In our last update on EURUSD, I forecast a continuation of the drop originally forecast in September.  From the Oct 24, 2016 Update on EURUSD:

June’s .618 tag suggests a further drop to at least the .786 at 1.0756 and possibly the .886 at 1.0647. [The correlation with SPX] suggests EURUSD will blow through those Fib levels…and head straight for the rising white channel bottom at 1.0602.

For the past week, EURUSD has been testing the white channel bottom, slightly overshooting our 1.0602 target to test the Dec 3, 2015 lows.  At yesterday’s low of 1.0517, the pair had shed 5.9% since our September top call.

The move seems to have caught most analysts off guard.  Yet, the catalyst for the decline was clear, well in advance, if one was willing to look at the big picture — which, oddly enough, revolves around the price of oil.

continued for members…

It’s been difficult to convince people, but oil has been the primary driver of equity prices going back all the way to Feb 11, when it began its ascent from 26.05 to highs of 52.22 in October.  We first theorized in What to Expect, on Sep 20, that CL would top out around 52-53 by Oct 10.

As the US eases into stagflation (my personal expectation, going back to Aug 18, 2011) an increase in the price of energy will really start to bite.  So, TPTB can increase CL until Oct 10 or so, at which point they’ll need to start letting it back down.

This would put CL around 52-53 by Oct 10, and back down to about 27 in Feb 2017.  It’s a vastly over-simplified scenario, to be sure.  But, the more I look at it, the more sense it makes.

CL shot up 19% between Sep 20 and Oct 11, and except for a brief surge on Oct 19, has been falling every since.  It plunged below its SMA200 on Nov 11, spent the next week bouncing in order to get SPX and DJIA to new highs, and is now selling off again.

CL’s off over 4% today as the bullish rumors which were fed to the algos over the past 10 days are beginning to unwind.  No matter, though, because SPX has broken out to new highs and busted all the bearish-pointing harmonics and chart patterns.

The new highs have also been the result of a relentless meltup in USDJPY……which has driven DX up past its previous highs.VIX is the last component of SPX’s meltup, with the channel it carefully constructed between Aug 9 and Nov 16 having recently broken down.If my expectation regarding CL is correct, and the latest OPEC deal falls apart, USDJPY will be responsible for ramping stocks higher.  But, any further breakout by DX could be problematic.  It has reached our 102.098 target, the white .618, and should reverse here.

The only way to keep DX from rallying past 102.098 is for the euro to strengthen enough to offset the yen’s influence on the USD.  That is, EURUSD would get a bounce here — at least until it’s time to let the air out of SPX.   This makes a good deal of sense.  For starters, a drop through 1.05 could reinforce the notion that the eurozone is failing — a notion that’s gathering momentum with each additional membership referendum.

Some might argue that the USD is likely to move higher (and, thus, EURUSD lower) with the upcoming FOMC rate increase.  But, although the increase seems certain (100% at last check) a move higher for DX isn’t.

Consider Dec 16, 2015, when the FOMC raised rates for the first time in almost a decade.  DX had already peaked two weeks before at a key Fib level. The FOMC’s action merely bought time for DX, keeping it on the rise through the end of Jan 2016.  It seems to me that this upcoming rate increase is priced in at least as much as was the Dec 2015 one.The alternative is that EURUSD doesn’t bounce.  Its white channel bottom has technically broken down and is, today, being backtested.  I’ve had a target at 1.0225 around the end of the year for what seems like ages — ever since it became apparent that the .786 at .9898 was going to be averted with what turned out to be a long and large flag pattern.

If CL does continue to fall, USDJPY is certain to continue rising. It has potential up to the white .618 at 115.58 and possibly even the .618 Fib at 120.11.  The higher it goes, the higher DX would ordinarily be driven, requiring a larger offsetting strengthening in the euro (increase in the EURUSD.)

Again, they don’t need to drive SPX hundreds of points higher at this time.  They just need to keep it from falling apart until early February, when they can start ramping CL higher again.

Suppose OPEC pulls it together and CL starts another leg higher now?  Stocks will soar, allowing USDJPY and DX to come back to earth.  EURUSD will rebound very strongly — not merely enough to prop stocks up for a month or two.

We’d likely be looking at a rally of several months.  Targets would start at 1.0756-1.0815 and go higher.  But, we’ll cross that bridge if/when we get to it.

I’m going to reflect on the above, and might tweak it a bit over the weekend — especially as I study DX and USDJPY a bit more.  Stay tuned.