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EUR/USD: What Moves You?

EUR/USD: What Moves You?

It’s not the news that creates forex market trends — it’s how traders interpret the news.

Courtesy of EWI’s Vadim Pokhlebkin

What moves currency markets? "The news" is how most forex traders would undoubtedly answer. Economic, political, you name it — events around the world are almost universally believed to shape trends in currencies.

A January 14 news story, for example, was high up on the roster of events that supposedly have a major impact on the euro-dollar exchange rate. That morning, the European Central Bank announced it was leaving the "interest rate unchanged at the record low of 1% for an eighth successive month." (FT.com)

The euro fell against the U.S. dollar after the news. But could it have rallied instead? You bet. In fact, traditional forex analysis says it should have. Here’s why.

Analysts always say that the higher a country’s interest rates, the more attractive its assets are to foreign investors — and, in turn, the stronger its currency. Well, U.S. interest rates are now at 0-.25% and in Europe, at 1%, they are 3 to 4 times higher. Isn’t that wildly bullish for the EUR? Apparently not, and wait till you hear why — because in today’s announcement ECB president Jean-Claude Trichet warned that European recovery would be “bumpy.” Ha!

By no means is this the first time a supposedly bullish event failed to lift the market. On June 6, 2007, for example, the ECB raised interest rates. Bullish, right? But the euro didn’t gain that day, either — the U.S. dollar did.

Watch forex markets with these "inconsistencies" in mind and you’ll see them often. In time you realize that it’s not news that creates market trends — it’s how traders interpret the news. That’s a subtle — but hugely important — distinction.

So the real question becomes: What determines how traders interpret the news? The Elliott Wave Principle answers that question head-on: social mood — i.e., how they collectively feel. Currency traders in a bullish mood disregard bad news and buy, leaving it to analysts to "explain" why. Bearishly-biased traders find "reasons" to sell even after the rosiest of economic reports.

If you know traders’ bias, you know the trend. How do you know? Watch Elliott wave patterns in forex charts – it’s reflected in there, on all time frames.

Today, the EUR/USD stands well below its November peak of $1.51. Find out what Elliott wave patterns are suggesting for the trend — FREE. Access EWI’s intraday and end-of-day Forex forecasts right now through next Wednesday, February 10.  Learn more about EWIs FreeWeek here.

Vadim Pokhlebkin joined Robert Prechter’s Elliott Wave International in 1998. A Moscow, Russia, native, Vadim has a Bachelor’s in Business from Bryan College, where he got his first introduction to the ideas of free market and investors’ irrational collective behavior. Vadim’s articles focus on the application of the Wave Principle in real-time market trading, as well as on dispersing investment myths through understanding of what really drives people’s collective investment decisions.

*****

To understand a little more how EWI integrates social mood and the market, here’s an article by Robert Prechter explaining Socionomic theory.  – Ilene

Popular Culture and the Stock Market

By Robert Prechter 

The following article is adapted from a special report on "Popular Culture and the Stock Market" published by Robert Prechter, founder and CEO of the technical analysis and research firm Elliott Wave International. Although originally published in 1985, "Popular Culture and the Stock Market" is so timeless and relevant that USA Today covered its insights in a Nov. 2009 article. For the whole 50-page report, download it for free here.

Popular Culture and the Stock Market

Both a study of the stock market and a study of trends in popular attitudes support the conclusion that the movement of aggregate stock prices is a direct recording of mood and mood change within the investment community, and by extension, within the society at large. It is clear that extremes in popular cultural trends coincide with extremes in stock prices, since they peak and trough coincidentally in their reflection of the popular mood. The stock market is the best place to study mood change because it is the only field of mass behavior where specific, detailed, and voluminous numerical data exists. It was only with such data that R.N. Elliott was able to discover the Wave Principle, which reveals that mass mood changes are natural, rhythmic and precise. The stock market is literally a drawing of how the scales of mass mood are tipping. A decline indicates an increasing ‘negative’ mood on balance, and an advance indicates an increasing ‘positive’ mood on balance.

