Is It Time To Talk Euro Parity Again?

2016-08-30 | David Starr

From the second half of 2014 into early 2015, all the talk was about the Euro reaching parity, that magic spot where one euro is equivalent to one dollar. The Euro was in a persistent downtrend during that time and appeared to be on a mission to reach 1.0000 vs. the U. S. Dollar. Then it stopped. The trend dried up and so did the incessant chatter of pundits calling for parity. Now that nobody is looking, I think it’s time for us to consider parity again.

Perhaps the move will come on the back of additional rate hikes by The Fed, or perhaps more stimulus out of Europe. I prefer to look at the currency moves technically using Elliot waves. On a daily chart we can see the move down from May, 2014 and how it appears to be a straight down move. Meanwhile, the action from March, 2015 is broadly sideways and revisits the same price range again and again. We don’t need to delve into an arcane practice of counting waves to highlight the difference in price action during these two periods.

EURUSD.FXCM - FWT Primary Analysis

The move down in the Euro is a classic example a trend move, while the sideways, wide-ranging chop after has all the hallmarks of a counter-trend move. So if the trend was down, and then we have a counter-trend move, after the chop is over we should expect to see the Euro continue down. That would have us head back down to below the March, 2015 low, perhaps to parity and with the potential to go materially lower.

Our chart of the Euro proposes a specific Elliott wave pattern for the sideways chop – a triangle. Successful identification of the specific pattern can help to anticipate when the turn down might be coming. Triangles have five waves which, by convention, we label A through E. In order for this to be a triangle we expect the waves to converge. That is, we expect C to end below A, D to end above B, and E to end below C. Furthermore, we expect the structure within each of A through C to be three-wave, corrective moves. This can be seen in the move up within A which we have labeled circle-a, circle-b, circle-c to highlight its three-wave structure.

At this point, the move meets all our criteria for a triangle. It is too early to confirm that it is a triangle or that it is over. The best we can say is that wave E of the suspected triangle has the corrective appearance we want to see and that the action from the August 18th high is sufficient to suggest that the move down might have begun. Back above that same high and wave E could still be ongoing. Back above the Wave C high from May and we might need to dismiss the triangle possibility. For now, however, this seems like the best interpretation and it warns that a move down to parity could be coming sooner rather than later.