Sive Morten
Special Consultant to the FPA
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Fundamentals
So, recent week was tough. Beyond expected important fundamental events we also have got not quite expected or better to say quite not expected - D. Trump statement on new spiral of tariffs. But let's go step by step. First is about Fed statement.
As Reuters reports - the dollar rose to a two-year peak against the euro and hit a two-month high versus the yen on Thursday as U.S. Federal Reserve Chairman Jerome Powell ruled out a lengthy easing cycle after delivering the first rate cut since the financial crisis.
In a widely expected move, the U.S. central bank cut rates by 25 basis points to shore up the economy against risks including trade friction.
At a press conference after the Fed’s decision, Powell said “it’s not the beginning of a long series of rate cuts.” At the same time, he said, “I didn’t say it’s just one rate cut.”
Traders still see one more rate cut this year. Powell’s remarks, however, slashed expectations the Fed is prepared to lower rates well into next year.
“The comments by Powell were not particularly dovish, so this is confirmation that this is a small insurance cut,” said Masafumi Yamamoto, chief currency strategist at Mizuho Securities in Tokyo.
“This outcome limits the dollar’s downside from here. Rate cuts will be on the small side, but this still strengthens the case for a prolonged U.S. economic expansion, which is positive for the dollar long term.”
While financial markets had widely expected the Fed to reduce its key overnight lending rate by 25 basis points to a target range of 2.00% to 2.25%, many traders had looked for clearer confirmation of more rate cuts from Powell.
Data from the Commodity Futures Trading Commission shows that hedge funds have been doing just that. Short euro positions increased to $5.44 billion in the week to July 26. Chart shows that net speculative position has increased almost 1.5 times, despite D. Trump tariffs statement. It means that bearish sentiment on market still holds and second - effect of tariffs statement probably will be short term and mostly have emotional background.
Source: cftc.gov
Charting by Investing.com
Investors expect the European Central Bank to take a more aggressive stance on monetary policy easing than the Fed, which would dampen appetite for the common currency. Fears that Britain may exit the European Union on Oct. 31 without transitional trade agreements in place hurt sterling and the euro.
Thus, Fed statement in general corresponds to our view. Fed kills some time and at the same time calms down markets, changing its forecast and, correspondingly market's expectations as well. Now Fed is absolutely free on choosing sentiment of next statement and could change it as it wants. On a background of positive GDP data, rising inflation we still do not expect softer policy. Besides we are not followers of theory that suggest negative impact on US economy due imposing of tariffs. At least, we think that effect significantly weaker than it is presented in media.
U.S. President Donald Trump on Thursday moved to impose a 10% tariff on an additional $300 billion worth of Chinese imports starting Sept. 1, after U.S. and Chinese negotiators failed to kickstart trade talks between the world’s two largest economies.
The new tariffs will hit a wide swath of consumer goods from cell phones to toys to computers. About $250 billion of imports from China are already subject to a 25% tariff. IMF has warned that tariffs already in place will shave 0.2% off global economic output in 2020. On a link above you could read a lot of economists' comments on this issue, so I do not put them here.
Finally, Nonfarm payrolls increased by 164,000 jobs in July, fewer than the month prior, and wages increased modestly, the Labor Department said. The report came a day after U.S. President Donald Trump announced an additional 10% tariff on $300 billion worth of Chinese imports starting Sept. 1, leading financial markets to almost fully price in a September rate cut.
That was absolutely outstanding metamorphoses of investors' sentiment on next rate cut, guys. And we see very fat trading potential, guys as people do not learn from own mistakes. Take a look what has happened:
A day prior to the Fed’s meeting, traders had forecast a 35% chance of three cuts by the end of the year. On Wednesday afternoon that figure had fallen to 12%, according to CME Group’s FedWatch tool.