Trends in music, movies, fashion, literature, television, popular philosophy, sports, dance, mores, sexual identity, family life, campus activities, politics and poetry all reflect the prevailing mood, sometimes in subtle ways. Noticeable changes in slower-moving mediums such as the movie industry more readily reveal changes in larger degrees of trend, such as the Cycle. More sensitive mediums such as television change quickly enough to reflect changes in the Primary trends of popular mood. Intermediate and Minor trends are likely paralleled by current song hits, which can rush up and down the sales charts as people change moods. Of course, all of these media of expression are influenced by mood changes of all degrees. The net impression communicated is a result of the mix and dominance of the forces in all these areas at any given moment.

Fashion:

It has long been observed, casually, that the trends of hemlines and stock prices appear to be in lock step. Skirt heights rose to mini-skirt brevity in the 1920′s and in the 1960′s, peaking with stock prices both times. Floor length fashions appeared in the 1930′s and 1970′s (the Maxi), bottoming with stock prices. It is not unreasonable to hypothesize that a rise in both hemlines and stock prices reflects a general increase in friskiness and daring among the population, and a decline in both, a decrease. Because skirt lengths have limits (the floor and the upper thigh, respectively), the reaching of a limit would imply that a maximum of positive or negative mood had been achieved.

Movies:

Five classic horror films were all produced in less than three short years. ‘Frankenstein’ and ‘Dracula’ premiered in 1931, in the middle of the great bear market. ‘Dr. Jekyll and Mr. Hyde’ played in 1932, the bear market bottom year, and the only year that a horror film actor was ever granted an Oscar. ‘The Mummy’ and ‘King Kong’ hit the screen in 1933, on the double bottom. Ironically, Hollywood tried to introduce a new monster in 1935 during a bull market, but ‘Werewolf of London’ was a flop. When filmmakers tried again in 1941, in the depths of a bear market, ‘The Wolf Man’ was a smash hit. These are the classic horror films of all time, along with the new breed in the 1970′s, and they all sold big. The milder horror styles of bull market years and the extent of their popularity stand in stark contrast. Musicals, adventures, and comedies weave into the pattern as well.

Popular Music:

Pop music has been virtually in lock-step with the Dow Jones Industrial Average as well. The remainder of this report will focus on details of this phenomenon in order to clarify the extent to which the relationship (and, by extension, the others discussed above) exists.

As a 78-rpm record collector put it in a recent Wall Street Journal article, music reflects ‘every fiber of life’ in the U.S. The timing of the careers of dominant youth-oriented (since the young are quickest to adopt new fashions) pop musicians has been perfectly in line with the peaks and troughs in the stock market. At turns in prices (and therefore, mood), the dominant popular singers and groups have faded quickly into obscurity, to be replaced by styles which reflected the newly emerging mood.

The 1920′s bull market gave us hyper-fast dance music and jazz. The 1930′s bear years brought folk-music laments (‘Buddy, Can You Spare a Dime?’), and mellow ballroom dance music. The 1932-1937 bull market brought lively ‘swing’ music. 1937 ushered in the Andrews Sisters, who enjoyed their greatest success during the corrective years of 1937-1942 (‘girl groups’ are a corrective wave phenomenon; more on that later). The 1940′s featured uptempo big band music which dominated until the market peaked in 1945-46. The ensuing late-1940′s stock market correction featured mellow love-ballad crooners, both male and female, whose style reflected the dampened public mood.

Learn what’s really behind trends in the stock market, music, fashion, movies and more… Read Robert Prechter’s Full 50-page Report, "Popular Culture and the Stock Market," FREE.


Robert Prechter, Chartered Market Technician, is the founder and CEO of Elliott Wave International, author of Wall Street best-sellers Conquer the Crash and Elliott Wave Principle and editor of The Elliott Wave Theorist monthly market letter since 1979.

 


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