Sive Morten
Special Consultant to the FPA
- Messages
- 18,669
Fundamentals
(Reuters) - The euro fell on Friday, marking its biggest weekly loss of the year a day after the European Central Bank decided to prolong its bond purchases and signaled its willingness to stick with an ultra-loose policy stance.
The tension between Madrid and Catalonia’s secessionists also stoked selling in the single currency after the Catalan parliament on Friday declared independence from Madrid following a secret ballot. Spain Prime Minister Mariano Rajoy retaliated by sacking the Catalan government and set elections on Dec. 21.
“The dovish surprise from the ECB was its openness to extend the duration of its bond purchase program,” said Omer Esiner, chief market strategist at Commonwealth Foreign Exchange in Washington.
On Thursday, the ECB said it will extend its bond purchases into September 2018 while reducing its monthly purchases by half to 30 billion euros starting in January.
The move raised bets the ECB was unlikely to raise interest rates until 2019 as the U.S. Federal Reserve has remained on its path to hike U.S. rates further.
The Fed will hold a two-day policy meeting next Tuesday and Wednesday where policy-makers are expected to leave rates unchanged.
The euro was down 0.5 percent at $1.1595, bringing its weekly loss against the dollar to 1.6 percent for the biggest in 11 months.
The Catalan parliament vote revived some safe-haven demand for the yen and Swiss franc.
Even in the aftermath of Friday’s political turmoil, “the situation in Spain seemed largely contained for now,” Eisner said.
As the euro wobbled this week, the dollar strengthened on upbeat economic data, hopes for a tax cut and speculation about President Donald Trump’s selection of someone who favors a faster pace of rate increases than current Fed Chair Janet Yellen, whose term expires in February.
The U.S. government reported on Friday that the economy grew at a 3.0 percent annual rate in the third quarter, faster than the 2.5 percent forecast among economists polled by Reuters.
Earlier Friday, Bloomberg reported that Trump leans toward nominating Fed Governor Jerome Powell as the next Fed chief, but has not made up his mind.
The dollar pared gains briefly on that report as Powell is seen less hawkish than Stanford University economist John Taylor, another potential nominee to lead the central bank.
Trump, who is expected to announce his Fed chief candidate next week, is also considering Yellen, former Fed Governor Kevin Warsh and his economic adviser, Gary Cohn, for the Fed’s top job.
The index that tracks the dollar against six currencies was up 0.3 percent at 94.919 after hitting a three-month high at 95.150. It gained 1.3 percent for its biggest weekly increase so far this year.
News in Charts: ECB: rate rises still a distant prospect
by Fathom Consulting
Following the October monetary policy meeting, President Draghi announced the future of the ECB’s quantitative easing programme. The asset purchase programme will continue until September 2018 (nine months longer than previously announced), however the monthly purchase target will decrease from €60 billion to €30 billion – slightly less than Fathom’s expectations. Both the main refinancing rate and the deposit facility rate remained unchanged at 0.0% and -0.4% respectively.
President Draghi stressed that the reduced rate of purchases should not be described as tapering and he left the door open for the ECB to extend, or even enlarge, the programme should the Governing Council not see a “sustained adjustment in the path of inflation”. The ECB was keen to avoid comparisons with the Federal Reserve’s monetary policy tightening, stating that the US is at a much more advanced stage of its business cycle.
Although price pressures have strengthened over the last year, headline inflation remains comfortably below the target of 2.0%, while core inflation (which excluded the most volatile components in the headline index) has only breached 1.2% once in four years. Fathom does not forecast headline inflation returning to target in the near future.
Substantial output gaps remain in a number of euro area countries, as highlighted in Fathom’s recent Global Economic and Markets Outlook. Given the large amount of economic slack in these countries and with inflation remaining below target, the ECB likely views reduced asset purchases as a sufficient tightening in the policy stance for the near future. Consequently, Fathom forecasts the deposit facility rate to remain negative until 2019 at the earliest.
