The wave count on the 4-hour EUR/USD chart has become more complex. On the higher timeframe (lower chart), the downward trend segment has taken the form of a five-wave structure labeled A-B-C-D-E, which could be completed at any time, as it appears structurally complete. All the waves in this segment are approximately equal in size, which is why it is considered corrective. If this assumption is correct, an impulsive upward trend segment will begin to develop once the correction is complete, with targets well above the 1.2000 level.
On the lower timeframe (upper chart), an impulsive wave sequence continues to develop, which may belong to wave E of the higher timeframe. If this is indeed the case, the dollar's strengthening is nearing its end, regardless of how much further it rises. The fifth wave of the downward structure may develop, as the current structure appears impulsive. However, in any case, the current wave pattern suggests that the downward wave sequence is nearing completion on both charts. The news background and the sharp shift in market sentiment have led to a strong appreciation of the US dollar, but it is becoming increasingly difficult for the dollar to continue rising.
Should Another Dollar Rally Be Expected?
The EUR/USD exchange rate rose by 40 basis points on Tuesday, a move that is insignificant in the context of the euro's 500-point decline over the past month. There were few important events during the first two days of the week, so the euro initially slipped another 40 points before recovering by the same amount. The first major events are expected today. On Wednesday, ECB President Christine Lagarde is scheduled to speak and may provide new comments on monetary policy. It is worth recalling that the latest inflation report for the EU showed inflation rising to 3.8%, a development that ECB policymakers cannot ignore. In the coming weeks, ECB officials are likely to adopt a more hawkish tone, as it is clear that two rounds of monetary policy tightening have failed to produce the desired results. At least a third round, if not a fourth, will be needed. However, what will matter for the euro today is not the degree of Christine Lagarde's hawkishness, but rather the inflation report and market sentiment.
The US inflation report is of key importance because the Federal Reserve will base its October interest rate decision on inflation data. In my view, any acceleration in inflation in September has already been priced in by the market. Nevertheless, an inflation reading above expectations could prompt market participants to resume buying the dollar. The Fed's stance has become less hawkish in recent weeks, and the market no longer expects monetary policy tightening in October. However, the US dollar remains strong, while traders have virtually no interest in the euro. Therefore, only a sharp exhaustion of selling pressure in EUR/USD could save the euro. The wave count of the downward trend segment appears structurally complete, so an upward wave sequence could begin from current levels.
General Conclusions
Based on the EUR/USD analysis, the pair remains within a global corrective trend segment labeled A-B-C-D-E. 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 secondary scenario. However, the Fed delivered a surprise, leaving the market with no alternative but to initiate another wave of dollar buying. Nevertheless, the dollar has been bought for several consecutive weeks, despite the absence of new supporting factors. Selling EUR/USD would not be advisable in the current news environment; instead, preparations should be made for a potential reversal.
The higher timeframe shows a downward trend segment taking the form of A-B-C-D-E. Consequently, EUR/USD may continue to decline below the low of wave C, while the internal wave structure of wave E may develop into a five-wave impulse.
Key Principles of the Analysis:
- Wave structures should be simple and easy to understand. Complex structures are difficult to trade and often involve changes in the wave count.
- If there is uncertainty about market conditions, it is better to stay out of the market.
- There can never be absolute certainty about the direction of price movement. Do not forget to use protective Stop Loss orders.
- Wave analysis can be combined with other forms of analysis and trading strategies.
