Sive Morten
Special Consultant to the FPA
- Messages
- 18,659
Fundamentals
(Reuters) - Although U.S. government data earlier on Friday showed the economy growing only sluggishly in the second quarter, Yellen said a lot of new jobs were being created and economic growth would likely continue at a moderate pace.
"I believe the case for an increase in the federal funds rate has strengthened in recent months," Yellen said in a speech at the Fed's annual monetary policy conference in Jackson Hole, Wyoming.
Yellen said the Fed already thinks it is close to meeting its goals of maximum employment and stable prices, and she described consumer spending as "solid" while noting business investment was weak and exports had been hurt by a strong U.S. dollar.
But she did not give guidance on what the central bank needs to see before raising rates. Following her remarks, investors continued to bet there were roughly even odds of an increase at the Fed's December policy meeting.
"She's just kept the door open for a hike sooner rather than later," said Subadra Rajappa, an interest rate strategist at Societe Generale in Washington.
Markets remained skeptical of the Fed's rate hike projections largely because of the perceived wide gap between what it has signaled and ultimately delivered.
In her speech, Yellen noted that Fed officials have a wide range of views on where rates will likely be in the coming years. She said current forecasts imply a 70 percent probability they will be between 0 percent and 3.75 percent at the end of 2017.
In addition to December, the Fed also has policy meetings scheduled in September and November, although prices for fed funds futures imply investors see scant chance of a rate increase at either of those meetings.
The dollar rallied quickly off Yellen comments that were perceived as hawkish, said Minh Trang, senior FX trader at Silicon Valley Bank in Santa Clara, California.
"The overall takeaway, not just from Yellen but for the week, is that all the Fed officials - the voter and no-voter alike - have all taken a hawkish bent. The only downside I see is that there are only three meetings left this year and time is running out. Given the Fed's history, it's difficult to see them hiking more than once this year."
In a mid-day interview on CNBC after Yellen spoke, the Fed's No. 2 policymaker, Vice Chair Stanley Fischer, suggested that rate hikes were on track for this year. U.S. stocks, which had been higher, then fell.
The odds of a hike in September climbed to 30 percent from 21 percent on Thursday, according to CME Group's FedWatch tool. Traders were pricing in a 60.2 percent chance of a hike in December, up from 51.8 percent on Thursday.
Recall the statement for Fantom Consulting last week. It mostly agrees with what we've got on Fri:
In our central scenario, this forces the Federal Reserve’s hand, resulting in a 25 basis point increase in the federal funds rate later this year. A December tightening now looks more likely than September. We expect at least two more rate hikes in 2017. This is less than implied by the FOMC’s latest summary of economic projections, but more than investors expected at the time of writing. We argued that low interest rates were holding back growth in productive potential by preventing the gales of creative destruction. We stand by that view, and implore Janet Yellen and her team to begin the process of interest rate normalisation in earnest. Bizarrely, a Trump victory may lend a helping hand, with his proposed fiscal stimulus easing the burden on monetary policy. Elsewhere, the policy mix has already begun to shift, with China leading the way.
COT Data
Here we do not have data after Yellen speech, but Wed numbers shows contraction of speculative short positions. Still, open interest has dropped as well and it could mean that shorts were closed partially without opening new long positions. This usually has softer impact on sentiment and could mean, say, that investors contract positions before Yellen speech.
We should get important data next week, when we will see - wether investors have taken new shorts as a result of Fed statement in Wyoming.
Technicals
Monthly
Recent action doesn't have strong impact on monthly chart by far, still it could change the shape of the chart. Although as July as August months right now are inside ones to June "high wave" candle, upward action, if it will continue further could change short term targets. Still, currently this action can't change long term bearish picture still.
Currently EUR stands at rather strong support area. This is lower border of downward channel and all-time 5/8 Fib support. Here EUR has formed Butterfly "buy" and it has reached first 1.27 extension here. Probably it needs some time to pass through this level and supportive fundamental background of US strength.
