Sive Morten
Special Consultant to the FPA
- Messages
- 18,644
Today guys, I thought to skip gold research, since nothing really interesting has happened there. So, I do not want to re-write the same stuff as last week.
That's why second video research we also dedicate to FX market and we will take a look at GBP, since some things have changed there.
As usuall, some fundamental information in the beginning:
UK Monetary Policy Committee: missing the bigger picture
by Fathom Consulting
Fathom’s UK Economic Sentiment Indicator rebounded in August, suggesting that the UK may avoid an overall contraction in output in the third quarter. The UK’s Monetary Policy Committee has rather generously given itself credit for this bounce-back. Nevertheless, this stronger run of data has done little to dissuade it from the necessity of further loosening. In our view, the timing of that loosening will coincide with the triggering of Article 50, with February next year looking the most likely at present. But UK policymakers are missing the bigger picture; ever looser monetary policy is part of the problem, not the solution.
In June, when the UK unexpectedly voted to leave the EU, we argued that the UK economy would narrowly avoid recession. We stuck to that view, even as July’s survey data pointed to a collapse in sentiment, on the basis that those surveys covered the most intense period of political and economic uncertainty following the UK referendum. With that in mind, we argued that over the next few months we would see a recovery in the survey readings. Albeit early days, it appears that we were right. Survey data have picked up, and consensus has drifted closer to our view. According to a Reuters poll, the median probability of a technical recession in the UK over the coming year has dropped from 60% in July, to 35% in August.
Our proxy of underlying UK economic activity, our UK Economic Sentiment Indicator (UKESI), has also improved after falling sharply in July. At 0.2%, it suggests that the UK might just manage to avoid a contraction in output in the third quarter. Similarly, an early reading of our more comprehensive near-term GDP growth model points to a quarterly expansion of 0.2% to 0.3%. For now, it appears that consumers have shrugged off the Brexit vote. The world is still spinning on its axis, and there have not been material job losses – yet.
Despite this bounce-back, which prompted the Bank’s Monetary Policy Committee (MPC) to revise up its estimate of economic growth in the third quarter from 0.1% to 0.3%, the MPC continues to argue that further monetary stimulus will be required. Indeed, the Minutes from September’s rate-setting meeting state that “a majority of members expected to support a further cut in Bank Rate to its effective lower bound at one of the MPC’s forthcoming meetings during the course of the year.” But with just one rate cut left in the MPC’s conventional tool kit and consumers largely shrugging off the Brexit vote, we believe that the Committee may well align the timing of its next rate cut with the beginning of Article 50 proceedings. At present, February next year looks the most likely date. Indeed, evoking Article 50 will eradicate any remaining hope of a near-term resolution, and is likely to foster even greater uncertainty.
The investment outlook is likely to be key in deciding when to pull the trigger. At this stage, there is relatively little new information available on firms’ investment intentions since the referendum other than the Bank of England’s Agents’ Summary of Business Conditions. A monthly survey, which extends to August and offers insight into business sentiment, this points to continued investment weakness. Overseas events, such as the US presidential election in November, will also have a bearing. A victory for Donald Trump could well trigger a negative market reaction. Under such a scenario, or significant further weakening in investment intentions, the UK MPC may opt to cut rates earlier, perhaps in December — its next meeting after the US election.
Whatever the Committee’s motivation, the impact of cutting Bank Rate will be vanishingly small. We are at the point where monetary policy, by itself, can do no more. Already, Bank Rate is at a record low of 0.25%, and members of the Committee have repeatedly stated that the lower bound is positive. As a consequence, there is very little room for manoeuvre. But regardless of whether Bank Rate is cut by 10, 15 or 20 basis points, it will be next to wholly ineffective — especially when the source of the downturn is uncertainty.
Worse still, we believe that the slowdown in productivity growth suffered by the UK since the crisis is to a great extent a consequence of ever lower rates. In other words, it is not that central banks have failed to reduce interest rates enough, but that the continued application of emergency monetary policy measures has held back growth in productive potential by enabling barely profitable and increasingly unproductive firms to survive.
For this reason, we take issue with the Bank’s assertion that its monetary policy action in August pulled the UK back from the brink. At a recent Treasury Select Committee meeting, Governor Carney said that the Bank’s “timely, comprehensive and concrete action” acted to “support, cushion and help the economy adjust”. But it is wrong for the Bank to take credit. There was no precipice for the UK economy to fall into, other than that conjured by its Committee members. By focusing on this, Bank staff risk missing the bigger picture. The UK economy was already slowing, and monetary policy — in its current form — has stopped working.