COT Report
Recent CFTC data doesn't show yet big changes that have happened on market recently. Here we still could see one of the technical reasons, why last weekend we were doubt on upside perspectives of EUR as net long position here stands at all time high. And from sentiment analysis point of view - this is one of the strong factors to suggest a reversal on the market.
Second issue - position still has started to decrease slowly as last CFTC data shows that net long position has dropped slightly.
So, guys, what we have at fundamental bottom line. Just to keep things simple and do not dive into sophisticated economical process, it seems that recent EUR drop is just a beginning. By putting "2+2" we have extended ECB dovish policy through 2018 and aggressive policy by Fed. By Fathom consulting analysis, markets still slightly underestimate the scale of rate increase in 2018 by Fed. I will not be surprised, if we will see EUR somewhere near parity again through 2018. By looking at price charts of basic assets - Dollar Index, US 10-year notes, Gold - everywhere we see signs of potential global shifts.
For example, our favorite Dollar Index monthly chart bearish reversal swing and deep upside retracement to 100.0 or higher level should follow through 2018. Lows stand at monthly OS and monthly K-support. You should remember this picture as we've used it not once in our analysis:
10-year notes - reverse H&S pattern that suggests strong interest rates growth above 3% or even higher:
Gold - monthly "222" Sell pattern:
And now - let's see what we have on EUR...
Technical
Monthly
So, when our major riddle was resolved - whether EUR will show another attempt to reach 1.21 or not, we
could turn to analysis of potential downside targets that EUR could reach. Last week we have described existed background rather well:
"As we have estimated earlier, EUR has formed short-term bearish pattern here - wash'n'rinse of previous top. August was indecision candle and in September price has tried to move higher but failed. This is sign of weakness and it increases chances on deeper retracement on lower time frames, mostly on daily. And this retracement right now stands under way.
Appearing of strong resistance on monthly chart, right at the moment of overloaded speculative bullish positions makes us to be careful with any bullish trades. We have two side-by-side Fib levels at 1.2160-1.2170 area on monthly chart and long-term support/resistance zone, where market stands right now.
As you can see August month shows mostly indecision action. May be shadows of this candle are not as big to call it "high wave" pattern, but by it's nature, it's probably the same. Appearing of "indecision" sign at this moment mostly stands in favor of retracement rather than upside breakout."
So, now we have two important moments here. First is - market has dropped below lows of both - September and August. They are "indecision" candles. It means that we probably is getting new direction right now.
Second - there are not many tools exist here, on monthly. Beyond of all-time support/resistance zone that cuts EUR/USD history by 1.20 edge, we have - rectangle consolidation and upside reversal swing. Making parallel to DXY chart, where we have downside reversal swing, here we also should suggest deep retracement down. This, in turn will push price back inside rectangle, which will be not good sign for bulls.
In this case of rectangle space will be open for price fluctuation and now it is impossible to say whether it will be deep retracement or real return back to lows.
Recent action, accompanied by fundamental background and parallel analysis of key financial markets mostly shows bearish picture and suggests downside action that could take large part of 2018 action.
Weekly
Last week we've discussed chances to see here DRPO "Sell" pattern. In general it's possible appearing would be logic, because it corresponds by it's nature to H&S pattern that we have on daily. But the problem with this pattern stands with strong upside action which it suggests as second top of DRPO needs to be formed here.
Another important condition - price should not reach important Fib support of DRPO's thrust.
Although theoretically it is still possible as price still stands above 1.1510 Fib support, but in reality, I suspect that DRPO chances looks phantom. Just because market already has got major impulse and it is mostly impossible to stop it, reverse up and return price back to 1.21 area.
Yes, 1.14-1.15 is strong support area. It includes multiple Fib levels (and K-areas), trend line supports and OS, and upside retracement indeed could happen here. But DRPO time mostly is gone - it was much simpler to appear 2 weeks ago when market was indecision and just crossed 3x3 DMA.