EUR is forming typical reversal candle in May. Price has moved above April top and closed below April's lows. It could not get extended continuation, but usually market shows downward continuation within next 1-3 candles.
Sometimes reversal candles lead to collapse, as it was on EUR around 1.40 area. Thrust down has started particularly by reversal candle in March 2014.
Speaking on big scale bearish signs, we have these ones:
EUR was not able to reach YPR1 and returned right back down to YPP, and now even stands slightly below it. This is bearish sign. Following this logic next destination could be YPS1 right around parity and 1.618 butterfly target. This is just another destination point that we have here.
Appearing of reversal candle brings nothing good to bulls. Currently we can't precisely forecast the consequences of its appearing, but even minor results will bring 1-2 months of downward action inside current 1.04 -1.15 consolidation... Although potential bearish impact could be even stronger.
Finally we have another bearish sign that looks like bearish dynamic pressure. Take a look that although trend holds bullish - market shows inablitity to move up, even from strong support area. Next strong support stands precisely at parity and will become a culmination of downward action, since this level includes support line, YPS1 and butterfly 1.618 target. Brexit results hardly will bring prosperity to EU and probably will become another bearish driving factor for EUR.
That's being said, just we've intended to talk on bullish perspectives last week, but all of them mostly were destroyed by Yellen speech. As a result we have just puny August candle on monthly chart with keeping all mentioned bearish issues that we have. Now it is a question of stability, how extended this downward reaction will be. It will depend on how investors treat recent speech - either as signal to downward trend continuation or just short-term reaction.
Weekly
Last week we've talked on possible breaking of normal bearish market mechanics by EUR. One example of this we have seen 2 weeks ago on daily chart, when we have put the start our upside trading on EUR. Here we have similar signs but of a bigger scale, since this is weekly time frame.
As you can see EUR has not dropped lower right to 1.05 lows as it should for normal bearish behavior, but stopped precisely at 5/8 Fib support. Previously we've mentioned that EUR keeps small downward swings equality very accurate, and if it breaks it - it should double it down, as it was on a way from 1.17 to 1.05 lows.
But this has not happened, instead of that EUR has formed "222" Buy pattern. It has not doubled downward swing, but formed AB-CD retracement instead. Thus, weekly chart suggests next target around 1.16 top. This is minor 0.618 AB-CD extension. Other targets stand above OB level, so they are not really interesting to us by far.
Second moment - is a trend line. On Brext voting EUR has broken it down, but take a look what is going on right now - it is returning right back to it. Trend has turned bullish on weekly chart. Currently it is still flirting with the line, but if it will show true return back - this will be strong bullish sign that will bring a lot of confidence with upside continuation.
But, as you can see unfortunately or may be fortunately (depending on your position, LOL), EUR has not returned back above trend line. Since weekly chart is rather big scale and real trend shifting here comes very slow - all patterns that we've discussed here are valid - "222" Buy and others.
Still, recent action mostly reminds re-testing of broken trend line, some kind of "Kiss goodbye". Currently weekly chart doesn't let us to say definitely what scenario we have, because to talk definitely on bearish trend - we need to get drop below 1.09 lows. But right now we have just one black candle near trend line. It absolutely doesn't excude appearing of white candle and upside breakout next week. We just need to see how market treats Fed comments - either as long-term direction or just short-term reaction. Result will be different for weekly chart.
That's why despite recent reaction on Yellen speech, technically bullish scenario has not been vanished yet.
As a result, most of our attention next week will be on daily and lower time frames:
Daily
So last week was moderately successful to us. Mostly because EUR has completed two targets, based on butterfly pattern, but has missed to complete final 1.618 AB-CD target around 1.1411 area, near Brexit candle top.
Still, it doesn't mean that it is impossible. EUR has a lot of freedom with this pattern, as it has big scale. If even EUR will drop to 1.1083 Fib support, technically it will keep this pattern valid and keep, at least theoretical chances to reach 1.14 area.