COT Report
Here again, guys we take a look at "all time" historical chart of CFTC data. This view is important because it explains recent slow in GBP action. As you can see, after Brexit, speculative net short position has reached all-time low. It means that investors' short positions were at maximum and market was not able to continue trend down, if even it would like to do this. The same situation we have on gold market, but in opposite direction.
Last 4 weeks, net speculative short position slightly has been reduced. Open interest also has dropped a bit, thus, some shorts were closed probably. Right now it means that GBP has got some capacity to continue trend down. But understand us correctly, COT data doesn't tell that this definitely will happen, it just doesn't contradict to this scenario.
Whether it will happen or not, we will have to understand from technical picture.
Technicals
Monthly
So guys, our long-term forecast, that we've created in 2011 in our Military Forex Course, based on Elliot Waves has been completed:
Long Term Forecast on GBP rate
Right now monthly trend is bearish, but market is not at oversold on monthly chart. We've said that lows will not survive because market has all-time 0.618 AB=CD target below them, so that has happened. Market has dropped and right now stands there, no W&R.
Overall picture looks bearish by some signs. First is - acceleration down to AB-CD target. Usually fast drop on this point tells that market has chances to continue to AB=CD target, which stands at 1.06 area. Currently it seems too brave suggestion, but at least some minor continuation down is very probable.
The point is if you will take a look at all-time GBP chart, you'll see that market already has broken major 5/8 Fib support and on a way down, drop is really fast since first leg was on 2008 crisis. Overall fundamental situation is mostly supportive to this scenario, besides, 20 points is not really big distance to GBP that is more volatile than many other major currencies:
That's why technically there is nothing impossible with 1.06 area. - that will be AB=CD on a way down.
Second stands for shorter-term perspective. GBP has dropped below YPS1 and this indicates starting of new bearish trend, not just a retracement down, but trend.
Swings right now are so large, that monthly chart let's us talk on very long-term perspective and does not bring any clarity on shorter-term perspective.
So, as no bounce has happened yet, in short-term perspective market could try to reach another AB-CD 0.618 traget. Initially we were focused on AB-CD pattern with 1.3080 target since it was more probable. As GBP has hit it already but shows no reaction, it could mean that A'B-CD target around 1.2450 area also could be hit, if we adjust our initial "A" point and shift it to "A' " as it is shown on the chart.
Last two months GBP stands rather tight. This is also looks bearish. As GBP has reached minor AB-CD target @ 1.3080 area, it should show at least some minor bounce, but price wasn't able to do this. That's why downside continuation is very probable here:
Weekly
Today we will not talk again on our VOB pattern. It's still valid, but market has not shown upside bounce fast, so, we will keep an eye on it, but our trade based on VOB is postponed a bit, probably. Or may be market needs to complete some closer targets before VOB pattern will start to work... Anyway...
Let's better take a look at shorter picture, that is important for nearest 1-2 weeks. On weekly chart we have triangle consolidation that could shift to butterfly "Buy" pattern. As our monthly target stands around 1.2450 - it could be reached by butterfly pattern.
Also, we have bearish evening star candlestick shape, and take a look - some kind of bearish dynamic pressure, as trend has turned bullish while price action is not:
Daily
Here, let's find out why we think that triangle has solid chances to shift into butterfly. Take a look at our initial triangle and setup that we've discussed 3-weeks ago - "222" Buy" pattern, remember?
In general this setup has worked well, but market has not quite reached AB=CD upside target and turned down too early. This indicates GBP weakness. Also, CD leg was two times longer than AB. So, inability of the market to complete target is a bearish sign.
Now take a look how market fluctuates around trend line of triangle, on our "222" setup it was broken up, on a way back price has tested it tried to move up but failed and returned back inside triangle. And then most important thing has happened - GBP has re-tested the same line but from the opposite direction and stays inside the triangle. Total combination of upside triangle breakout and inability to continue move up or at least to hold above triangle is a bearish sign. And it means that downward breakout is just a question of time. Trend is bearish on daily chart:
Hourly
That's being said, currently GBP stands at support - MPS1, as we see on weekly chart and lower border of triangle. Thus, some upside bounce is probable in the beginning of the week.
Hourly chart shows nice thrust down, currently we do not have any DiNapoli patterns here, but may be something will appear later. Potential upward bounce to WPP, or 5/8 Fib resistance looks normal.
Conclusion:
Currently we do not want to look too far in the future. Yes, market shows strong bearish action, especially on very long-term charts, drops down indeed look miserable, and from that standpoint GBP could reach even 1.06 target, but right now we're mostly interested in tactical weekly/daily setup.
Last 3 weeks GBP looks heavy no signs of upward bounce and even has shown clear signs of weakness on daily chart. Thus, we should be ready for downward breakout and completion of our nearest downside target around 1.2450 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.
