structure, making it more complex. It should be noted that the news background and wave count often conflict with each other, making adjustments necessary.
The wave count has now transformed into a more complex structure. Wave C has taken a three-wave form, while the following wave is identified as wave D. The entire trend segment that began on January 27 may 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 at 1.1325. The pair is now only a short distance from this level; below it, the presumed wave E could complete at any time.
The Market Did Not React to the FOMC Minutes
EUR/USD declined by 60 basis points during Wednesday and appears ready to continue its overall decline, which has been ongoing for a month with virtually no interruptions. Yesterday provided another clear example of the actual reasons behind the dollar's rise over the past month. The minutes of the Federal Reserve's September meeting were released in the evening, during which a decision was made to raise the interest rate by 25 basis points. In addition, Federal Reserve officials raised their expectations for monetary policy tightening through the end of the year. As noted previously, the dot plot showed an increase in hawkish expectations three weeks ago. Yesterday, it became known that most FOMC officials expect another rate hike before the end of the year, which is fully consistent with the information provided to the markets on September 18. Therefore, traders did not learn anything new.
Nevertheless, demand for the U.S. currency increased throughout the previous trading day. The U.S. stock market ended the day lower, but the dollar is not responding to various negative factors. The market's monetary policy expectations weakened rather than strengthened in September and early October, as several Federal Reserve officials stated that there was no need to rush with further tightening. The market once again priced in the most hawkish scenario for the dollar, but even this factor could not and should not have resulted in a month-long rise in the dollar. Yesterday, there were no reasons for market participants to buy the U.S. currency — neither before nor after the minutes were released. Nevertheless, the U.S. currency once again ended the day higher, which suggests that there is currently no clear relationship between the news background and market sentiment.
General Conclusions
Based on the EUR/USD analysis, the pair remains within the framework of a global A-B-C-D-E corrective trend structure. If this assumption is correct, the decline will continue toward targets below the low of wave C at 1.1325. This scenario was previously considered an alternative, and without the Federal Reserve meeting, it would have remained a backup scenario. However, the Federal Reserve provided an unexpected development, leaving the market with no other option but to resume buying the U.S. currency. However, buying has continued for several weeks, even though there are no new supporting factors for the dollar. Short positions would not be advisable under the current news background; instead, preparations should be made for a reversal.
On the higher time frame, a downward trend segment can be seen taking the form of A-B-C-D-E. Therefore, EUR/USD may continue declining below the low of wave C, while the internal wave structure of wave E may take a five-wave impulsive form.
Main Principles of the Analysis:
- Wave structures should be simple and clear. Complex structures are difficult to trade and often require adjustments.
- If there is no confidence about what is happening in the market, it is better not to enter the market.
- There can never be 100% certainty about the direction of price movement. Protective Stop Loss orders should always be used.
- Wave analysis can be combined with other types of analysis and trading strategies.
