Sive Morten
Special Consultant to the FPA
- Messages
- 18,781
Fundamentals
This week we have two groups of events that drove the markets. They are statistics as in EU as in US and Brexit discussion in UK.
Statistics was mixed this week. Europe data supports our worryings on EU economy perspectives. The euro dipped on Thursday as weak German economic data and a report that Italy would slash its growth forecasts prompted fears about weakening growth in the region.
German industrial orders fell by the sharpest rate in more than two years in February as they were hit by a slump in foreign demand, compounding worries that Europe’s largest economy had a weak start to the year.
“I’m a little bit surprised we didn’t get more reaction on the back of the German factory orders data, which really suggests that we’re not seeing a significant pickup in the industrial sector after a pretty soft second half to last year,” said Shaun Osborne, chief FX strategist at Scotiabank in Toronto.
Sentiment at major exporting countries including Germany, South Korea and China has been deteriorating, Osborne said.
“I have to wonder if there isn’t an underlying concern here that reflects worries about where global trade is going on the back of the tariff discussions, or if it’s perhaps more of a sign that there is a more meaningful slowdown in the global economy just around the corner,” Osborne said.
Reuters also reported that Italy this month will probably cut its 2019 economic growth forecast to 0.3 percent or 0.4 percent and raise the budget deficit target to around 2.3 percent of gross domestic product.
Investors are focussed on trade discussions between the United States and China on the hope that an agreement will remove headwinds to global growth.
U.S. President Donald Trump said on Thursday that trade talks with China were going well and he would only accept a “great” deal as negotiators hammered out differences ahead of a meeting between Trump and China’s vice premier later in the day. Trade talks between the U.S. and China are also in focus as investors hope a deal between the countries may remove some global headwinds to growth.
U.S. President Donald Trump said on Thursday the United States and China were close to a trade deal that could be announced within four weeks, while warning Beijing that it would be difficult to allow trade to continue without a pact.
On Friday, we've got NFP report. Reaction was mixed by the reason that we've talked about many times. US Jobs market is highly saturated as it creates 150K new jobs on average per month for last 2+ years. The capacity of the market is contracting as well as unemployment. This is the reason why we need to pay more attention not to NFP numbers per se but wage growth, which is inflation indicator. Particularly wage grown has decreased, while NFP data at all was better than expected.
Nonfarm payrolls rose by 196,000 jobs last month. Data for February was revised modestly up to show payrolls rising by 33,000 jobs instead of the previously reported 20,000. February job gains were the smallest since September 2017.
Wage gains also slowed in March and more people dropped out of the labour force. Average hourly earnings increased by four cents, or 0.1 percent in March after jumping 0.4 percent in February.
“It’s a pretty mixed report. The headline was a little bit better than expected, February was revised up slightly, but obviously the average hourly earnings was a big disappointment,” said Win Thin, global head of currency strategy at Brown Brothers Harriman in New York.
Reaction in the dollar was relatively muted, and swung between small gains and losses. The dollar index against a basket of six major currencies was last down 0.06% on the day at 97.256.
Investors are focussed on data for further clues about Federal Reserve policy after the U.S. central bank stunned markets in March by abandoning projections for any interest rate hikes this year.
“The takeaway for me is that it basically means steady as she goes,” said Thin.
“The thought of any rate cuts this year seems premature, but at the same time the lack of any wage pressures argues against any hikes. So we’re in the limbo again where the Fed is waiting and seeing,” he said.
Now we turn to Brexit topic. It comes to culmination, because no new decision from UK parliament should launch hard way by the end of coming week, on 12th of April. I'm not big expect in UK politics and prefer to listen what real professionals could say, especially if they are UK domestic company. Let's take a look what Fathom consulting thinks.
In new article, dedicated to Brexit topic and UK business sentiment they point two major things. UK sentiment is deteriorating and this trend probably will continue, especially in the case of hard Brexit. Second - they suggest that hard Brexit now is more probable way.
Here is some most interesting extractions from report:
Fathom’s UK Economic Sentiment Indicator (ESI) declined for the seventh month in a row in February, sinking to just 0.1%. The fall in confidence among UK firms and households since last summer has been broad-based, with all but two of the thirteen components heading south. Heightened uncertainty about both the timing and the nature of the UK’s departure from the European Union, captured by our ESI, has already had a measurable impact on economic activity, particularly affecting business investment. Indeed, we estimate that it has added some 300 basis points to the required return to investment projects, which makes it just as contractionary as a 300 basis point policy tightening.
