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Where is EUR/USD heading? Elliott Waves says much higher

on Oct 26, 2022
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  • EUR/USD moved above parity today as the short squeeze continues
  • Elliott Waves suggests that the rally has just begun
  • Given that many traders are positioned on the short side, there is scope for more upside

The euro, and the EUR/USD in particular, is squeezing higher. It crossed above parity today after rallying from as low as 0.96 and remains bid.

The rally is more surprising as few have predicted such a reversal. Even at these levels, the main sentiment in the market is that this is nothing but a squeeze in a bearish market and that the EUR/USD’s weakness should dominate again.

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It may very well be so because anticipating market moves is a tough job. But for contrarian trades willing to take the other side of the bearish trade, the Elliott Waves theory paints a bullish picture of the EUR/USD, which points to much higher levels.

In other words, Elliott Waves says that the EUR/USD rally has just started.

X-wave of a running correction should push the pair higher

The Elliott Waves Theory consists of counting impulsive and corrective market waves with the aim at forecasting the next move. Ralph Elliott divided market moves in impulsive and corrective, belonging to various market cycles.

One of the biggest challenges for Elliott traders is to know where the count begins. In our case, the EUR/USD’s bearish trend ended with a contracting triangle.

It suggests that the previous bearish trend was a corrective wave and that it ended not at the absolute low, but where the triangle ended. Applying this rule, we can easily find the start of the new impulsive wave.

EUR/USD chart by TradingView

Impulsive wave starts with the latest US inflation data

The latest US inflation data marked the end of the contracting triangle. The spike that followed is the first wave, in black, and then the market formed an irregular flat pattern, seen in blue and labeled a-b-c.

But that is not the end of the correction – it is only the beginning. As it is often the case, the second waves end up forming running corrections.

In that case, the recent move higher is part of the x-wave – an intervening wave meant to connect two corrective patterns. Judging by the looks of it, the x-wave appears to have started with a zigzag pattern.

A zigzag is formed out of two impulsive waves, and the market is now building energy to complete the extended wave of the first impulsive structure belonging to the zigzag.

To sum up, if the Elliott Waves scenario presented above is correct, then the EUR/USD should continue its rally until the 1.03-1.04 area, where it should correct for a while before another leg higher. By the time the zigzag ends, the EUR/USD should trade well above 1.08.

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