At the same time, to be honest, AB-CD per se has secondary importance to us. On coming week we mostly will watch for 1.1080-1.11 area since it should give us clarity on medium-term perspective, depending on how EUR will behave there. Take a look that this area is a bottom of potential right shoulder of reverse H&S pattern. This is significant suppport, that includes MPP and Fib levels.
Thus, if market will keep weekly "222" Buy and confirm reverse H&S it will be able to reach 1.16 area and it will keep bullish scenario - this is what we've said above that it is too early to speak about failure. On a way to 1.16 market will hit 1.14 AB-CD target as well...
But if EUR will not able to hold above 1.11 and drop further - this will be the sign that investors treat Yellen comments as strong signal for new medium-term trend. Dropping below 1.11 will return EUR to bearish scenario that we've discussed previously and could lead market to 1.05 area. Thus, first stage of our trading plan for next week is watching what will happen around 1.11 and use potential reverse H&S as checkpoint:
4-hour
Here we have few additional details of overall picture. Thus, bearish reversal here has taken the shape of H&S pattern and this let's us estimate target of downward action with more precision. We should use either 1.618 of AB-CD, based on head and shoulder, or classical distance between top of the head and neckline and count it down.
As you can see they stand very close and gives almost the same result - an area around 1.11 level. It also will be WPS1.
Thus, we will get strong support cluster around 1.11 - MPP, WPS1, Fib level and Agreement. Normal bullish market should turn up. If EUR will break it down - will become even stronger bearish sign, since strong support will be broken.
Scalp traders could search chances to take short position based on minor retracements on a way down, until EUR will reach targets around 1.11 area.
Conclusion:
Last time we've said that support where market stands on monthly chart is very long-term and wide. Standing there could last for months or even years, and may be sometime upward action will happen there. And right now we see some hints on minor upward action. Still on a big scale EUR shows mostly bearish signs. Currently we can't talk on some very extended targets and better to treat current splash as tactical retracement yet.
In shorter -term perspective despite that market has dropped on Friday - it still keeps valid major bullish patterns. Situation should be resolved around 1.11 support.
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) - Although U.S. government data earlier on Friday showed the economy growing only sluggishly in the second quarter, Yellen said a lot of new jobs were being created and economic growth would likely continue at a moderate pace.
"I believe the case for an increase in the federal funds rate has strengthened in recent months," Yellen said in a speech at the Fed's annual monetary policy conference in Jackson Hole, Wyoming.
Yellen said the Fed already thinks it is close to meeting its goals of maximum employment and stable prices, and she described consumer spending as "solid" while noting business investment was weak and exports had been hurt by a strong U.S. dollar.
But she did not give guidance on what the central bank needs to see before raising rates. Following her remarks, investors continued to bet there were roughly even odds of an increase at the Fed's December policy meeting.
"She's just kept the door open for a hike sooner rather than later," said Subadra Rajappa, an interest rate strategist at Societe Generale in Washington.
Markets remained skeptical of the Fed's rate hike projections largely because of the perceived wide gap between what it has signaled and ultimately delivered.
In her speech, Yellen noted that Fed officials have a wide range of views on where rates will likely be in the coming years. She said current forecasts imply a 70 percent probability they will be between 0 percent and 3.75 percent at the end of 2017.
In addition to December, the Fed also has policy meetings scheduled in September and November, although prices for fed funds futures imply investors see scant chance of a rate increase at either of those meetings.
The dollar rallied quickly off Yellen comments that were perceived as hawkish, said Minh Trang, senior FX trader at Silicon Valley Bank in Santa Clara, California.
"The overall takeaway, not just from Yellen but for the week, is that all the Fed officials - the voter and no-voter alike - have all taken a hawkish bent. The only downside I see is that there are only three meetings left this year and time is running out. Given the Fed's history, it's difficult to see them hiking more than once this year."
In a mid-day interview on CNBC after Yellen spoke, the Fed's No. 2 policymaker, Vice Chair Stanley Fischer, suggested that rate hikes were on track for this year. U.S. stocks, which had been higher, then fell.