"The two most likely outcomes now appear to be either that the UK asks for a long extension, in order to negotiate perhaps a softer form of Brexit (a request that may or may not be granted), or that the UK leaves without a deal on 12 April. To our way of thinking, the risk of a ‘no-deal’ departure is higher now than it has ever been, entering for the first time the realms of ‘too close to call’.
And then Fathom makes forecast that is most valuable for us - how it should impact GBP currency.
It is almost universally acknowledged, by ‘Leavers’ and ‘Remainers’ alike, that life in the UK would be difficult in the immediate aftermath of a ‘no-deal’ Brexit. There are likely to be shortages of essential items, (much) higher prices, and perhaps a severe economic contraction.
GBPUSD has proved to be one of the best indicators of investor sentiment towards the negotiations, moving higher when the news flow favours a soft Brexit, and vice versa. Yet the currency has traded in the range $1.30 to $1.33 through most of March, and the pound is stronger at the time of writing than it was at the start of the year.
The prospect of ‘no deal’ is not adequately reflected in current pricing, in our view, and neither are the potential consequences. It is almost universally acknowledged, by ‘Leavers’ and ‘Remainers’ alike, that life in the UK would be difficult in the immediate aftermath of a ‘no-deal’ Brexit.
To our way of thinking, a no-deal Brexit would weaken the pound, but by simultaneously raising the likelihood of a Labour government, it would also raise inflation expectations and with that gilt yields.
This information guys, again, creates thrilling trading setup, that is based not on technical factors. This kind of setups appear very rare. Last time it was on UK Parliament elections when we took the bet on T. May defeat and GBP has dropped in one day for 150-200 pips. At the same time, this type of trades care significant risk, because opposite action also will be very strong if no hard Brexit will happen. Thus, we call you first is to think whether you indeed want to take part in it, second - contract your trading volume twice of your ordinary lot.
COT Report
It seems it makes sense to take a look not only on EUR but on GBP positions as well. On EUR sentiment stands bearish as investors have increased net short positions this week. This stands in a row with our technical view that provides more bearish signs as we've talked about it this week and previous week as well:
Source: cftc.gov
Charting by Investing.com
On GBP we do not see so big changes yet - net short position has increased by just for 1K contracts. It means very important thing - investors are not ready for hard Brexit way and still treat this perspective as less probable. But at the same it means that action could be very strong if it becomes a reality.
Source: cftc.gov
Charting by Investing.com
Technicals
Monthly
On technical side we have minimal changes. Just take a look at the April trading range here and it becomes clear - it makes no impact on monthly picture. Here we need volatility and new direction that EUR just can't provide by far.
As we said previously we're watching either downside breakout and start action to 1.08 and later to 1.03 or ability of the EUR to hold above 1.12 and turning up. Market stands at support area around major 5/8 Fib level. In case of upside action, YPP will be important target , because, as a rule, market tends to touch YPP through the year. But after recent events chances on rally stand phantom.
As Fathom consulting expects first rate change by Fed in June, but market is not ready for this step (as wee see from Fed watch tool by CME) - this is the first moment when EUR could show big action. By our view this could happen somewhere in the summer. Of course, recent news and market sentiment hardly agree with this now, but situation changes rapidly and this scenario is not erased totally yet. Brexit saga also could add some fuel to the fire and we could get strong action even on next week.
As we said this many times previously - indirect technical factors point on market's weakness, at least in long-term perspectives, as EUR can't jump out from strong support within more than 5-6 months and just lays upon it. Trend stands bearish here.
Monthly situation shortly could be described as indecision with light gravitation to the downside. In fact, long standing around Yearly Pivot last year confirms things that we've discussed above. MACD trend stands bearish here.
Thus we keep valid our downside COP target around 1.03 by far.
Just by using of common sense, guys, in nowadays it is difficult to expect something positive as in global economy as in politics. Hence, any bad new triggers demand for safe haven assets and US dollar. Following simple logic odds stand in favor of downside trend rather than sharp upside reversal.