On Friday, situation drastically has changed due imposing of new tariffs on Chinese export. Now September rate cut totally priced-in as probability stands at 96% (now rate stands at 200-225 level) and another rate cut is expected in December- January:
“On balance it is probably a slightly dollar-negative number because I do think that the totality of the report increases the case for a Fed rate cut in September. We’re already at the point where we’re trading that,” said Greg Anderson, global head of foreign exchange strategy at BMO Capital Markets in New York.
“We think that’s way too high. Clearly what (Powell) wanted to convey at the press conference was that there’s no certainty about what the next move is going to be,” said Gershon Distenfeld, co-head of fixed income at AllianceBernstein.
“The reality is that if the intention was to ease monetary conditions, this did exactly the opposite. Equities are down, the curve is flatter, the dollar higher - all monetary tightening conditions here in the U.S. So they didn’t really accomplish much except getting markets nervous.”
Now guys, let's take a look at report results with more details. Payrolls themselves were spot on expectations - 164K. Average hourly earnings, that indicate wage inflation were better for 0.1 point as on MoM basis as YoY, which shows 3.2% of inflation. Since November 2018 wage inflation stands at 3% or higher. Whether it was bad report that changes situation? I guess not.
Speaking on tariffs. Do you see any negative effect on US economy from 25% tariffs on 250Bln Import? And why do you think that 10% tariffs on 300Bln import will make some effect?
Speculative position on EUR/USD shows growing bearish sentiment on the market despite any tariffs announcements.
Taking all this stuff together makes us think that on September Fed meeting we could get fat bearish trading setup. We see that newsmakers start to shake investors' boat again, pushing them to accept the idea of rate cut on September and we see that this manipulating by public opinion was successful as balance on Fed Fund futures has changed and positions on 25 points rate cut on September are opened. They contradict to net position on Forex market where investors suggest further dollar strength.
This divergence makes us think that we should get either smooth correction of this mismatch until September meeting, or we could get big collapse and disappointment right at Sep meeting where Fed will keep rate intact.
It is also interesting to take a look on Fed minutes protocol...
Speaking on ECB policy - Fathom consulting provides new research of this subject. As usual we put here some extractions.
Euro area macroeconomic policy – what it took and what it will take
Fathom’s Macroeconomic Policy Indicator (FMPI) provides a measure of the overall stance of macroeconomic policy across different countries. Since Mario Draghi’s ‘whatever it takes’ speech in 2012, FMPI has shown looser macroeconomic policy in the euro area, primarily reflecting a more accommodative monetary policy stance.
During that period, the ECB reduced the deposit rate from 0.25% to -0.4%, moving its policy rate into negative territory for the first time. The move was primarily aimed at stimulating demand in the economy. But by removing the hard limit of the zero lower bound, the central bank also had an impact on market perceptions of the extent to which the ECB could support the euro area economy.
FMPI suggests that in 2019 a small loosening in macroeconomic policy will come from fiscal easing while monetary policy remains on hold. The loosening is driven largely by expected changes in the fiscal stances of France, Germany and Italy which are all expected to become more accommodative in 2019.
With little scope for further monetary easing, fiscal policy will need to step in to bolster demand should the next economic downturn occur soon. However, using Fathom’s government debt calculator, we calculate that debt levels in France and Italy will remain around 35 percentage points above their pre-crisis levels over the next five years, despite the sustained fiscal adjustments of recent years. As a result, many euro area governments could face questions about debt sustainability and a renewed pressure on yields during the next crisis.
Technicals
Monthly
Despite all talks about US problems and USD weakness - price doesn't lie and we see July performance showing USD appreciation. After breakout of major 5/8 Fib support, price still stands below it, without any attention to revanchist sentiments of dovish policy followers.
This week we do not have big changes. We still have a kind of bearish engulfing pattern here. In longer-term view, take a look that EUR stands for a long time below upper border of rectangle, while normally, bullish market has to jump up after re-testing it. Dropping back inside rectangle and standing there, although near the border, is a sign of weakness.
