FOREX PRO Weekly, 04-08 June, 2018

Sive Morten

Special Consultant to the FPA
Messages
18,564
Fundamentals

We continue to look at fundamental situation through the prism of our major points that we've specified earlier. In two words speaking dollar strength is based on two components - its own strength and attractiveness due interest rate increase and second one is weakness of rivals. Speaking about first component - it is more or less clear and priced-in on 80%, I suppose. Recent positive NFP report which shows not just positive new job places created but drop unemployment to 3.8% and ! rising of wages for 0.3% in April - makes June rate hike almost done. Fed watch tool shows that market suggests 91.3% rate increase in June. Next major change should come in December. Although there is 65% anticipation of rate change in September, but it could be not enough for next step. September will be first meeting after Summer time, and investors just return after vacations. October - November is a period of the end of financial year for
myriads of mutual, hedge funds and companies. It is logical to see rate change in December and it is also confirmed by probabilities:
Source: cmegroup.com
upload_2018-6-2_13-20-15.png


Besides, we expect that NFP numbers will start to decrease, but not because of deterioration of job market but because of saturation. So, it will become more dense rather than wide. It also could change investors anticipation of rate change in favor of December.
So, situation with dollar inner driving factors stands relatively stable:

“The market was fairly pricing the Fed’s path coming into the number, which was a shift from the beginning of the week where the market took out some of the rate hikes,” said Charles Tomes, senior investment analysts at Manulife Asset Management.


As we've said in our previous reports - 1.15 level right now seems fair. It was our first target based on fundamentals. Next target is 1.10 but to reach it dollar will need additional assistance from external factors, mostly weakness of the rivals. They could come as from political uncertainty, mutual sanctions, trade war and, indecisive ECB policy of course. Let's see what we have right now:

First, let's recall one of the problems that we've mentioned last week on Italian political crisis. Now situation is more or less stabilized, as revived coalition deal between two anti-establishment parties pulled the country back from snap elections. As a result EUR has got a support from dropping of Italian bond yields.
Still, in most recent report on EU economic sentiment, Fathom consulting tells that hardly new government will hold for long time:

"Looking ahead, we do not foresee the government in Italy surviving a full term and we anticipate new elections within two years. Policies including the adoption of a flat rate of income tax, universal basic income and a repeal of previous pension reforms are likely to make Italian government finances unsustainable going forward, with further rises in government borrowing costs ultimately forcing the government to back down."

European Union, Canada and Mexico are expected to retaliate to the import tariffs on steel and aluminium announced by President Donald Trump. Conversely EU, Canada and Mexico have made the statement that they plan to retaliate with levies on billions of dollars of U.S. goods from orange juice and whiskey to blue jeans and Harley-Davidsons.

Besides, Fathom sees additional hazard from tariffs, nervousness that stands around it and uncertainty. Because right now nobody has clear understanding what tariffs will be applied, in what way it will be done and how long it will last. As a result sentiment in EU turns down, despite recent EU PMI shows good numbers around 55.0 level.
"Weak Ifo and PMI readings drove the decline as the euro area’s largest economy continues to suffer from a loss of confidence in its economic future. The ESI (Economic Sentiment indicator) for Germany fell by 0.2 percentage points in April, the largest monthly decline across the region. Geopolitical uncertainty, particularly in Iran after the US decision to back out of the nuclear deal, has taken its toll on oil prices (where Germany is a net importer) with the Brent crude variant hovering around $75 a barrel."
OW-Germany-GDP-Economic-Sentiment-Indicator-03_16_2018.jpg


In General, for whole EU Fathom’s Economic Sentiment Indicator (ESI) fell for two straight months. It remained broadly flat in April at 1.3%, as the downward trajectory of weaker survey data across the bloc continued into the second quarter of 2018.

So, as you can see second component of US dollar strength let's US to maneuver between NAFTA countries and EU suppliers, keep tight all of them and been nervous on perspective. US has a choice who will supply commodities in US - EU, China, Canada etc. Besides, while everybody stand in cloud of tariffs dust - US has its own domestic producers as it is rather reach resource base in North America. While many EU companies strongly related on US demand, and not just commodities suppliers, but car makers and a lot of others.

