An important week for the currency market has started today. On Wednesday, the Federal Reserve of the United States (Fed) will release its monetary policy decision, and the market participants are eager to find out what the Fed will do and say.
But this article is not about fundamentals – I’ll talk about that in a different one before the Fed’s decision. Instead, it is about technical analysis and how the EUR/USD technical traders “scream” for a bounce from the current lows.
It all comes down to the decline from the 2023 highs.
In July, the EUR/USD exchange rate reached 1.1270. The level was impressive because the rate was as low as 0.9590 only several months earlier. Therefore, bulls had all the reasons to believe the rally would continue, given the market’s strength.
Only it did not.
In fact, the market did the opposite – it tanked, slashing six big figures (i.e., six hundred pips) in a couple of months.
Yet, while choosing to buy the EUR against the USD seems risky here, contrarian traders might find it attractive from a risk-reward perspective. More precisely, the price action from the yearly highs to the current levels looks corrective. According to Elliott Waves, a double combination pattern might have just completed ahead of the Fed’s decision.
EUR/USD back to 1.10According to the Elliott Waves theory, an impulsive wave must have at least one extended segment. Extension refers to the wave being 161.8% longer than the next longest one.
But the decline from the 2023 highs has no such extension. Hence, by ruling out an impulsive structure, the technical trader is left with a corrective one.
EUR/USD chart by TradingViewDouble combinations are the most common corrective patterns. They involve two simple corrections connected by an intervening wave – the x-wave.
Also, they almost always end with a triangle.
In this case, the triangle looks like a falling wedge pattern – another bullish sign.
So what should the contrarian trader do here?
The safest way to trade this pattern is to wait for the market to move above the d-wave. Such strength invalidates the market’s reaction to the ECB’s interest rate decision from last week.
Moreover, it signals the end of the triangle (falling wedge), and a move to 1.10 should follow, providing the market does not make another lower low.
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