So, although on technical picture we see just light and indirect signs of EUR weakness, political background stands negative. This is the major reason why I do not believe in resurrection of bull trend on EUR in this year.
Weekly
As last week, this time frame is least informative among the others as nothing happens here. Market stands in the same consolidation, providing just minimal changes. Since price stands long-term here already, the exit probably should be strong and fast:
On weekly time frame we prefer to use Dollar Index chart. It still keeps traders on tenterhooks and holds upside scenario because of major COP has not been hit. Some signs of bullish dynamic pressure also are present here. Thus, this puts bearish shadow on weekly EUR as well:
Daily
Here we do not want to repeat things that we talked though the week about AB-CD pattern and OP target, let' better focus on price action of this week. What does it tell us? First is, probably we have to forget about B&B setup as market drops back below 3x3 DMA. Second is - take a look on price action around previous lows (in red circle) - EUR was not able to break it up, and all attempts to close above it has failed.
Now let' recall our second pattern here - DRPO "Buy". Is it still possible? Well, by letter - yes, in reality - no.
DRPO suggests strong reversal action and sentiment shift of the market. Sentiment analysis tells that no shift exits and traders even have increased shorts. Price action also doesn't show any reversal. It means that DRPO could happen only by external driving factor - politics, economy but not inner EUR/USD technical action. The price action that we saw this week mostly suggests downside breakout, because we have tight consolidation right near the major weekly lows.
Intraday
Here is the pattern that we've traded through the week. Our entry at 5/8 Fib support before NFP release, at the bottom of the right arm has done well, but now the coming perspective of this pattern is more interesting.
As you can see neither price action of right shoulder nor reaction on neckline corresponds to normal action of H&S. It means that pattern probably will fail next week. Technically, this will happen as soon as price drops below 1.12 area. It seems that we should be ready to drop back to 1.1175 lows and possible challenge later in this week. Currently we do not see any chances for bullish context by far.
Conclusion:
Price action of this week shows weakness, fundamental data and sentiment also stands not in favor of EUR. On coming week we should be ready for possible challenge of 1.1170 daily lows. Second issue that we have to keep an eye on is Brexit saga and 12th of April hard way scenario.
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.
This week we have two groups of events that drove the markets. They are statistics as in EU as in US and Brexit discussion in UK.
Statistics was mixed this week. Europe data supports our worryings on EU economy perspectives. The euro dipped on Thursday as weak German economic data and a report that Italy would slash its growth forecasts prompted fears about weakening growth in the region.
German industrial orders fell by the sharpest rate in more than two years in February as they were hit by a slump in foreign demand, compounding worries that Europe’s largest economy had a weak start to the year.
“I’m a little bit surprised we didn’t get more reaction on the back of the German factory orders data, which really suggests that we’re not seeing a significant pickup in the industrial sector after a pretty soft second half to last year,” said Shaun Osborne, chief FX strategist at Scotiabank in Toronto.
Sentiment at major exporting countries including Germany, South Korea and China has been deteriorating, Osborne said.
“I have to wonder if there isn’t an underlying concern here that reflects worries about where global trade is going on the back of the tariff discussions, or if it’s perhaps more of a sign that there is a more meaningful slowdown in the global economy just around the corner,” Osborne said.
Reuters also reported that Italy this month will probably cut its 2019 economic growth forecast to 0.3 percent or 0.4 percent and raise the budget deficit target to around 2.3 percent of gross domestic product.
Investors are focussed on trade discussions between the United States and China on the hope that an agreement will remove headwinds to global growth.
U.S. President Donald Trump said on Thursday that trade talks with China were going well and he would only accept a “great” deal as negotiators hammered out differences ahead of a meeting between Trump and China’s vice premier later in the day. Trade talks between the U.S. and China are also in focus as investors hope a deal between the countries may remove some global headwinds to growth.
U.S. President Donald Trump said on Thursday the United States and China were close to a trade deal that could be announced within four weeks, while warning Beijing that it would be difficult to allow trade to continue without a pact.
On Friday, we've got NFP report. Reaction was mixed by the reason that we've talked about many times. US Jobs market is highly saturated as it creates 150K new jobs on average per month for last 2+ years. The capacity of the market is contracting as well as unemployment. This is the reason why we need to pay more attention not to NFP numbers per se but wage growth, which is inflation indicator. Particularly wage grown has decreased, while NFP data at all was better than expected.
