The Forex Pattern Price Time Report - EUR USD - Weekly Recap

Looking back at the week, one would have to say that the action on Thursday, August 7 was the set up day for the break out in the Dollar.  Throughout the week the U.S. Dollar had been trending higher, but the U.S. economic news for the week was giving no indication that the Dollar deserved to break out to the upside.

During the past week the U.S. Dollar was able to withstand heat from mounting losses at Freddie Mac and AIG, poor same store sales from Wal-Mart, and a six-year high in Initial Claims.  Lower crude oil helped, but there was always the fear that a geo-political situation would flare up causing it to rally.  All of this came to a head on August 7 as the U.S. Dollar was able to shrug off the economic negativity and stand tall while all around was falling apart including the U.S. stock market.

The timeline tells the story this year for the U.S. Dollar starting with the first top in the EUR USD on April 22. That first top was shortly after the G-7 meeting and close to the day Luxembourg Finance Minister Jean-Claude Juncker stated that the Euro’s recent advance against the Dollar is not “desirable.”  Additional comments from G-7 members followed, and the EUR USD started its first major break for the year.  Some could say that this was a ‘verbal intervention” by the G-7.  The subsequent break set the range for the next three months.  The bottom on May 8 at 1.5283 identified the area traders were going to defend as the market continued to withstand attempts to break this level into June. 

The rally from the June 13 bottom at 1.5302 to the all-time high at 1.6038 on July 15, was set up by a series of events including a weaker than expected U.S. unemployment report in June, a rate hike by the ECB on July 3 and the worsening U.S. credit crisis culminating with a Fannie Mae and Freddie Mac “bailout” in the middle of July.  Although these up moves made weaker traders nervous at times, comments from Treasury Secretary Paulson reassured Dollar bulls that the administration was committed to a strong Dollar.  He called for ‘confidence” in the Dollar and the U.S. economy.

During the April to July time period one thing became clear.  The Commitment of Traders Report for futures contracts started to show net long positions in the Dollar for the first time since 2005.  Looking back at the chart formation it now becomes clearer that the top taking place was a distribution of the EUR USD.  It seems that that the big money had committed to a long Dollar, and was waiting for the economic slowdown to spread to the Euro Zone.  Once the Euro Zone began to experience a slowdown, it just became a matter of time before the short positions that had been built for several months would pay off.

Some can argue that the “top” came to the EUR USD when the Fed stopped cutting interest rates on March 17.  This may also be true as the last leg up from 1.3359 started with a surprise interest rate cut on August 16, 2007.  There is no question that interest rates will play a part in the strength of the U.S. Dollar as this break develops. 
Looking at the current chart formation, the first downside objective of this break is 1.4699.  After the Fed begins to bring interest rates back to an acceptable level, the EUR USD is likely to retrace the entire rally this past year back to 1.3359.