Sive Morten
Special Consultant to the FPA
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Fundamentals
(Reuters) - The euro soared to its highest level in more than two years against the dollar on Friday after European Central Bank President Mario Draghi did not express concern about a strong euro zone currency, as some analysts had expected.
Some analysts had suggested that Draghi could use the Jackson Hole, Wyoming central bankers’ conference to talk the euro down. When he did not do so, traders took that as a green light to buy euros.
The dollar index dropped to a more than one-year low following Draghi’s speech and after Federal Reserve Chair Janet Yellen made no reference to U.S. monetary policy in her speech.
Europe’s single currency has climbed 13 percent so far this year against the dollar, as it benefited from political dysfunction in Washington and the Federal Reserve’s gradual monetary tightening pace. A strong euro is a headwind for the export-driven euro zone economy.
Instead of the surging euro, Draghi, in his speech at the Jackson Hole, Wyoming central banker’s conference, instead focused on other aspects such as a solid global recovery.
“Primarily the dynamic that traders are betting on now is that the European Central Bank is not concerned about the euro’s strength despite the impact that the euro is having on core inflation and growth metrics throughout the euro area,” said Karl Schamotta, director of global market strategy at Cambridge Global Payments in Toronto.
He added that traders had expected Draghi to jawbone the currency downward, following up particularly on the minutes of the last meeting, “in which it was very clear that the governing council had become increasingly concerned about the euro’s strength.”
The euro hit a high of $1.1940, its strongest level since January 2015. It was last at $1.1929, up 1 percent on the day, its best daily percentage gain in two months.
Against the yen, the dollar fell 0.2 percent to 109.31, while the dollar index slid to 92.542, down 0.8 percent.
“At this point, there isn’t too much for Yellen to add,” said currency strategist Sireen Harajli of Mizuho Corporate Bank in New York.
"The FOMC (Federal Open Market Committee) has been very clear in terms of communicating their intention to continue tightening policy very gradually, and I don't think they see anything to change that view."
Instead, Yellen focused on U.S. regulations, saying those put in place after the 2007-2009 crisis had strengthened the financial system without impeding economic growth, and any future changes should remain modest.
Chart of the Week: The Folly of Data-dependent Monetary Policy
by Fathom Consulting
When it comes to hiring, UK businesses appear to have shrugged off Brexit related uncertainty, pushing the unemployment rate down to 4.4%, the lowest in over 40 years. But the impact of that tightening, which would normally feed through to pay settlements, remains elusive.
As a consequence, although consumer price inflation surprised on the downside in both June and July, staying stable at 2.6%, the average worker was worse off as real earnings continued to contract. While numerous explanations for this divergence have surfaced, a common thread across the developed world is that of poor productivity growth. Ironically, that is unlikely to improve until interest rates are raised, an increasingly distant prospect on the back of last week’s inflation and wage data.
COT Report
CFTC data shows bullish sentiment on EUR - within last 4 weeks as open interest as net long position are increasing. Last number shows 88 K contracts on net long position. EUR right now stands very close to all time high that was fixed in 2011 - 99.5K. As EUR still has some room to grow further, this is the moment where moderate retracement could start. As a rule, when EUR stands at 10% range to absolute extreme levels of net position - chances on retracement increase dramatically. Although EUR provides positive mood, but we just need to keep in mind this moment and do not miss signs of starting retracement.
Techical
Monthly
Today, guys, we will take a look at EUR, but with keeping in mind a bit overload speculative position and through the prism of other currencies - CHF and Dollar Index. It will help us a bit with medium-term perspective.
So, what do we have at current moment? Draghi did show no concern of EUR's strength. This is good and bullish sign for EUR. Four months in a row EUR shows tail closing, which also suggests strength. The only limit factor that we see right now is too extended speculative long position. Market stands relatively close to a moment where will be nobody to buy to support this trend and market could need some moderate bounce.
That's why on monthly chart, we mostly are interested - where nearest resistance is. Chart shows that bounce down could start around 1.22 area - this is EUR favorite 50% Fib level and monthly OB ~1.2225. This is also natural long-term support/resistance zone, but actually it is too wide to make any sense for us.
Here we also should recall recent news from US Treasury. They indend to issue 500 Bln Bonds in IIIQ. This is very large volume that has not been seen since 2008 crisis. Putting this bonds on market will draw liquidity and provide support to USD. This is some kind of hidden intervension. Impact hardly will be dramatic, but in cooperation with other factors, this could be important.
Aproximately the same picture we see on Dollar Index. Here price stands even closer to OS level and we easily could recognize possible H&S pattern:
Both these moments tell that EUR could continue upside action a bit more, but market definitely is coming to moderate retracement within perspectives of 1-2 months.
Weekly
This chart brings nothing special to overall picture. Price right now is entering in zone where a lot of extension targets stand. Thus, first one is 1.27 extension of recent swing down @1.1950. 1.20 is MPR1. After that we have another, greater 1.27 extension target around 1.2150. So, 1.20-1.22 is a stripe of different minor targets.