Nonfarm payrolls rose by 196,000 jobs last month. Data for February was revised modestly up to show payrolls rising by 33,000 jobs instead of the previously reported 20,000. February job gains were the smallest since September 2017.
Wage gains also slowed in March and more people dropped out of the labour force. Average hourly earnings increased by four cents, or 0.1 percent in March after jumping 0.4 percent in February.
“It’s a pretty mixed report. The headline was a little bit better than expected, February was revised up slightly, but obviously the average hourly earnings was a big disappointment,” said Win Thin, global head of currency strategy at Brown Brothers Harriman in New York.
Reaction in the dollar was relatively muted, and swung between small gains and losses. The dollar index against a basket of six major currencies was last down 0.06% on the day at 97.256.
Investors are focussed on data for further clues about Federal Reserve policy after the U.S. central bank stunned markets in March by abandoning projections for any interest rate hikes this year.
“The takeaway for me is that it basically means steady as she goes,” said Thin.
“The thought of any rate cuts this year seems premature, but at the same time the lack of any wage pressures argues against any hikes. So we’re in the limbo again where the Fed is waiting and seeing,” he said.
Now we turn to Brexit topic. It comes to culmination, because no new decision from UK parliament should launch hard way by the end of coming week, on 12th of April. I'm not big expect in UK politics and prefer to listen what real professionals could say, especially if they are UK domestic company. Let's take a look what Fathom consulting thinks.
In new article, dedicated to Brexit topic and UK business sentiment they point two major things. UK sentiment is deteriorating and this trend probably will continue, especially in the case of hard Brexit. Second - they suggest that hard Brexit now is more probable way.
Here is some most interesting extractions from report:
Fathom’s UK Economic Sentiment Indicator (ESI) declined for the seventh month in a row in February, sinking to just 0.1%. The fall in confidence among UK firms and households since last summer has been broad-based, with all but two of the thirteen components heading south. Heightened uncertainty about both the timing and the nature of the UK’s departure from the European Union, captured by our ESI, has already had a measurable impact on economic activity, particularly affecting business investment. Indeed, we estimate that it has added some 300 basis points to the required return to investment projects, which makes it just as contractionary as a 300 basis point policy tightening.
"The two most likely outcomes now appear to be either that the UK asks for a long extension, in order to negotiate perhaps a softer form of Brexit (a request that may or may not be granted), or that the UK leaves without a deal on 12 April. To our way of thinking, the risk of a ‘no-deal’ departure is higher now than it has ever been, entering for the first time the realms of ‘too close to call’.
And then Fathom makes forecast that is most valuable for us - how it should impact GBP currency.
It is almost universally acknowledged, by ‘Leavers’ and ‘Remainers’ alike, that life in the UK would be difficult in the immediate aftermath of a ‘no-deal’ Brexit. There are likely to be shortages of essential items, (much) higher prices, and perhaps a severe economic contraction.
GBPUSD has proved to be one of the best indicators of investor sentiment towards the negotiations, moving higher when the news flow favours a soft Brexit, and vice versa. Yet the currency has traded in the range $1.30 to $1.33 through most of March, and the pound is stronger at the time of writing than it was at the start of the year.
The prospect of ‘no deal’ is not adequately reflected in current pricing, in our view, and neither are the potential consequences. It is almost universally acknowledged, by ‘Leavers’ and ‘Remainers’ alike, that life in the UK would be difficult in the immediate aftermath of a ‘no-deal’ Brexit.
To our way of thinking, a no-deal Brexit would weaken the pound, but by simultaneously raising the likelihood of a Labour government, it would also raise inflation expectations and with that gilt yields.
This information guys, again, creates thrilling trading setup, that is based not on technical factors. This kind of setups appear very rare. Last time it was on UK Parliament elections when we took the bet on T. May defeat and GBP has dropped in one day for 150-200 pips. At the same time, this type of trades care significant risk, because opposite action also will be very strong if no hard Brexit will happen. Thus, we call you first is to think whether you indeed want to take part in it, second - contract your trading volume twice of your ordinary lot.