Here is just simple example how US could manipulate global markets and keep EU, Japan, NAFTA countries under pressure. They have announced steel and aluminium tariffs. As a result - price has jumped. But it has jumped not just for US supplies but for all countries. Consequently price of EU cars have increased. Now US make second impact and put embargo on EU car sector in US. At the same time, US could buy basic metals easily from Canada, Turkey, China - everywhere on long-term contracts and at lower price. In fact US feels no strong impact from turmoil that they have started. Japanese cars indirectly also become more expensive, just due commodity prices.
And the same is for other type of goods. So, this is really powerful tool in US hands and it could keep global markets under control, just because everything is trading for US dollars and US is major consumer.

As a bottom line - whether EUR will go to 1.10 area will depend on EU response to non-friendly US steps. How fast EU will find substitution for US markets, whether it will find counter steps to hold US tariffs aggression, and what ECB will do. ECB takes backseat, because it doesn't drive EU economy but follow to its result. And results, as we've said stands under impact of US trade war.

COT Report

CFTC data shows reducing of net long EUR position as speculators close longs. We can't talk on massive shorts because open interest is dropping, which suggests contraction of positions but not expansion.
upload_2018-6-2_14-7-23.png


Technicals
Monthly


Long term technical picture also keeps chances on positive changes for EU. One of the issues that we were keeping eye on - bullish grabber on monthly chart, has been formed. Theoretically it suggests action above 1.26 top. But we understand that to make this possible, EU will have to mitigate impact of second factor in hands of US that we've talked about. Or, situation in US economy should change drastically somehow.

Anyway, from technical point of view - grabbers lows takes special meaning right now. They are invalidation point of the grabber and also important lows around YPP.

Reversal down has happened after completion of harmonic swing and around YPR1. The fact that EUR has failed to break through YPR1 tells that upside rally from 1.03 to 1.26 was just a retracement within larger bear trend. Now it is particularly interesting how EUR will behave around YPP. Drop below it will open road to YPS1 at ~1.09 which corresponds to our fundamental 1.10 target.

Conversely EUR ability to hold above YPP and keeping grabber valid could become a reversal point if corresponding fundamental factors will appear.

Within few weeks we will work with upside respect of strong monthly support, so moment of truth is postponed by far, but not for too long, some months probably.
eur_m_04_06_18.png


Weekly

So, on weekly chart you can see basic scenario. Right now we expect to get upside bounce back to 1.20-1.21 area, where market should form right arm of our H&S pattern. If, by that time, when arm will be completed, no major shifts in EU/US balance will happen - drop to 1.10 could become a reality. Whole action will take approximately 6 month. 1.09 - 1.10 area is major 5/8 Fib support and YPS1.
Alternative scenarios, such as immediate downside breakout and failure of H&S pattern in 1.20 area, if EUR will not stop but continue upside action now look less probable.
But again - it will depend on fundamentals, which we will monitor. This should let us to adjust/keep trading plan correspondingly.
eur_w_04_06_18.png


Daily

On daily TF situation stands mostly the same as on Friday. We're watching for upside startup, based on nicely looking bullish engulfing pattern. It is interesting that white candle is almost reversal one as price has closed above the top of black candle.
Here we try to use common features of engulfing pattern. Usually its take the shape of AB=CD pattern on lower time frame and its target equals to the length of the bars. It means that market could reach daily 1.1810-1.1850 resistance next week. At least this will be our weekly ceil, because it also coincides with daily OB level.
Second issue that we have here is our B&B "Sell" pattern. It should provide a retracement and "BC" leg. AS B&B will be completed upside action should continue. B&B has started on Thu, but it has not reached the target yet, despite good NFP numbers. It lets us think that market should move slightly lower before it will turn north again.
eur_d_04_06_18.png