The odds of a hike in September climbed to 30 percent from 21 percent on Thursday, according to CME Group's FedWatch tool. Traders were pricing in a 60.2 percent chance of a hike in December, up from 51.8 percent on Thursday.
Recall the statement for Fantom Consulting last week. It mostly agrees with what we've got on Fri:
In our central scenario, this forces the Federal Reserve’s hand, resulting in a 25 basis point increase in the federal funds rate later this year. A December tightening now looks more likely than September. We expect at least two more rate hikes in 2017. This is less than implied by the FOMC’s latest summary of economic projections, but more than investors expected at the time of writing. We argued that low interest rates were holding back growth in productive potential by preventing the gales of creative destruction. We stand by that view, and implore Janet Yellen and her team to begin the process of interest rate normalisation in earnest. Bizarrely, a Trump victory may lend a helping hand, with his proposed fiscal stimulus easing the burden on monetary policy. Elsewhere, the policy mix has already begun to shift, with China leading the way.
COT Data
Here we do not have data after Yellen speech, but Wed numbers shows contraction of speculative short positions. Still, open interest has dropped as well and it could mean that shorts were closed partially without opening new long positions. This usually has softer impact on sentiment and could mean, say, that investors contract positions before Yellen speech.
We should get important data next week, when we will see - wether investors have taken new shorts as a result of Fed statement in Wyoming.
Technicals
Monthly
Recent action doesn't have strong impact on monthly chart by far, still it could change the shape of the chart. Although as July as August months right now are inside ones to June "high wave" candle, upward action, if it will continue further could change short term targets. Still, currently this action can't change long term bearish picture still.
Currently EUR stands at rather strong support area. This is lower border of downward channel and all-time 5/8 Fib support. Here EUR has formed Butterfly "buy" and it has reached first 1.27 extension here. Probably it needs some time to pass through this level and supportive fundamental background of US strength.
EUR is forming typical reversal candle in May. Price has moved above April top and closed below April's lows. It could not get extended continuation, but usually market shows downward continuation within next 1-3 candles.
Sometimes reversal candles lead to collapse, as it was on EUR around 1.40 area. Thrust down has started particularly by reversal candle in March 2014.
Speaking on big scale bearish signs, we have these ones:
EUR was not able to reach YPR1 and returned right back down to YPP, and now even stands slightly below it. This is bearish sign. Following this logic next destination could be YPS1 right around parity and 1.618 butterfly target. This is just another destination point that we have here.
Appearing of reversal candle brings nothing good to bulls. Currently we can't precisely forecast the consequences of its appearing, but even minor results will bring 1-2 months of downward action inside current 1.04 -1.15 consolidation... Although potential bearish impact could be even stronger.
Finally we have another bearish sign that looks like bearish dynamic pressure. Take a look that although trend holds bullish - market shows inablitity to move up, even from strong support area. Next strong support stands precisely at parity and will become a culmination of downward action, since this level includes support line, YPS1 and butterfly 1.618 target. Brexit results hardly will bring prosperity to EU and probably will become another bearish driving factor for EUR.
That's being said, just we've intended to talk on bullish perspectives last week, but all of them mostly were destroyed by Yellen speech. As a result we have just puny August candle on monthly chart with keeping all mentioned bearish issues that we have. Now it is a question of stability, how extended this downward reaction will be. It will depend on how investors treat recent speech - either as signal to downward trend continuation or just short-term reaction.
Weekly
Last week we've talked on possible breaking of normal bearish market mechanics by EUR. One example of this we have seen 2 weeks ago on daily chart, when we have put the start our upside trading on EUR. Here we have similar signs but of a bigger scale, since this is weekly time frame.
As you can see EUR has not dropped lower right to 1.05 lows as it should for normal bearish behavior, but stopped precisely at 5/8 Fib support. Previously we've mentioned that EUR keeps small downward swings equality very accurate, and if it breaks it - it should double it down, as it was on a way from 1.17 to 1.05 lows.
