Forex Technical Update
The 1H EUR/USD chart shows the market rallying from the 78.6% retracement level of the a correction rally from 1.3384 to 1.3566. The failure to break the Sept 22 low and an outside bar are first signs that consolidation is not over. Although the RSI has been held below 60, it failed to break back below 40, also suggesting that the bearish momentum has not fully returned. Note the a-b-c structure of the rally as well as the decline in this consolidation so far. These are likely the A and B waves of an ABC correction, suggesting we are in wave C.
Wave equality of this ABC correction between A and C would target 1.36. However, if the C wave becomes a 5-wave rally in a zig zag type of correction, it can extend further. The 61.8% retracement of EUR/USD's decline since the FOMC statement, from 1.3796 to 1.3384, is 1.3640. However only a break above 1.37 should weaken the case for bearish continuation and suggests a longer consolidation or perhaps a stronger correction for the new couple of weeks.
For the current ABC scenario to pan out, we need to break above a local pivot at 1.3530, which gave a sharp rejection Thursday during the development of wave A. We are already seeing some rejection here again, so a break above does indeed prove bulls winning in the very short-term battle. The daily EUR/USD chart shows that we could be completing a bearish impulse wave (a 5-wave decline). A break above 1.37 suggests that the 5-wave decline is over. If so, a return toward 1.3966, 50% retracement is possible over the next couple of weeks. Otherwise, if the market remains below 1.3640 (let's give some elbow room and say 1.3650), it is likely that wave 5 in the daily chart has not been complete, and another wave down is needed before a more significant correction.
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Fan Yang CMT
Chief Technical Strategist