Most important, I suppose, is weekly OB level. It stands at the same 1.22 area:
As EUR brings not too much on weekly chart, it could be interesting to take a look at CHF. Actually, here market has formed strong bullish engulfing pattern. Now price stands in retracement back inside the body of this pattern, but potentially it suggests upside action. For EUR it means that it could turn down. This is another sign that retracement, possibly, is coming here:
Also, guys, we need to understand that Yellen's term will expire in February. Before appointing of new Fed chairman or (chairwoman), investors could unwind positions to reduce risk. A lot of other stuff will come as well - as Germany elections in September, US Debt ceil voting in US Congress and others...
Daily
So, or daily trading plan has worked perfect last week, and, indeed, bullish dynamic pressure has worked as it should to. Intraday 1.1950 target has been completed.
Meantime daily chart gives two other extensions. First one stands at 1.1975 and mostly coincides with daily Overbought. Next one is 1.2050 area. This probably will become a ceil for coming week. Be ready that price action will become more volatile as EUR enters turbulence zone around weekly, monthly and daily OB area.
Besides, if, our suggestion is correct, and, indeed EUR will turn down around 1.22 - it needs to prepare this reversal. Thus, upside action probably will be not as streight as before, and market could start to form some bearish reversal pattern here:
As a result, on CHF we could get very attractive "222' Buy pattern:
Intraday
Recent action has solid upside impulse, so rally has good chances to continue. At the same time EUR stands very close to daily OB level around 1.20. It means that on coming week we will have special tactics of buying deeps and out around previous tops.
On 4-hour chart price is forming butterfly "sell". As soon as 1.618 target will be completed, some retracement is possible. Most probable it will be either 1.1890 or 1.1850 K-support area. If we will get chance to go long, our target will be around 1.20 - daily overbought and daily extensions...
Conclusion:
In very long term perspective EUR looks positive as monthly USD index is forming huge H&S pattern.
In shorter-term within few weeks EUR could climb slightly higher, but as sentiment analysis as some fundamental reasons suggest coming moderate retracement. It means that upside action will not be as streight as previously and EUR could start forming some bearish reversal pattern on daily chart.
On coming week, as EUR stands close to daily OB area, our tactic will be buying deeps and out at previous tops (somewhere around 1.20's)
The technical portion of Sive's analysis owes a great deal to Joe DiNapoli's methods, and uses a number of Joe's proprietary indicators. Please note that Sive's analysis is his own view of the market and is not endorsed by Joe DiNapoli or any related companies.
(Reuters) - The euro soared to its highest level in more than two years against the dollar on Friday after European Central Bank President Mario Draghi did not express concern about a strong euro zone currency, as some analysts had expected.
Some analysts had suggested that Draghi could use the Jackson Hole, Wyoming central bankers’ conference to talk the euro down. When he did not do so, traders took that as a green light to buy euros.
The dollar index dropped to a more than one-year low following Draghi’s speech and after Federal Reserve Chair Janet Yellen made no reference to U.S. monetary policy in her speech.
Europe’s single currency has climbed 13 percent so far this year against the dollar, as it benefited from political dysfunction in Washington and the Federal Reserve’s gradual monetary tightening pace. A strong euro is a headwind for the export-driven euro zone economy.
Instead of the surging euro, Draghi, in his speech at the Jackson Hole, Wyoming central banker’s conference, instead focused on other aspects such as a solid global recovery.
“Primarily the dynamic that traders are betting on now is that the European Central Bank is not concerned about the euro’s strength despite the impact that the euro is having on core inflation and growth metrics throughout the euro area,” said Karl Schamotta, director of global market strategy at Cambridge Global Payments in Toronto.
He added that traders had expected Draghi to jawbone the currency downward, following up particularly on the minutes of the last meeting, “in which it was very clear that the governing council had become increasingly concerned about the euro’s strength.”
The euro hit a high of $1.1940, its strongest level since January 2015. It was last at $1.1929, up 1 percent on the day, its best daily percentage gain in two months.
Against the yen, the dollar fell 0.2 percent to 109.31, while the dollar index slid to 92.542, down 0.8 percent.
“At this point, there isn’t too much for Yellen to add,” said currency strategist Sireen Harajli of Mizuho Corporate Bank in New York.
"The FOMC (Federal Open Market Committee) has been very clear in terms of communicating their intention to continue tightening policy very gradually, and I don't think they see anything to change that view."
Instead, Yellen focused on U.S. regulations, saying those put in place after the 2007-2009 crisis had strengthened the financial system without impeding economic growth, and any future changes should remain modest.
Chart of the Week: The Folly of Data-dependent Monetary Policy
by Fathom Consulting
When it comes to hiring, UK businesses appear to have shrugged off Brexit related uncertainty, pushing the unemployment rate down to 4.4%, the lowest in over 40 years. But the impact of that tightening, which would normally feed through to pay settlements, remains elusive.