COT Report
It seems it makes sense to take a look not only on EUR but on GBP positions as well. On EUR sentiment stands bearish as investors have increased net short positions this week. This stands in a row with our technical view that provides more bearish signs as we've talked about it this week and previous week as well:
Source: cftc.gov
Charting by Investing.com
On GBP we do not see so big changes yet - net short position has increased by just for 1K contracts. It means very important thing - investors are not ready for hard Brexit way and still treat this perspective as less probable. But at the same it means that action could be very strong if it becomes a reality.
Source: cftc.gov
Charting by Investing.com
Technicals
Monthly
On technical side we have minimal changes. Just take a look at the April trading range here and it becomes clear - it makes no impact on monthly picture. Here we need volatility and new direction that EUR just can't provide by far.
As we said previously we're watching either downside breakout and start action to 1.08 and later to 1.03 or ability of the EUR to hold above 1.12 and turning up. Market stands at support area around major 5/8 Fib level. In case of upside action, YPP will be important target , because, as a rule, market tends to touch YPP through the year. But after recent events chances on rally stand phantom.
As Fathom consulting expects first rate change by Fed in June, but market is not ready for this step (as wee see from Fed watch tool by CME) - this is the first moment when EUR could show big action. By our view this could happen somewhere in the summer. Of course, recent news and market sentiment hardly agree with this now, but situation changes rapidly and this scenario is not erased totally yet. Brexit saga also could add some fuel to the fire and we could get strong action even on next week.
As we said this many times previously - indirect technical factors point on market's weakness, at least in long-term perspectives, as EUR can't jump out from strong support within more than 5-6 months and just lays upon it. Trend stands bearish here.
Monthly situation shortly could be described as indecision with light gravitation to the downside. In fact, long standing around Yearly Pivot last year confirms things that we've discussed above. MACD trend stands bearish here.
Thus we keep valid our downside COP target around 1.03 by far.
Just by using of common sense, guys, in nowadays it is difficult to expect something positive as in global economy as in politics. Hence, any bad new triggers demand for safe haven assets and US dollar. Following simple logic odds stand in favor of downside trend rather than sharp upside reversal.
So, although on technical picture we see just light and indirect signs of EUR weakness, political background stands negative. This is the major reason why I do not believe in resurrection of bull trend on EUR in this year.
Weekly
As last week, this time frame is least informative among the others as nothing happens here. Market stands in the same consolidation, providing just minimal changes. Since price stands long-term here already, the exit probably should be strong and fast:
On weekly time frame we prefer to use Dollar Index chart. It still keeps traders on tenterhooks and holds upside scenario because of major COP has not been hit. Some signs of bullish dynamic pressure also are present here. Thus, this puts bearish shadow on weekly EUR as well:
Daily
Here we do not want to repeat things that we talked though the week about AB-CD pattern and OP target, let' better focus on price action of this week. What does it tell us? First is, probably we have to forget about B&B setup as market drops back below 3x3 DMA. Second is - take a look on price action around previous lows (in red circle) - EUR was not able to break it up, and all attempts to close above it has failed.
Now let' recall our second pattern here - DRPO "Buy". Is it still possible? Well, by letter - yes, in reality - no.
DRPO suggests strong reversal action and sentiment shift of the market. Sentiment analysis tells that no shift exits and traders even have increased shorts. Price action also doesn't show any reversal. It means that DRPO could happen only by external driving factor - politics, economy but not inner EUR/USD technical action. The price action that we saw this week mostly suggests downside breakout, because we have tight consolidation right near the major weekly lows.
Intraday
Here is the pattern that we've traded through the week. Our entry at 5/8 Fib support before NFP release, at the bottom of the right arm has done well, but now the coming perspective of this pattern is more interesting.
As you can see neither price action of right shoulder nor reaction on neckline corresponds to normal action of H&S. It means that pattern probably will fail next week. Technically, this will happen as soon as price drops below 1.12 area. It seems that we should be ready to drop back to 1.1175 lows and possible challenge later in this week. Currently we do not see any chances for bullish context by far.
Conclusion:
Price action of this week shows weakness, fundamental data and sentiment also stands not in favor of EUR. On coming week we should be ready for possible challenge of 1.1170 daily lows. Second issue that we have to keep an eye on is Brexit saga and 12th of April hard way scenario.
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.