On Thursday, July 3, the European Central Bank is expected to raise interest rates by 0.25%. That same day, economists expect the U.S. jobs number ("nonfarm payrolls") to show a 60,000 reduction.
Question: How should the two events affect the U.S. dollar's standing against other currencies?
Well, in theory, when a central bank raises interest rates, it makes that country's assets more attractive to foreign investors. And since the country's assets are denominated in that country's currency, it also becomes "more attractive" – i.e. it gains.
A weak jobs report speaks for itself. So, come Thursday, the USD should get decimated. Will it?
Possibly, but… If you've traded forex for a while, you've seen many instances when the market would react "illogically" to the news. What's stopping Thursday from being one of those days?
Forex markets often don't behave as "fundamentals" suggest they should. That's because what determines the trend is not the news. It's forex traders' reaction to the news. If they, collectively, feel bullish, they'll use the news – any news, good or bad – as an excuse to buy. And if they are feeling bearish, they'll wait for a news report and sell.
On days like that – when market action makes no sense – commentators say things like, "Currency traders shrugged off the negative U.S. jobs report and sold the euro, focusing instead on [fill in the blank]." Sound familiar?
So, the real question is – how do you know what mood, collectively, are forex traders in?
Here at EWI, the most reliable method for tracking and forecasting traders' bias that we know is – not surprisingly – the Elliott Wave Principle. Right now, according to our Currency Specialty Service, there is a good chance that the daily chart of the EURUSD is showing a contracting triangle (you can see this chart fully labeled inside Currency Specialty Service now):
According to Elliott wave analysis, triangles usually resolve in the direction of the previous trend. Clearly, the EURUSD's trend has been up, so chances are, if this is indeed a triangle pattern, price will soon shoot higher.
There is just one caveat. "There is the possibility," writes Currency Specialty Service's editor Jim Martens in his July 01 closing commentary, "that wave D of the triangle shown is ending here and a final setback in wave E is needed."
How do we know if this triangle (if it is a triangle) is finished or not? In his July 01 analysis, Jim Martens shows you several key support and resistance levels that, if broken, will likely determine the answer to that question. Price action in the EURUSD on Wednesday, July 2, should be key to what happens next.
EURUSD: What Happens Next? EWI's Currency Specialty Service has answers right now.