In such circumstances, it is more probable to get another bearish continuation pattern, that also suggests moderate upside retracement - this is "222" Sell. And it is very probable that it could start somewhere around 1.1450-1.15 area:
Daily
Daily picture shows important details as for a bit longer perspective as directly for coming week. By looking slightly over horizon of coming week, we major AB-CD pattern that is based on our H&S shape. And it has two important targets - 1.1450 and 1.12.
1.1450 is more important as it coincides with strong weekly support area and major 3/8 Fib support and it is very high chances that upside moderate retracement could start from there.
1.12 is too far and is not as interesting for us.
Speaking on coming week perspective... As you can see EUR has reached 1.16 daily K-support and price stands OS right now. But it is more important that 1.16 is upper boarder of monthly consolidation / previous tops as well - whatever description you like more.
That's why on Monday some upside reaction is possible but it should not be too extended - just re-test broken neckline or even smaller.
Intraday
On 4-hour chart we have an action that we could draw as butterfly, but of course it doesn't have clear butterfly shape. Still, 1.618 extension stands around 1.1540. This is a level where upside bounce could start:
Hourly chart shows that potential target of upside bounce is 1.1675 area - 3/8 Fib resistance, WPP and neckline of H&S pattern. If market will drop slightly lower first, as we've suggested, to 1.1540 - in this case, it will be not 3/8 but 50% Fib level probably.
As thrust here looks nice, scalp traders could watch for DiNapoli patterns. This is also will be source of potential patterns here on coming week.
Conclusion:
In the beginning of next week we suggest minor bounce, somewhere to 1.1650-1.1675 area, before price will continue action down to major 1.1450-1.15 target.
In longer perspective, before major collapse on EUR - deep retracement up should happen to fade existed upside momentum, as EUR was standing in long term uptrend. So, this retracement has great chances to start somewhere around 1.1450 area, but probably this will happen not on coming week (only if Payrolls will accelerate this process).
The technical portion of Sive's analysis owes a great deal to Joe DiNapoli's methods, and uses a number of Joe's proprietary indicators. Please note that Sive's analysis is his own view of the market and is not endorsed by Joe DiNapoli or any related companies.
(Reuters) - The euro fell on Friday, marking its biggest weekly loss of the year a day after the European Central Bank decided to prolong its bond purchases and signaled its willingness to stick with an ultra-loose policy stance.
The tension between Madrid and Catalonia’s secessionists also stoked selling in the single currency after the Catalan parliament on Friday declared independence from Madrid following a secret ballot. Spain Prime Minister Mariano Rajoy retaliated by sacking the Catalan government and set elections on Dec. 21.
“The dovish surprise from the ECB was its openness to extend the duration of its bond purchase program,” said Omer Esiner, chief market strategist at Commonwealth Foreign Exchange in Washington.
On Thursday, the ECB said it will extend its bond purchases into September 2018 while reducing its monthly purchases by half to 30 billion euros starting in January.
The move raised bets the ECB was unlikely to raise interest rates until 2019 as the U.S. Federal Reserve has remained on its path to hike U.S. rates further.
The Fed will hold a two-day policy meeting next Tuesday and Wednesday where policy-makers are expected to leave rates unchanged.
The euro was down 0.5 percent at $1.1595, bringing its weekly loss against the dollar to 1.6 percent for the biggest in 11 months.
The Catalan parliament vote revived some safe-haven demand for the yen and Swiss franc.
Even in the aftermath of Friday’s political turmoil, “the situation in Spain seemed largely contained for now,” Eisner said.
As the euro wobbled this week, the dollar strengthened on upbeat economic data, hopes for a tax cut and speculation about President Donald Trump’s selection of someone who favors a faster pace of rate increases than current Fed Chair Janet Yellen, whose term expires in February.
The U.S. government reported on Friday that the economy grew at a 3.0 percent annual rate in the third quarter, faster than the 2.5 percent forecast among economists polled by Reuters.
