The Impulsive Decline of the Dollar as One of the Possible Scenarios

The continuous decline of the dollar since the beginning of 2006 has been constantly accompanied in forecasts from one key point to another. After the price broke the last key point at the beginning of June 2007, it became obvious that the greenback would continue falling. It was reflected in Annual-07(2) , published at the end of June. The variants of wave counting conceding a scenario in the form of continuous global impulse for the European currencies (see fig. E4, G4, C5) were given there.

But the nature of the decline itself on its last part has been ambiguous and has allowed interpreting the dollar’s fall since the end of 2005 as a corrective structure as well as an impulsive structure. Both variants of movement were considered in the article Let’s Analyze a Zigzag Wave Construction. In this article a conclusion was made that by the end of summer of 2007 the wave construction couldn’t be a completed impulse. It was rather an uncompleted correction, and this supposition formed the basis of the accepted scenarios.

Indeed, further decline of the dollar confirmed partly my suppositions. However the strength of this fall appeared to be closer to the impulsive but not corrective nature of movement. In order to assume such a supposition one only have to look at the current monthly chart of the currencies under consideration (pictures 1, 5, 9 and 13 below).

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Of course one can’t always make the final conclusion about a forming wave pattern and its phase of development judging only by the external appearance of the impetuous price movement. That’s why let’s look at a smaller weekly time frame in order to consider the inside structure of the latest upward trend (wave (5) in the picture 2).

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Unfortunately when prolongations in an impulse are forming it is impossible to say exactly in advance how many inclusions will form the prolongation, where and when the trend will reach completion. But additional tools both in the form of various types of graphical analysis, and in the form of the trend strength indicators (momentum, for example) suggest that its completion may be still a distant prospect.

Based on the current wave structure and the supposition that the dollar will continue falling the wave counting draft, given in the picture 2, was made.

Note. Taking into account possible impulsive nature of the trend abbreviation imp for impulse was added in the marking of these scenarios in order to distinguish them from the scenarios supposing the corrective nature of the decline, that haven’t been cancelled yet.

If the supposition is true the next significant top of this impulse may form in the second half of spring 2008 (this key point is determined by the method of the pulse key points). It is difficult to say so far if this top will be reversal for the global trend. But the fact that it will be a significant bifurcation point, which will either confirm or disapprove the possible corrective nature of the dollar’s decline, is the most probable.

Please note that in the picture 2 wave 3 of (5) is 2.618 times longer than wave 1 of (5) and is broken down into two equal parts by internal wave [iv] of 3, which is typical for impulses. The last impetuous impulse [iii] of 5 is also 2.618 times bigger so far than the first wave [i] of 5, which is also typical for the third waves of an impulse. Besides it is practically fully completed with waves (see picture 3, below).

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In fact there are reasons to suppose that impulse [iii] is close to its completion. At the same time it may easily continue its ascent forming nested prolongations. In such a case its wave (iii) of [iii] may be only half way to its completion (alternative at the top part of the chart).

The only thing we can do is to wait patiently for a confirmation or disproof of the considered scenario.

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In the context of the supposed impulsive upward trend but as an alternative we may consider the variant of the completion of the whole global trend in the near term (picture 4). However some disproportion of waves [ii] of 3 and [iv] of 3, which isn’t observed in the previous variant, as well as the fact that the completion of the whole impulse isn’t confirmed by additional tools, don’t allow bringing this variant to the forefront.

Similar considerations can be applied to the charts of other European currencies, that’s why comments to the following pictures will be a little shorter.

GBP/USD

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The surge of the pound doesn’t exclude that the global upward impulse will continue to form.

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Rather questionable and ambiguous but possible variant of wave counting is given in the picture 6. Impulse [v] of 3 of (5) looks somewhat clumsy, but picture 7 makes my point of view clear.

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Skewed triangle (iv) of [v] of 3 looks unusual and somewhat non-natural. But it is interesting that there are no breaks of the rules!

If this scenario proves to be true this skewed triangle will add my collection of offbeat patterns.

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On the analogy with the picture 4 (EUR/USD) a possible alternative conceding that the global upward trend is over was found. The critical and confirming levels for these scenario are plotted on the chart.

USD/JPY

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The chart of USD/JPY differs somewhat by the nature of its movement from the charts of the European currencies. But for the last half of the year the dollar has been steadily declining here as well.

I suppose that now the question is what shape wave (B) of [E] will assume— a flat or an expanded flat.

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If we synchronize the forecast for the yen with the suppositions for the European currencies, then wave (B) of [E] may have formed in the shape of an expanded wave flat by summer 2008. This variant seems to be the most proportional.

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Here are possible variants of wave counting of almost half yearly decline of the dollar on the chart of USD/JPY.

At the same time it is possible that the global decline of the dollar will complete in the near term (see picture 12).

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In such a case we get not quite proportional but a admissible downward impulse C of (B), that ends correction (B) of zigzag [E].

USD/CHF

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The downward global impulse of the Swiss franc isn’t so impetuous as of the euro and pound. But it is seen clearly that last month the dollar's decline received additional downward impetus and it is hardly the end.

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There are several variants of wave counting of the supposed downward impulse (5), one of which is given in the picture 14. You may see the other one in the picture 6 in the article Let’s Analyze Zigzag Wave Construction .

But in the both cases the further development of wave 5 of (5) is supposed to be uncompleted so far. Thus we shall wait for the key point at the beginning of spring 2008 in order to make the final decision about the further movement of the Swiss franc.

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The last impulse [iii] may be close to its completion. We have grounds for such a supposition. But as the impulse of EUR/USD from picture 3, it may be easily continued downward as a prolongation (the alternative in the lower part of the chart).

The only thing we can do is to wait patiently for a confirmation or disapprove of the considered scenario.

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The less possible (and unconfirmed) scenario doesn’t exclude that the downward global trend will complete in the near term.

Thus, at present the supposition that the USA dollar will continue falling at least until the second half of spring remains the most probable. Besides lately the impulsive but not corrective component of such a decline has been prevailing, and this will be reflected in the accepted scenarios. At the same time taking into account the guile of the FX market I wouldn’t shrug off the alternate scenarios until they are completely cancelled.