Nearest downside target stands around 1.0950 - YPS1.
Weekly
On weekly chart our "Evening star" pattern setup is completed, potential reverse H&S setup looks overstretched here and not quite natural. As a result we do not have some bright patterns here.
Still, we have bullish divergence that is lasting more than a year already. EUR hits weekly COP target near oversold area. This fact creates short-term bullish context for few weeks due possible technical reaction on target by some retracement.
Recent upside pullbacks shows accurate harmonic swings. Theoretically this points on pullback to 1.1325 area, which is also Fib resistance. Still, this is just the levels. Whether pullback will happen and how strong it will be, we could understand only based on particular patterns and extensions.
Daily
On daily chart MACD trend stands bearish by far. Market shows pullback up from extension targets area - daily OP, butterfly extension and weekly COP. Now price stands at former lows, as we've suggested in our recent update.
August pivots agree with strong resistance levels. MPP stands right at K-area of 1.1175, while MPR1 at 1.1264 5/8 FIb resistance.
Upside bounce could be different, depending on the pattern. Thus, it could be right to K-resistance, as it is suggested by butterfly, or higher, if EUR forms, say, reverse H&S pattern here.
Intraday
On intraday charts we do not have something special, only the same AB-CD pattern, that we've discussed on Friday. Its OP target stands around 1.1137, near daily Fib resistance level. Once it will be hit, we will see what to do next.
Situation stands so that we have patterns only on weekly time frame - Dollar Index shows shooting star, which suggests some AB-CD action on daily/intraday time scale. And our minor hourly AB-CD should be the "AB" leg of this pattern. Thus, on intraday charts we do not have anything to add.
Conclusion:
Just in one week uncertainty degree has increased many times, which makes trading process on EUR fast, interesting but risky as well. Driving factors promise to bring more volatility. Our analysis of fundamental background tells that September Fed meeting could provide really fat trading setup.
Technically market now stands in upside response to targets and retracement probably should last through the next week.
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.
So, recent week was tough. Beyond expected important fundamental events we also have got not quite expected or better to say quite not expected - D. Trump statement on new spiral of tariffs. But let's go step by step. First is about Fed statement.
As Reuters reports - the dollar rose to a two-year peak against the euro and hit a two-month high versus the yen on Thursday as U.S. Federal Reserve Chairman Jerome Powell ruled out a lengthy easing cycle after delivering the first rate cut since the financial crisis.
In a widely expected move, the U.S. central bank cut rates by 25 basis points to shore up the economy against risks including trade friction.
At a press conference after the Fed’s decision, Powell said “it’s not the beginning of a long series of rate cuts.” At the same time, he said, “I didn’t say it’s just one rate cut.”
Traders still see one more rate cut this year. Powell’s remarks, however, slashed expectations the Fed is prepared to lower rates well into next year.
“The comments by Powell were not particularly dovish, so this is confirmation that this is a small insurance cut,” said Masafumi Yamamoto, chief currency strategist at Mizuho Securities in Tokyo.
“This outcome limits the dollar’s downside from here. Rate cuts will be on the small side, but this still strengthens the case for a prolonged U.S. economic expansion, which is positive for the dollar long term.”
While financial markets had widely expected the Fed to reduce its key overnight lending rate by 25 basis points to a target range of 2.00% to 2.25%, many traders had looked for clearer confirmation of more rate cuts from Powell.
Data from the Commodity Futures Trading Commission shows that hedge funds have been doing just that. Short euro positions increased to $5.44 billion in the week to July 26. Chart shows that net speculative position has increased almost 1.5 times, despite D. Trump tariffs statement. It means that bearish sentiment on market still holds and second - effect of tariffs statement probably will be short term and mostly have emotional background.
Charting by Investing.com
Investors expect the European Central Bank to take a more aggressive stance on monetary policy easing than the Fed, which would dampen appetite for the common currency. Fears that Britain may exit the European Union on Oct. 31 without transitional trade agreements in place hurt sterling and the euro.
