Volatility in the FX market has reached dramatic levels after the British pound fell to historic levels today. Because all markets are interconnected, the abrupt moves in the GBP pairs and the UK bond market have spilled to other markets.
Investors in continental Europe have yet to digest the full outcome of the Italian elections. Yesterday, a right-win coalition won the elections, and Italy will have a new prime minister and government in a few weeks. More about Italy and the Italian elections can be found here.
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So the euro opened the new trading week in a tough place.
But one currency pair looks particularly attractive here – the EUR/JPY. According to the Elliott Waves Theory, a move beyond 150 should not surprise anyone in the following months.
EUR/JPY completing a double-three running pattern
According to the Elliott Waves Theory, financial markets move in waves – corrective and impulsive. The latter comprises five segments; out of each, one is the longest.
It is said that it extends and is typically the third wave in an impulsive move.
But how do Elliott traders know when a third wave starts? The answer comes from the pattern that precedes it.
In this case, the market formed a double-three running pattern, counted in blue on the chart above. A running pattern appears almost exclusively as the second wave in an impulsive move, right before the extended third wave.
Hence, if completed with the recent move lower, the double-three running suggests a rally as the third wave in an impulsive structure should follow.
EUR/JPY forecast for the following months
What to expect next from the EUR/JPY exchange rate?
First, look for the market to rally and break the b-d trendline. There is a time limit for the move.
Namely, it must break the b-d trendline in less or the same time it took the e-wave to form.
Second, the extended third wave should be minimum 161.8% of the first wave’s length. This gives us a measured move for the third wave of about 1.6k pips, or a final target well beyond 150.
On the flip side, a drop below 133 would invalidate the bullish scenario.
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