Earlier Friday, Bloomberg reported that Trump leans toward nominating Fed Governor Jerome Powell as the next Fed chief, but has not made up his mind.
The dollar pared gains briefly on that report as Powell is seen less hawkish than Stanford University economist John Taylor, another potential nominee to lead the central bank.
Trump, who is expected to announce his Fed chief candidate next week, is also considering Yellen, former Fed Governor Kevin Warsh and his economic adviser, Gary Cohn, for the Fed’s top job.
The index that tracks the dollar against six currencies was up 0.3 percent at 94.919 after hitting a three-month high at 95.150. It gained 1.3 percent for its biggest weekly increase so far this year.
News in Charts: ECB: rate rises still a distant prospect
by Fathom Consulting
Following the October monetary policy meeting, President Draghi announced the future of the ECB’s quantitative easing programme. The asset purchase programme will continue until September 2018 (nine months longer than previously announced), however the monthly purchase target will decrease from €60 billion to €30 billion – slightly less than Fathom’s expectations. Both the main refinancing rate and the deposit facility rate remained unchanged at 0.0% and -0.4% respectively.
President Draghi stressed that the reduced rate of purchases should not be described as tapering and he left the door open for the ECB to extend, or even enlarge, the programme should the Governing Council not see a “sustained adjustment in the path of inflation”. The ECB was keen to avoid comparisons with the Federal Reserve’s monetary policy tightening, stating that the US is at a much more advanced stage of its business cycle.
Although price pressures have strengthened over the last year, headline inflation remains comfortably below the target of 2.0%, while core inflation (which excluded the most volatile components in the headline index) has only breached 1.2% once in four years. Fathom does not forecast headline inflation returning to target in the near future.
COT Report
Recent CFTC data doesn't show yet big changes that have happened on market recently. Here we still could see one of the technical reasons, why last weekend we were doubt on upside perspectives of EUR as net long position here stands at all time high. And from sentiment analysis point of view - this is one of the strong factors to suggest a reversal on the market.
Second issue - position still has started to decrease slowly as last CFTC data shows that net long position has dropped slightly.
So, guys, what we have at fundamental bottom line. Just to keep things simple and do not dive into sophisticated economical process, it seems that recent EUR drop is just a beginning. By putting "2+2" we have extended ECB dovish policy through 2018 and aggressive policy by Fed. By Fathom consulting analysis, markets still slightly underestimate the scale of rate increase in 2018 by Fed. I will not be surprised, if we will see EUR somewhere near parity again through 2018. By looking at price charts of basic assets - Dollar Index, US 10-year notes, Gold - everywhere we see signs of potential global shifts.
For example, our favorite Dollar Index monthly chart bearish reversal swing and deep upside retracement to 100.0 or higher level should follow through 2018. Lows stand at monthly OS and monthly K-support. You should remember this picture as we've used it not once in our analysis:
10-year notes - reverse H&S pattern that suggests strong interest rates growth above 3% or even higher:
Gold - monthly "222" Sell pattern:
And now - let's see what we have on EUR...
Technical
Monthly
So, when our major riddle was resolved - whether EUR will show another attempt to reach 1.21 or not, we
could turn to analysis of potential downside targets that EUR could reach. Last week we have described existed background rather well:
"As we have estimated earlier, EUR has formed short-term bearish pattern here - wash'n'rinse of previous top. August was indecision candle and in September price has tried to move higher but failed. This is sign of weakness and it increases chances on deeper retracement on lower time frames, mostly on daily. And this retracement right now stands under way.
Appearing of strong resistance on monthly chart, right at the moment of overloaded speculative bullish positions makes us to be careful with any bullish trades. We have two side-by-side Fib levels at 1.2160-1.2170 area on monthly chart and long-term support/resistance zone, where market stands right now.
