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The wave pattern on the 4-hour EUR/USD chart appears clear and structured. A new downward cycle began on September 25, forming a five-wave impulse structure. Two months ago, a corrective upward movement started, expected to consist of at least three waves. The structure of the first wave was well-defined, suggesting that the second wave will also take a clear shape. Three waves have already formed, but a fifth wave (e) might still develop, or wave (c) in wave 2 could take on a full five-wave pattern.
Overall, the current wave count does not raise concerns about ambiguity. The fundamental background continues to favor sellers over buyers, especially when considering economic data. Recent U.S. reports consistently indicate a strong economy with no signs of significant slowdown. The Federal Reserve will proceed with policy easing at a cautious pace, whereas the European Central Bank sees no reason to pause its rate-cutting cycle. This suggests that, in the long run, the U.S. dollar should remain in demand. However, the current correction phase is ongoing, with the market reducing demand for the dollar due to Trump's policies.
The EUR/USD rate surged by 135 basis points on Tuesday and added another 80 points today. The reasons behind this rapid market shift away from the U.S. dollar are not difficult to identify. Since Friday, I have warned that the market was heading into a new Trump-driven storm. Like many others, I did not anticipate such a drastic depreciation of the U.S. dollar, which lost three cents in under three trading days. However, for Donald Trump, nothing seems impossible. Under his leadership, the U.S. economy is slowing down, facing a potential recession, stock markets are falling, and the dollar is depreciating.
Trump may have a long-term strategy in place, aiming to weaken the dollar and increase import revenues. Maintaining friendly relations with Canada and Mexico does not appear to be a priority for him. Whether this strategy will prove successful remains to be seen in the coming weeks. The next four years promise to be eventful and unpredictable.
On Wednesday, the Eurozone released new reports on services sector activity for February. The final figures were weaker than market expectations, yet they had no impact on the euro's ability to rise. The market ignored economic data on Wednesday, much like it did on Monday and Tuesday, despite some reports being supportive of euro buyers. However, economic indicators were not the primary driver behind the EUR/USD rally.
Based on the EUR/USD analysis, it is evident that the pair continues to develop a downward trend. The first wave of this trend looks complete and well-defined. As a result, a three-wave or more complex correction should be expected, providing new entry opportunities for selling. Since wave 2 has taken on a relatively clear structure, I anticipate a decline within wave 3, potentially targeting 1.03.
A failed breakout at 1.0731, which corresponds to the 161.8% Fibonacci extension of wave b, could indicate a temporary pause in dollar weakening.
On the higher wave scale, the wave pattern has transformed into an impulse structure, suggesting that a new long-term bearish trend may be emerging. However, its length and structure are still difficult to determine at this stage.
Wave analysis can be effectively combined with other analytical methods and trading strategies for a more comprehensive market approach.
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