Intraday

Hourly chart shows rather choppy price action. Retracement indeed has started, as we've suggested, but downside action moves hard. Theoretical perfect B&B "Sell" target stands around 1.1590 - major 5/8 Fib support and XOP target. OP target already has been hit on Friday and, in general market has reached 1.1616 lows.
Taking in consideration market's shape it is difficult to be sure that 1.1590 target definitely will hit. Anyway, if you keep shorts with B&B - just move stops to breakeven and apply partial profit taking. As soon as retracement will be over, we expect extension stage by daily bullish engulfing pattern.
eur_1h_04_06_18.png


Conclusion:

Fundamental picture puts EU and EUR in tricky position, where it depends on US and its trade policy as major driving factor right now for EU economy sentiment is tariffs and sanctions. Taking in consideration that US economy and yields are warming up, this makes USD looks stronger in perspectives of few months.

Fundamental picture gives high chances on reaching 1.15 area (which is done already) and upside bounce to 1.20-1.21 later, but further action either to 1.10 or to new highs above 1.26 will depend on fundamental balance and ECB policy in particular.

On coming week we will be busy with upside action. Potential ceil for coming week is 1.1850 area.


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.
 
Hi Sive great & valuable analysis as always. Yes the Euro is rather dicey for me for now and I am staying on the sideline with any currency that is paired with the EUR.

Cheers and all the best!
 
As always very interesting explanations, but wondering now where trading is going if some joker president gets the market info before we traders do !!!
 
Fundamentals

We continue to look at fundamental situation through the prism of our major points that we've specified earlier. In two words speaking dollar strength is based on two components - its own strength and attractiveness due interest rate increase and second one is weakness of rivals. Speaking about first component - it is more or less clear and priced-in on 80%, I suppose. Recent positive NFP report which shows not just positive new job places created but drop unemployment to 3.8% and ! rising of wages for 0.3% in April - makes June rate hike almost done. Fed watch tool shows that market suggests 91.3% rate increase in June. Next major change should come in December. Although there is 65% anticipation of rate change in September, but it could be not enough for next step. September will be first meeting after Summer time, and investors just return after vacations. October - November is a period of the end of financial year for
myriads of mutual, hedge funds and companies. It is logical to see rate change in December and it is also confirmed by probabilities:
Source: cmegroup.com
View attachment 37808

Besides, we expect that NFP numbers will start to decrease, but not because of deterioration of job market but because of saturation. So, it will become more dense rather than wide. It also could change investors anticipation of rate change in favor of December.
So, situation with dollar inner driving factors stands relatively stable:

“The market was fairly pricing the Fed’s path coming into the number, which was a shift from the beginning of the week where the market took out some of the rate hikes,” said Charles Tomes, senior investment analysts at Manulife Asset Management.


As we've said in our previous reports - 1.15 level right now seems fair. It was our first target based on fundamentals. Next target is 1.10 but to reach it dollar will need additional assistance from external factors, mostly weakness of the rivals. They could come as from political uncertainty, mutual sanctions, trade war and, indecisive ECB policy of course. Let's see what we have right now:

First, let's recall one of the problems that we've mentioned last week on Italian political crisis. Now situation is more or less stabilized, as revived coalition deal between two anti-establishment parties pulled the country back from snap elections. As a result EUR has got a support from dropping of Italian bond yields.
Still, in most recent report on EU economic sentiment, Fathom consulting tells that hardly new government will hold for long time:

"Looking ahead, we do not foresee the government in Italy surviving a full term and we anticipate new elections within two years. Policies including the adoption of a flat rate of income tax, universal basic income and a repeal of previous pension reforms are likely to make Italian government finances unsustainable going forward, with further rises in government borrowing costs ultimately forcing the government to back down."

European Union, Canada and Mexico are expected to retaliate to the import tariffs on steel and aluminium announced by President Donald Trump. Conversely EU, Canada and Mexico have made the statement that they plan to retaliate with levies on billions of dollars of U.S. goods from orange juice and whiskey to blue jeans and Harley-Davidsons.