As you can see August month shows mostly indecision action. May be shadows of this candle are not as big to call it "high wave" pattern, but by it's nature, it's probably the same. Appearing of "indecision" sign at this moment mostly stands in favor of retracement rather than upside breakout."
So, now we have two important moments here. First is - market has dropped below lows of both - September and August. They are "indecision" candles. It means that we probably is getting new direction right now.
Second - there are not many tools exist here, on monthly. Beyond of all-time support/resistance zone that cuts EUR/USD history by 1.20 edge, we have - rectangle consolidation and upside reversal swing. Making parallel to DXY chart, where we have downside reversal swing, here we also should suggest deep retracement down. This, in turn will push price back inside rectangle, which will be not good sign for bulls.
In this case of rectangle space will be open for price fluctuation and now it is impossible to say whether it will be deep retracement or real return back to lows.
Recent action, accompanied by fundamental background and parallel analysis of key financial markets mostly shows bearish picture and suggests downside action that could take large part of 2018 action.
Weekly
Last week we've discussed chances to see here DRPO "Sell" pattern. In general it's possible appearing would be logic, because it corresponds by it's nature to H&S pattern that we have on daily. But the problem with this pattern stands with strong upside action which it suggests as second top of DRPO needs to be formed here.
Another important condition - price should not reach important Fib support of DRPO's thrust.
Although theoretically it is still possible as price still stands above 1.1510 Fib support, but in reality, I suspect that DRPO chances looks phantom. Just because market already has got major impulse and it is mostly impossible to stop it, reverse up and return price back to 1.21 area.
Yes, 1.14-1.15 is strong support area. It includes multiple Fib levels (and K-areas), trend line supports and OS, and upside retracement indeed could happen here. But DRPO time mostly is gone - it was much simpler to appear 2 weeks ago when market was indecision and just crossed 3x3 DMA.
In such circumstances, it is more probable to get another bearish continuation pattern, that also suggests moderate upside retracement - this is "222" Sell. And it is very probable that it could start somewhere around 1.1450-1.15 area:
Daily
Daily picture shows important details as for a bit longer perspective as directly for coming week. By looking slightly over horizon of coming week, we major AB-CD pattern that is based on our H&S shape. And it has two important targets - 1.1450 and 1.12.
1.1450 is more important as it coincides with strong weekly support area and major 3/8 Fib support and it is very high chances that upside moderate retracement could start from there.
1.12 is too far and is not as interesting for us.
Speaking on coming week perspective... As you can see EUR has reached 1.16 daily K-support and price stands OS right now. But it is more important that 1.16 is upper boarder of monthly consolidation / previous tops as well - whatever description you like more.
That's why on Monday some upside reaction is possible but it should not be too extended - just re-test broken neckline or even smaller.
Intraday
On 4-hour chart we have an action that we could draw as butterfly, but of course it doesn't have clear butterfly shape. Still, 1.618 extension stands around 1.1540. This is a level where upside bounce could start:
Hourly chart shows that potential target of upside bounce is 1.1675 area - 3/8 Fib resistance, WPP and neckline of H&S pattern. If market will drop slightly lower first, as we've suggested, to 1.1540 - in this case, it will be not 3/8 but 50% Fib level probably.
As thrust here looks nice, scalp traders could watch for DiNapoli patterns. This is also will be source of potential patterns here on coming week.
Conclusion:
In the beginning of next week we suggest minor bounce, somewhere to 1.1650-1.1675 area, before price will continue action down to major 1.1450-1.15 target.
In longer perspective, before major collapse on EUR - deep retracement up should happen to fade existed upside momentum, as EUR was standing in long term uptrend. So, this retracement has great chances to start somewhere around 1.1450 area, but probably this will happen not on coming week (only if Payrolls will accelerate this process).
The technical portion of Sive's analysis owes a great deal to Joe DiNapoli's methods, and uses a number of Joe's proprietary indicators. Please note that Sive's analysis is his own view of the market and is not endorsed by Joe DiNapoli or any related companies.