Thus, Fed statement in general corresponds to our view. Fed kills some time and at the same time calms down markets, changing its forecast and, correspondingly market's expectations as well. Now Fed is absolutely free on choosing sentiment of next statement and could change it as it wants. On a background of positive GDP data, rising inflation we still do not expect softer policy. Besides we are not followers of theory that suggest negative impact on US economy due imposing of tariffs. At least, we think that effect significantly weaker than it is presented in media.
U.S. President Donald Trump on Thursday moved to impose a 10% tariff on an additional $300 billion worth of Chinese imports starting Sept. 1, after U.S. and Chinese negotiators failed to kickstart trade talks between the world’s two largest economies.
The new tariffs will hit a wide swath of consumer goods from cell phones to toys to computers. About $250 billion of imports from China are already subject to a 25% tariff. IMF has warned that tariffs already in place will shave 0.2% off global economic output in 2020. On a link above you could read a lot of economists' comments on this issue, so I do not put them here.
Finally, Nonfarm payrolls increased by 164,000 jobs in July, fewer than the month prior, and wages increased modestly, the Labor Department said. The report came a day after U.S. President Donald Trump announced an additional 10% tariff on $300 billion worth of Chinese imports starting Sept. 1, leading financial markets to almost fully price in a September rate cut.
That was absolutely outstanding metamorphoses of investors' sentiment on next rate cut, guys. And we see very fat trading potential, guys as people do not learn from own mistakes. Take a look what has happened:
A day prior to the Fed’s meeting, traders had forecast a 35% chance of three cuts by the end of the year. On Wednesday afternoon that figure had fallen to 12%, according to CME Group’s FedWatch tool.
On Friday, situation drastically has changed due imposing of new tariffs on Chinese export. Now September rate cut totally priced-in as probability stands at 96% (now rate stands at 200-225 level) and another rate cut is expected in December- January:
“On balance it is probably a slightly dollar-negative number because I do think that the totality of the report increases the case for a Fed rate cut in September. We’re already at the point where we’re trading that,” said Greg Anderson, global head of foreign exchange strategy at BMO Capital Markets in New York.
“We think that’s way too high. Clearly what (Powell) wanted to convey at the press conference was that there’s no certainty about what the next move is going to be,” said Gershon Distenfeld, co-head of fixed income at AllianceBernstein.
“The reality is that if the intention was to ease monetary conditions, this did exactly the opposite. Equities are down, the curve is flatter, the dollar higher - all monetary tightening conditions here in the U.S. So they didn’t really accomplish much except getting markets nervous.”
Now guys, let's take a look at report results with more details. Payrolls themselves were spot on expectations - 164K. Average hourly earnings, that indicate wage inflation were better for 0.1 point as on MoM basis as YoY, which shows 3.2% of inflation. Since November 2018 wage inflation stands at 3% or higher. Whether it was bad report that changes situation? I guess not.
Speaking on tariffs. Do you see any negative effect on US economy from 25% tariffs on 250Bln Import? And why do you think that 10% tariffs on 300Bln import will make some effect?
Speculative position on EUR/USD shows growing bearish sentiment on the market despite any tariffs announcements.
Taking all this stuff together makes us think that on September Fed meeting we could get fat bearish trading setup. We see that newsmakers start to shake investors' boat again, pushing them to accept the idea of rate cut on September and we see that this manipulating by public opinion was successful as balance on Fed Fund futures has changed and positions on 25 points rate cut on September are opened. They contradict to net position on Forex market where investors suggest further dollar strength.
This divergence makes us think that we should get either smooth correction of this mismatch until September meeting, or we could get big collapse and disappointment right at Sep meeting where Fed will keep rate intact.
It is also interesting to take a look on Fed minutes protocol...