That's why second video research we also dedicate to FX market and we will take a look at GBP, since some things have changed there.
As usuall, some fundamental information in the beginning:
UK Monetary Policy Committee: missing the bigger picture
by Fathom Consulting
Fathom’s UK Economic Sentiment Indicator rebounded in August, suggesting that the UK may avoid an overall contraction in output in the third quarter. The UK’s Monetary Policy Committee has rather generously given itself credit for this bounce-back. Nevertheless, this stronger run of data has done little to dissuade it from the necessity of further loosening. In our view, the timing of that loosening will coincide with the triggering of Article 50, with February next year looking the most likely at present. But UK policymakers are missing the bigger picture; ever looser monetary policy is part of the problem, not the solution.
In June, when the UK unexpectedly voted to leave the EU, we argued that the UK economy would narrowly avoid recession. We stuck to that view, even as July’s survey data pointed to a collapse in sentiment, on the basis that those surveys covered the most intense period of political and economic uncertainty following the UK referendum. With that in mind, we argued that over the next few months we would see a recovery in the survey readings. Albeit early days, it appears that we were right. Survey data have picked up, and consensus has drifted closer to our view. According to a Reuters poll, the median probability of a technical recession in the UK over the coming year has dropped from 60% in July, to 35% in August.
Our proxy of underlying UK economic activity, our UK Economic Sentiment Indicator (UKESI), has also improved after falling sharply in July. At 0.2%, it suggests that the UK might just manage to avoid a contraction in output in the third quarter. Similarly, an early reading of our more comprehensive near-term GDP growth model points to a quarterly expansion of 0.2% to 0.3%. For now, it appears that consumers have shrugged off the Brexit vote. The world is still spinning on its axis, and there have not been material job losses – yet.
Despite this bounce-back, which prompted the Bank’s Monetary Policy Committee (MPC) to revise up its estimate of economic growth in the third quarter from 0.1% to 0.3%, the MPC continues to argue that further monetary stimulus will be required. Indeed, the Minutes from September’s rate-setting meeting state that “a majority of members expected to support a further cut in Bank Rate to its effective lower bound at one of the MPC’s forthcoming meetings during the course of the year.” But with just one rate cut left in the MPC’s conventional tool kit and consumers largely shrugging off the Brexit vote, we believe that the Committee may well align the timing of its next rate cut with the beginning of Article 50 proceedings. At present, February next year looks the most likely date. Indeed, evoking Article 50 will eradicate any remaining hope of a near-term resolution, and is likely to foster even greater uncertainty.
The investment outlook is likely to be key in deciding when to pull the trigger. At this stage, there is relatively little new information available on firms’ investment intentions since the referendum other than the Bank of England’s Agents’ Summary of Business Conditions. A monthly survey, which extends to August and offers insight into business sentiment, this points to continued investment weakness. Overseas events, such as the US presidential election in November, will also have a bearing. A victory for Donald Trump could well trigger a negative market reaction. Under such a scenario, or significant further weakening in investment intentions, the UK MPC may opt to cut rates earlier, perhaps in December — its next meeting after the US election.
Whatever the Committee’s motivation, the impact of cutting Bank Rate will be vanishingly small. We are at the point where monetary policy, by itself, can do no more. Already, Bank Rate is at a record low of 0.25%, and members of the Committee have repeatedly stated that the lower bound is positive. As a consequence, there is very little room for manoeuvre. But regardless of whether Bank Rate is cut by 10, 15 or 20 basis points, it will be next to wholly ineffective — especially when the source of the downturn is uncertainty.
Worse still, we believe that the slowdown in productivity growth suffered by the UK since the crisis is to a great extent a consequence of ever lower rates. In other words, it is not that central banks have failed to reduce interest rates enough, but that the continued application of emergency monetary policy measures has held back growth in productive potential by enabling barely profitable and increasingly unproductive firms to survive.
For this reason, we take issue with the Bank’s assertion that its monetary policy action in August pulled the UK back from the brink. At a recent Treasury Select Committee meeting, Governor Carney said that the Bank’s “timely, comprehensive and concrete action” acted to “support, cushion and help the economy adjust”. But it is wrong for the Bank to take credit. There was no precipice for the UK economy to fall into, other than that conjured by its Committee members. By focusing on this, Bank staff risk missing the bigger picture. The UK economy was already slowing, and monetary policy — in its current form — has stopped working.
COT Report
Here again, guys we take a look at "all time" historical chart of CFTC data. This view is important because it explains recent slow in GBP action. As you can see, after Brexit, speculative net short position has reached all-time low. It means that investors' short positions were at maximum and market was not able to continue trend down, if even it would like to do this. The same situation we have on gold market, but in opposite direction.