As a consequence, although consumer price inflation surprised on the downside in both June and July, staying stable at 2.6%, the average worker was worse off as real earnings continued to contract. While numerous explanations for this divergence have surfaced, a common thread across the developed world is that of poor productivity growth. Ironically, that is unlikely to improve until interest rates are raised, an increasingly distant prospect on the back of last week’s inflation and wage data.
COT Report
CFTC data shows bullish sentiment on EUR - within last 4 weeks as open interest as net long position are increasing. Last number shows 88 K contracts on net long position. EUR right now stands very close to all time high that was fixed in 2011 - 99.5K. As EUR still has some room to grow further, this is the moment where moderate retracement could start. As a rule, when EUR stands at 10% range to absolute extreme levels of net position - chances on retracement increase dramatically. Although EUR provides positive mood, but we just need to keep in mind this moment and do not miss signs of starting retracement.
Techical
Monthly
Today, guys, we will take a look at EUR, but with keeping in mind a bit overload speculative position and through the prism of other currencies - CHF and Dollar Index. It will help us a bit with medium-term perspective.
So, what do we have at current moment? Draghi did show no concern of EUR's strength. This is good and bullish sign for EUR. Four months in a row EUR shows tail closing, which also suggests strength. The only limit factor that we see right now is too extended speculative long position. Market stands relatively close to a moment where will be nobody to buy to support this trend and market could need some moderate bounce.
That's why on monthly chart, we mostly are interested - where nearest resistance is. Chart shows that bounce down could start around 1.22 area - this is EUR favorite 50% Fib level and monthly OB ~1.2225. This is also natural long-term support/resistance zone, but actually it is too wide to make any sense for us.
Here we also should recall recent news from US Treasury. They indend to issue 500 Bln Bonds in IIIQ. This is very large volume that has not been seen since 2008 crisis. Putting this bonds on market will draw liquidity and provide support to USD. This is some kind of hidden intervension. Impact hardly will be dramatic, but in cooperation with other factors, this could be important.
Aproximately the same picture we see on Dollar Index. Here price stands even closer to OS level and we easily could recognize possible H&S pattern:
Both these moments tell that EUR could continue upside action a bit more, but market definitely is coming to moderate retracement within perspectives of 1-2 months.
Weekly
This chart brings nothing special to overall picture. Price right now is entering in zone where a lot of extension targets stand. Thus, first one is 1.27 extension of recent swing down @1.1950. 1.20 is MPR1. After that we have another, greater 1.27 extension target around 1.2150. So, 1.20-1.22 is a stripe of different minor targets.
Most important, I suppose, is weekly OB level. It stands at the same 1.22 area:
As EUR brings not too much on weekly chart, it could be interesting to take a look at CHF. Actually, here market has formed strong bullish engulfing pattern. Now price stands in retracement back inside the body of this pattern, but potentially it suggests upside action. For EUR it means that it could turn down. This is another sign that retracement, possibly, is coming here:
Also, guys, we need to understand that Yellen's term will expire in February. Before appointing of new Fed chairman or (chairwoman), investors could unwind positions to reduce risk. A lot of other stuff will come as well - as Germany elections in September, US Debt ceil voting in US Congress and others...
Daily
So, or daily trading plan has worked perfect last week, and, indeed, bullish dynamic pressure has worked as it should to. Intraday 1.1950 target has been completed.
Meantime daily chart gives two other extensions. First one stands at 1.1975 and mostly coincides with daily Overbought. Next one is 1.2050 area. This probably will become a ceil for coming week. Be ready that price action will become more volatile as EUR enters turbulence zone around weekly, monthly and daily OB area.
Besides, if, our suggestion is correct, and, indeed EUR will turn down around 1.22 - it needs to prepare this reversal. Thus, upside action probably will be not as streight as before, and market could start to form some bearish reversal pattern here:
As a result, on CHF we could get very attractive "222' Buy pattern:
Intraday
Recent action has solid upside impulse, so rally has good chances to continue. At the same time EUR stands very close to daily OB level around 1.20. It means that on coming week we will have special tactics of buying deeps and out around previous tops.
On 4-hour chart price is forming butterfly "sell". As soon as 1.618 target will be completed, some retracement is possible. Most probable it will be either 1.1890 or 1.1850 K-support area. If we will get chance to go long, our target will be around 1.20 - daily overbought and daily extensions...
Conclusion:
In very long term perspective EUR looks positive as monthly USD index is forming huge H&S pattern.
In shorter-term within few weeks EUR could climb slightly higher, but as sentiment analysis as some fundamental reasons suggest coming moderate retracement. It means that upside action will not be as streight as previously and EUR could start forming some bearish reversal pattern on daily chart.
On coming week, as EUR stands close to daily OB area, our tactic will be buying deeps and out at previous tops (somewhere around 1.20's)
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.
