The EUR/USD exchange rate recovered the lost ground and bounced back above parity. It found support at the round number today before making another leg higher on an important day for market participants as midterm elections are underway.
Euro had suffered in 2022 due to Russia’s invasion of Ukraine and high inflation in the euro area. But the current bounce from the lows is not a euro move, if not a US dollar move.
Not only is the EUR/USD well off its lows, but also the AUD/USD, the NZD/USD, or the GBP/USD. In other words, one may argue that the US dollar is weak across the board, and its weakness is mainly responsible for the EUR/USD regaining parity.
So now that the main exchange rate trades above parity, what comes next?
Elliott Waves theory favors a running correction
A bearish trend is made of a series of lower lows and lower highs. Based on the daily chart below, the EUR/USD pair was in a bearish trend until October.
It found support between 0.96 and 0.98 and consolidated for a while. A contracting triangle that acted as a reversal pattern suggests that the EUR/USD bottomed one month ago with the release of the US inflation data.
Based on the price action that followed the contracting triangle, the Elliott Waves theory favors a running correction for the second wave of an impulsive move.
A running correction’s main segment is the intervening wave, also called the x-wave. Its length varies, but usually, it is much bigger than the first wave of the impulsive structure.
In other words, the a-b-c in red is unlikely to mark the end of the 2nd wave in blue. Instead, it represents only the first corrective phase of a running pattern, with the x-wave in the makings.
If that is the case, the EUR/USD has more upside potential, especially if the US dollar weakness persists. 1.04 is the first resistance area.