Speaking on ECB policy - Fathom consulting provides new research of this subject. As usual we put here some extractions.
Euro area macroeconomic policy – what it took and what it will take
Fathom’s Macroeconomic Policy Indicator (FMPI) provides a measure of the overall stance of macroeconomic policy across different countries. Since Mario Draghi’s ‘whatever it takes’ speech in 2012, FMPI has shown looser macroeconomic policy in the euro area, primarily reflecting a more accommodative monetary policy stance.
During that period, the ECB reduced the deposit rate from 0.25% to -0.4%, moving its policy rate into negative territory for the first time. The move was primarily aimed at stimulating demand in the economy. But by removing the hard limit of the zero lower bound, the central bank also had an impact on market perceptions of the extent to which the ECB could support the euro area economy.
FMPI suggests that in 2019 a small loosening in macroeconomic policy will come from fiscal easing while monetary policy remains on hold. The loosening is driven largely by expected changes in the fiscal stances of France, Germany and Italy which are all expected to become more accommodative in 2019.
With little scope for further monetary easing, fiscal policy will need to step in to bolster demand should the next economic downturn occur soon. However, using Fathom’s government debt calculator, we calculate that debt levels in France and Italy will remain around 35 percentage points above their pre-crisis levels over the next five years, despite the sustained fiscal adjustments of recent years. As a result, many euro area governments could face questions about debt sustainability and a renewed pressure on yields during the next crisis.
Technicals
Monthly
Despite all talks about US problems and USD weakness - price doesn't lie and we see July performance showing USD appreciation. After breakout of major 5/8 Fib support, price still stands below it, without any attention to revanchist sentiments of dovish policy followers.
This week we do not have big changes. We still have a kind of bearish engulfing pattern here. In longer-term view, take a look that EUR stands for a long time below upper border of rectangle, while normally, bullish market has to jump up after re-testing it. Dropping back inside rectangle and standing there, although near the border, is a sign of weakness.
Nearest downside target stands around 1.0950 - YPS1.
Weekly
On weekly chart our "Evening star" pattern setup is completed, potential reverse H&S setup looks overstretched here and not quite natural. As a result we do not have some bright patterns here.
Still, we have bullish divergence that is lasting more than a year already. EUR hits weekly COP target near oversold area. This fact creates short-term bullish context for few weeks due possible technical reaction on target by some retracement.
Recent upside pullbacks shows accurate harmonic swings. Theoretically this points on pullback to 1.1325 area, which is also Fib resistance. Still, this is just the levels. Whether pullback will happen and how strong it will be, we could understand only based on particular patterns and extensions.
Daily
On daily chart MACD trend stands bearish by far. Market shows pullback up from extension targets area - daily OP, butterfly extension and weekly COP. Now price stands at former lows, as we've suggested in our recent update.
August pivots agree with strong resistance levels. MPP stands right at K-area of 1.1175, while MPR1 at 1.1264 5/8 FIb resistance.
Upside bounce could be different, depending on the pattern. Thus, it could be right to K-resistance, as it is suggested by butterfly, or higher, if EUR forms, say, reverse H&S pattern here.
Intraday
On intraday charts we do not have something special, only the same AB-CD pattern, that we've discussed on Friday. Its OP target stands around 1.1137, near daily Fib resistance level. Once it will be hit, we will see what to do next.
Situation stands so that we have patterns only on weekly time frame - Dollar Index shows shooting star, which suggests some AB-CD action on daily/intraday time scale. And our minor hourly AB-CD should be the "AB" leg of this pattern. Thus, on intraday charts we do not have anything to add.
Conclusion:
Just in one week uncertainty degree has increased many times, which makes trading process on EUR fast, interesting but risky as well. Driving factors promise to bring more volatility. Our analysis of fundamental background tells that September Fed meeting could provide really fat trading setup.
Technically market now stands in upside response to targets and retracement probably should last through the next week.
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.