Besides, Fathom sees additional hazard from tariffs, nervousness that stands around it and uncertainty. Because right now nobody has clear understanding what tariffs will be applied, in what way it will be done and how long it will last. As a result sentiment in EU turns down, despite recent EU PMI shows good numbers around 55.0 level.
"Weak Ifo and PMI readings drove the decline as the euro area’s largest economy continues to suffer from a loss of confidence in its economic future. The ESI (Economic Sentiment indicator) for Germany fell by 0.2 percentage points in April, the largest monthly decline across the region. Geopolitical uncertainty, particularly in Iran after the US decision to back out of the nuclear deal, has taken its toll on oil prices (where Germany is a net importer) with the Brent crude variant hovering around $75 a barrel."
OW-Germany-GDP-Economic-Sentiment-Indicator-03_16_2018.jpg


In General, for whole EU Fathom’s Economic Sentiment Indicator (ESI) fell for two straight months. It remained broadly flat in April at 1.3%, as the downward trajectory of weaker survey data across the bloc continued into the second quarter of 2018.

So, as you can see second component of US dollar strength let's US to maneuver between NAFTA countries and EU suppliers, keep tight all of them and been nervous on perspective. US has a choice who will supply commodities in US - EU, China, Canada etc. Besides, while everybody stand in cloud of tariffs dust - US has its own domestic producers as it is rather reach resource base in North America. While many EU companies strongly related on US demand, and not just commodities suppliers, but car makers and a lot of others.

Here is just simple example how US could manipulate global markets and keep EU, Japan, NAFTA countries under pressure. They have announced steel and aluminium tariffs. As a result - price has jumped. But it has jumped not just for US supplies but for all countries. Consequently price of EU cars have increased. Now US make second impact and put embargo on EU car sector in US. At the same time, US could buy basic metals easily from Canada, Turkey, China - everywhere on long-term contracts and at lower price. In fact US feels no strong impact from turmoil that they have started. Japanese cars indirectly also become more expensive, just due commodity prices.
And the same is for other type of goods. So, this is really powerful tool in US hands and it could keep global markets under control, just because everything is trading for US dollars and US is major consumer.

As a bottom line - whether EUR will go to 1.10 area will depend on EU response to non-friendly US steps. How fast EU will find substitution for US markets, whether it will find counter steps to hold US tariffs aggression, and what ECB will do. ECB takes backseat, because it doesn't drive EU economy but follow to its result. And results, as we've said stands under impact of US trade war.

COT Report

CFTC data shows reducing of net long EUR position as speculators close longs. We can't talk on massive shorts because open interest is dropping, which suggests contraction of positions but not expansion.
View attachment 37810

Technicals
Monthly


Long term technical picture also keeps chances on positive changes for EU. One of the issues that we were keeping eye on - bullish grabber on monthly chart, has been formed. Theoretically it suggests action above 1.26 top. But we understand that to make this possible, EU will have to mitigate impact of second factor in hands of US that we've talked about. Or, situation in US economy should change drastically somehow.

Anyway, from technical point of view - grabbers lows takes special meaning right now. They are invalidation point of the grabber and also important lows around YPP.

Reversal down has happened after completion of harmonic swing and around YPR1. The fact that EUR has failed to break through YPR1 tells that upside rally from 1.03 to 1.26 was just a retracement within larger bear trend. Now it is particularly interesting how EUR will behave around YPP. Drop below it will open road to YPS1 at ~1.09 which corresponds to our fundamental 1.10 target.

Conversely EUR ability to hold above YPP and keeping grabber valid could become a reversal point if corresponding fundamental factors will appear.

