FX Insights: US Dollar Strength and Potential EURUSD Reversal Zones

Hello Traders, and welcome to another Elliott wave blog post!

As you know, nearly two weeks ago, we discussed the US dollar in general and highlighted the current recovery from October, which has been tied to speculation around Trump's potential return to the White House. This has come true, and possibly the US dollar recovery could persist, especially following Powell's remarks yesterday who somehow sounded a bit concerned about inflation, particularly if the economy remains strong.

This could keep US dollar strength in an uptrend because of higher US yeilds, thus markets may not reverse this dollar trend from October so easily. However, as always, there will be retracements—nothing moves in a straight line. On the EURUSD pair, we observed a notable drop from the 1.0880 to 1.0950 resistance area, which we previously highlighted as a key reversal zone for the fourth wave rally.

Looking at the updated wave structure and price action on EURUSD, the sell-off following Trump's election news could actually mark the end of this impulse from the September highs. In Elliott wave terms, we know that after every five waves, the market may enter a corrective retracement, so I wouldn't be surprised to see some stabilization, especially now that the US elections are behind us. There may be some back-and-forth movement, with the Euro potentially retesting the 1.09 area, where I would look for a new sell-off.

Additionally, RSI divergence suggests there could be a relief rally. However, one reason I believe that EURUSD may experience more weakness after any strong bounce is not only due to US dollar strength but also due to ongoing challenges in the Eurozone, including economic and political issues in Germany.

Grega Horvat

Forex Analytix