EURUSD to 1.4000: Will it Break?

The EURUSD is approaching the psychological 1.4000 level but will it break substantially higher? Often times, a currency pair will fail to break through the psychological round number on the first attempt (think GBPUSD at 2.0000 in 1991 and 1992 or USDJPY at 100.00 in 1999/2000 and 2004/2005). The near term wave structure remains bullish and suggests that at least a test of 1.4000 is in order. Fibonacci extensions identify possible reversal points if indeed 1.4000 is exceeded.

Current Price: 1.3770
Key Levels:

One glance at the monthly EURUSD chart indicates that the pair is at a critical level. The most heavily traded pair has tested the 1995 high (synthetic/DEM rates) the last two months just above the 1.3800 figure. To state the obvious, we could either see a break and significantly higher prices or a rejection and likely 10+ figure retrace. Something to keep in mind is that tests of key psychological levels rarely break through on the first try. For example, Cable tested the 2.000 figure in 1991 and 1992 before finally breaking through this year. Similarly, the USDJPY came close to 100.00 in late 1999 / early 2000 and late 2004 / early 2005 before skyrocketing higher. In this instance, 1.4000 is the psychological level in question.

There is little doubt that the advance from the October 2000 low traced out 5 waves higher. What is tricky is the correction that has followed. The decline from 1.3666-1.1640 is a clear 5 wave decline, indicating that the wave is just part of a larger correction (likely large wave A). The rally since has not necessarily taken on an impulsive look either. The waves are choppy and overlapping. It is possible to count the entire rally from 1.1640 as a 3 wave rally with waves a-b-c (W) into 1.2979, wave X as an irregular flat ending at 1.2482, and wave Y in progress as a 5 wave diagonal. This subdivision is W-X-Y for large wave B of a flat. Wave C would follow and lead to a decline below 1.1640 about a year after the top is in place. For this interpretation to be correct, price must top before 1.4081. This is where wave wave v of the diagonal would be longer than wave iii of the diagonal, which would indicate that some other pattern is unfolding from 1.1640.

Make no mistake that the trend remains towards higher prices right now. This is true as long as price is above the August low of 1.3360. Watch the resisting line drawn off of the June 2006, December 2006, April 2007, and July 2004 highs as this could be a reversal point. That line is at 1.3947 today and increases about 3 pips per day. If the EURUSD blows by 1.4000, then the next level of resistance would not be until 1.4214 and 1.4441 (the 127% and 138.2% levels of 1.3666-1.1640). It is still possible for the rally from 1.1640 to be large wave B within an A-B-C flat correction from 1.3666. In fact, b waves of flats are often at least 100% of wave A.