But this has not happened, instead of that EUR has formed "222" Buy pattern. It has not doubled downward swing, but formed AB-CD retracement instead. Thus, weekly chart suggests next target around 1.16 top. This is minor 0.618 AB-CD extension. Other targets stand above OB level, so they are not really interesting to us by far.
Second moment - is a trend line. On Brext voting EUR has broken it down, but take a look what is going on right now - it is returning right back to it. Trend has turned bullish on weekly chart. Currently it is still flirting with the line, but if it will show true return back - this will be strong bullish sign that will bring a lot of confidence with upside continuation.
But, as you can see unfortunately or may be fortunately (depending on your position, LOL), EUR has not returned back above trend line. Since weekly chart is rather big scale and real trend shifting here comes very slow - all patterns that we've discussed here are valid - "222" Buy and others.
Still, recent action mostly reminds re-testing of broken trend line, some kind of "Kiss goodbye". Currently weekly chart doesn't let us to say definitely what scenario we have, because to talk definitely on bearish trend - we need to get drop below 1.09 lows. But right now we have just one black candle near trend line. It absolutely doesn't excude appearing of white candle and upside breakout next week. We just need to see how market treats Fed comments - either as long-term direction or just short-term reaction. Result will be different for weekly chart.
That's why despite recent reaction on Yellen speech, technically bullish scenario has not been vanished yet.
As a result, most of our attention next week will be on daily and lower time frames:
Daily
So last week was moderately successful to us. Mostly because EUR has completed two targets, based on butterfly pattern, but has missed to complete final 1.618 AB-CD target around 1.1411 area, near Brexit candle top.
Still, it doesn't mean that it is impossible. EUR has a lot of freedom with this pattern, as it has big scale. If even EUR will drop to 1.1083 Fib support, technically it will keep this pattern valid and keep, at least theoretical chances to reach 1.14 area.
At the same time, to be honest, AB-CD per se has secondary importance to us. On coming week we mostly will watch for 1.1080-1.11 area since it should give us clarity on medium-term perspective, depending on how EUR will behave there. Take a look that this area is a bottom of potential right shoulder of reverse H&S pattern. This is significant suppport, that includes MPP and Fib levels.
Thus, if market will keep weekly "222" Buy and confirm reverse H&S it will be able to reach 1.16 area and it will keep bullish scenario - this is what we've said above that it is too early to speak about failure. On a way to 1.16 market will hit 1.14 AB-CD target as well...
But if EUR will not able to hold above 1.11 and drop further - this will be the sign that investors treat Yellen comments as strong signal for new medium-term trend. Dropping below 1.11 will return EUR to bearish scenario that we've discussed previously and could lead market to 1.05 area. Thus, first stage of our trading plan for next week is watching what will happen around 1.11 and use potential reverse H&S as checkpoint:
4-hour
Here we have few additional details of overall picture. Thus, bearish reversal here has taken the shape of H&S pattern and this let's us estimate target of downward action with more precision. We should use either 1.618 of AB-CD, based on head and shoulder, or classical distance between top of the head and neckline and count it down.
As you can see they stand very close and gives almost the same result - an area around 1.11 level. It also will be WPS1.
Thus, we will get strong support cluster around 1.11 - MPP, WPS1, Fib level and Agreement. Normal bullish market should turn up. If EUR will break it down - will become even stronger bearish sign, since strong support will be broken.
Scalp traders could search chances to take short position based on minor retracements on a way down, until EUR will reach targets around 1.11 area.
Conclusion:
Last time we've said that support where market stands on monthly chart is very long-term and wide. Standing there could last for months or even years, and may be sometime upward action will happen there. And right now we see some hints on minor upward action. Still on a big scale EUR shows mostly bearish signs. Currently we can't talk on some very extended targets and better to treat current splash as tactical retracement yet.
In shorter -term perspective despite that market has dropped on Friday - it still keeps valid major bullish patterns. Situation should be resolved around 1.11 support.
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.