Within few weeks we will work with upside respect of strong monthly support, so moment of truth is postponed by far, but not for too long, some months probably.
View attachment 37811

Weekly

So, on weekly chart you can see basic scenario. Right now we expect to get upside bounce back to 1.20-1.21 area, where market should form right arm of our H&S pattern. If, by that time, when arm will be completed, no major shifts in EU/US balance will happen - drop to 1.10 could become a reality. Whole action will take approximately 6 month. 1.09 - 1.10 area is major 5/8 Fib support and YPS1.
Alternative scenarios, such as immediate downside breakout and failure of H&S pattern in 1.20 area, if EUR will not stop but continue upside action now look less probable.
But again - it will depend on fundamentals, which we will monitor. This should let us to adjust/keep trading plan correspondingly.
View attachment 37812

Daily

On daily TF situation stands mostly the same as on Friday. We're watching for upside startup, based on nicely looking bullish engulfing pattern. It is interesting that white candle is almost reversal one as price has closed above the top of black candle.
Here we try to use common features of engulfing pattern. Usually its take the shape of AB=CD pattern on lower time frame and its target equals to the length of the bars. It means that market could reach daily 1.1810-1.1850 resistance next week. At least this will be our weekly ceil, because it also coincides with daily OB level.
Second issue that we have here is our B&B "Sell" pattern. It should provide a retracement and "BC" leg. AS B&B will be completed upside action should continue. B&B has started on Thu, but it has not reached the target yet, despite good NFP numbers. It lets us think that market should move slightly lower before it will turn north again.
View attachment 37813

Intraday

Hourly chart shows rather choppy price action. Retracement indeed has started, as we've suggested, but downside action moves hard. Theoretical perfect B&B "Sell" target stands around 1.1590 - major 5/8 Fib support and XOP target. OP target already has been hit on Friday and, in general market has reached 1.1616 lows.
Taking in consideration market's shape it is difficult to be sure that 1.1590 target definitely will hit. Anyway, if you keep shorts with B&B - just move stops to breakeven and apply partial profit taking. As soon as retracement will be over, we expect extension stage by daily bullish engulfing pattern.
View attachment 37814

Conclusion:

Fundamental picture puts EU and EUR in tricky position, where it depends on US and its trade policy as major driving factor right now for EU economy sentiment is tariffs and sanctions. Taking in consideration that US economy and yields are warming up, this makes USD looks stronger in perspectives of few months.

Fundamental picture gives high chances on reaching 1.15 area (which is done already) and upside bounce to 1.20-1.21 later, but further action either to 1.10 or to new highs above 1.26 will depend on fundamental balance and ECB policy in particular.

On coming week we will be busy with upside action. Potential ceil for coming week is 1.1850 area.


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.

Superb report, clear as a bell! We are so fortunate to have you as a mentor Sive, thank you heaps :)
 
Hi Sive great & valuable analysis as always. Yes the Euro is rather dicey for me for now and I am staying on the sideline with any currency that is paired with the EUR.
Cheers and all the best!
As always very interesting explanations, but wondering now where trading is going if some joker president gets the market info before we traders do !!!
Superb report, clear as a bell! We are so fortunate to have you as a mentor Sive, thank you heaps :)

Thanks for support, guys. Freddy, I suggest it always was and will be in this way ;)

Thank you sure sir for the nice and clear view...
Hope you will share usdcad chart as well
Have a great week ahead
God bless

Well, actually in second report I plan to take a look at JPY ;)
But we probably return to CAD in some daily video on coming week.
 
Dear Sive
Great job ,do u think the rate hike in June has no effect on yr expectation to the 1.2x retracement?shouldn t push that pair down further before it bounce bank?thanks
 
What i liked about this report especially is your explanation of the fully engulfing candles pattern, would like to hear more of that in the chart setting, such as tweezers as there are dozens of examples everywhere but in the relevant chart to see this is most helpful. Thank you again :)
 
Dear Sive
Great job ,do u think the rate hike in June has no effect on yr expectation to the 1.2x retracement?shouldn t push that pair down further before it bounce bank?thanks

Hey,
Well, CME Fed watch tool shows that this event is priced in for 90+%. Hardly it will push EUR down, only if Fed will say something really hawkish. But according to our analysis, they probably will stay in trend to 3 rate changes in 2018. I would suggest that as rate will be increased - EUR could accelerate up a bit. EUR could change the trend, only if hints on 4 rate hikes will be given. But based on statistics and overall situation - this is not very probable.
 
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