Last 4 weeks, net speculative short position slightly has been reduced. Open interest also has dropped a bit, thus, some shorts were closed probably. Right now it means that GBP has got some capacity to continue trend down. But understand us correctly, COT data doesn't tell that this definitely will happen, it just doesn't contradict to this scenario.
Whether it will happen or not, we will have to understand from technical picture.
Technicals
Monthly
So guys, our long-term forecast, that we've created in 2011 in our Military Forex Course, based on Elliot Waves has been completed:
Long Term Forecast on GBP rate
Right now monthly trend is bearish, but market is not at oversold on monthly chart. We've said that lows will not survive because market has all-time 0.618 AB=CD target below them, so that has happened. Market has dropped and right now stands there, no W&R.
Overall picture looks bearish by some signs. First is - acceleration down to AB-CD target. Usually fast drop on this point tells that market has chances to continue to AB=CD target, which stands at 1.06 area. Currently it seems too brave suggestion, but at least some minor continuation down is very probable.
The point is if you will take a look at all-time GBP chart, you'll see that market already has broken major 5/8 Fib support and on a way down, drop is really fast since first leg was on 2008 crisis. Overall fundamental situation is mostly supportive to this scenario, besides, 20 points is not really big distance to GBP that is more volatile than many other major currencies:
That's why technically there is nothing impossible with 1.06 area. - that will be AB=CD on a way down.
Second stands for shorter-term perspective. GBP has dropped below YPS1 and this indicates starting of new bearish trend, not just a retracement down, but trend.
Swings right now are so large, that monthly chart let's us talk on very long-term perspective and does not bring any clarity on shorter-term perspective.
So, as no bounce has happened yet, in short-term perspective market could try to reach another AB-CD 0.618 traget. Initially we were focused on AB-CD pattern with 1.3080 target since it was more probable. As GBP has hit it already but shows no reaction, it could mean that A'B-CD target around 1.2450 area also could be hit, if we adjust our initial "A" point and shift it to "A' " as it is shown on the chart.
Last two months GBP stands rather tight. This is also looks bearish. As GBP has reached minor AB-CD target @ 1.3080 area, it should show at least some minor bounce, but price wasn't able to do this. That's why downside continuation is very probable here:
Weekly
Today we will not talk again on our VOB pattern. It's still valid, but market has not shown upside bounce fast, so, we will keep an eye on it, but our trade based on VOB is postponed a bit, probably. Or may be market needs to complete some closer targets before VOB pattern will start to work... Anyway...
Let's better take a look at shorter picture, that is important for nearest 1-2 weeks. On weekly chart we have triangle consolidation that could shift to butterfly "Buy" pattern. As our monthly target stands around 1.2450 - it could be reached by butterfly pattern.
Also, we have bearish evening star candlestick shape, and take a look - some kind of bearish dynamic pressure, as trend has turned bullish while price action is not:
Daily
Here, let's find out why we think that triangle has solid chances to shift into butterfly. Take a look at our initial triangle and setup that we've discussed 3-weeks ago - "222" Buy" pattern, remember?
In general this setup has worked well, but market has not quite reached AB=CD upside target and turned down too early. This indicates GBP weakness. Also, CD leg was two times longer than AB. So, inability of the market to complete target is a bearish sign.
Now take a look how market fluctuates around trend line of triangle, on our "222" setup it was broken up, on a way back price has tested it tried to move up but failed and returned back inside triangle. And then most important thing has happened - GBP has re-tested the same line but from the opposite direction and stays inside the triangle. Total combination of upside triangle breakout and inability to continue move up or at least to hold above triangle is a bearish sign. And it means that downward breakout is just a question of time. Trend is bearish on daily chart:
Hourly
That's being said, currently GBP stands at support - MPS1, as we see on weekly chart and lower border of triangle. Thus, some upside bounce is probable in the beginning of the week.
Hourly chart shows nice thrust down, currently we do not have any DiNapoli patterns here, but may be something will appear later. Potential upward bounce to WPP, or 5/8 Fib resistance looks normal.
Conclusion:
Currently we do not want to look too far in the future. Yes, market shows strong bearish action, especially on very long-term charts, drops down indeed look miserable, and from that standpoint GBP could reach even 1.06 target, but right now we're mostly interested in tactical weekly/daily setup.
Last 3 weeks GBP looks heavy no signs of upward bounce and even has shown clear signs of weakness on daily chart. Thus, we should be ready for downward breakout and completion of our nearest downside target around 1.2450 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.
will wait with bated breath.
