Sive Morten
Special Consultant to the FPA
- Messages
- 18,690
Fundamentals
This week doesn't show superb action, except, may be GBP, because investors have taken some relief as all major events were released the week before. Major driving factors were statistics, new thoughts on Brexit and impeachment rush.
In general, as we've mentioned earlier, activity on FX market is dropping. It happens not only because of coming Christmas, but dues some other background as well.
Average daily foreign exchange trading volumes fell 4.2% year-on-year in November, CLS said on Monday, as long-running trade talks between the United States and China and the run-up to the British election suppressed broader market volatility. CLS, a major settler of trades in the foreign exchange market, said in a statement that November’s volumes dropped to$1.61 trillion, down from last year’s $1.68 trillion. The November 2019 daily average was also down 10% from October’s number, however.
The decline in FX turnover was the second consecutive month on CLS platforms. Banks have increasingly routed more volumes on their internal platforms this year, according to a recent Bank for International Settlements report. Foreign exchange volumes have generally been rising in 2019 despite near record-low volatility.
However, uncertainty about whether the U.S. and China would agree a deal to resolve part of their trade war and about who would win last week’s general election in Britain encouraged more forex traders last month to sit on the sidelines and wait for clarity.
The most impressive action we've got on GBP. Once election euphoria has released markets - it comes to reality and investors start to think about Brexit practice and problems that UK will meet on the way out of EU. The British pound fell on Tuesday after reports UK Prime Minister Boris Johnson was seeking a hard line on Britain’s transition period after Brexit, effectively creating a new cliff in its negotiations with Brussels.
Johnson’s revised Withdrawal Agreement Bill would require the United Kingdom to have arrangements to leave the European Union be in place by Dec. 31 next year, UK broadcaster ITV reported on Monday.
The move dashes hopes Johnson would take a flexible approach to the end-2020 deadline for a trade deal with the EU after Britain leaves the bloc, which now looks almost certain to happen on Jan. 31 following the landslide Conservative election win.
“Common sense suggests that crafting a trade deal would take at least more than a year, so markets had assumed that the transition period will be extended,” said Masafumi Yamamoto, chief currency strategist at Mizuho Securities. “It seems like the big majority Johnson won is enabling him to take a hard line approach, which the market doesn’t like so much... Considering the UK economy looks set to deteriorate as people and companies start to leave the country because of Brexit, sterling’s short-covering rally is over,” he added.
The pound extended its slide on Wednesday, as Britain’s fixing of a fresh Brexit deadline rekindled fears of a chaotic exit from the European Union, while the dollar won back lost ground.
“With the level of frothiness in positioning, I think people had priced in very smooth sailing throughout 2020,” said Chris Weston, head of research at Melbourne brokerage Pepperstone. “This has given us a snap back to reality. If you thought Brexit was solved, and we’re going to see very, very smooth times ahead, then that’s not quite going to be the case.”
Asked if the government would legislate to rule out any extension of the transition beyond 2020, one of Johnson’s most senior ministers, Michael Gove, said: “Exactly, absolutely.” In Brussels, officials said the timetable was “rigid” and likely to limit the scope of any deal.
The pound was little changed by data showing the UK economy grew 0.4% in the third quarter, an upward revision from the previous estimate of 0.3%.
“I think sterling could start to do better again if we see signs of stronger economic data and progress in UK-EU negotiations on the future relationship,” Standard Chartered’s Graham said.
The Bank of England kept rates steady on Thursday, saying it was too soon to tell how much Johnson’s election win would lift the Brexit uncertainty that has clouded the economy. As expected, Andrew Bailey was announced as the bank’s new governor on Friday. Sterling did not move on the news.
George Buckley, chief European economist at Nomura, said Bailey’s role went beyond monetary policymaking: “Financial regulation could be a big part of the next year for him, given that there’s going to be a lot of debate about any deal (with the EU) that can be had... He’s a solid choice.”
Industrial production rebounded in the United States in November, mainly because a strike by General Motors Co workers ended. Housing starts and building permits were both reported to have grown more than expected and October JOLTS job openings were better than forecast, suggesting that the U.S. labor market remains strong.
Expectations the Fed will cut rates from the current 150-175 basis point level are 2.2% for the January meeting, 4.3% for March and 12% for April, according to CME Group’s FedWatch tool. The same tool shows a 50% chance that rates will remain at current levels through December 2020.
Last week we showed you total probability table of possible rate change. It shows that early signs of rate easing could appear only in Nov-Dec 2020:
“Bottom line: the U.S. economy remains on solid footing even as the rest of the world struggles,” wrote analysts at Brown Brothers Harriman.
The dollar index “is up two days in a row for the first time since the last week of November, and has recouped over a third of its December swoon. Sterling is testing the Dec. 12 low near $1.3050 and a break below would set up a test of the November 22 low near $1.2825,” the Brown Brothers Harriman analysts wrote.
German business morale rose more than expected in December, a survey showed on Wednesday, another sign that a manufacturing slump in Europe’s largest economy may be bottoming out after overall output shrank earlier in the year. The data, however, failed to help the falling euro.
U.S. Trade Representative Robert Lighthizer said the United States may raise tariffs on European goods as it tries to shrink its chronic trade deficit with the continent, re-igniting worries about the export-driven euro.
Dollar traders were sanguine after a majority of lawmakers in the U.S. House of Representatives voted to impeach Trump. “It is unlikely that the Senate will support the motion when it votes in January, as is required to remove Trump from office,” ANZ economists wrote in a note.
“The most significant piece of news overnight has been the German December IFO survey, which... has shown evidence that the German economy may be in the process of pulling itself up by its boot straps,” said Ray Attrill, Sydney-based head of forex strategy at National Australia Bank. “Improvement in the German – and broader Eurozone – economy – is fundamental to our expectation for a softer U.S. dollar and stronger Euro next year.”
Sterling was precariously poised as it headed for its worst week in more than two years on Friday, hobbled by familiar fears of a chaotic British exit from the European Union, while firm data helped the dollar arrest its recent slide. Cable has given up all the gains won after Prime Minister Boris Johnson was re-elected last week and has slumped 2.3% against the dollar since Monday. It has fared even worse against the euro, headed for its largest weekly loss since July 2017.
“The market was always a little bit naive in a way to think that a Tory election win was going to remove the fog of Brexit,” said Ray Attrill, head of FX strategy at National Australia Bank. “There were obviously some longs in weak hands that got forced out.”
The dollar recorded its best week since early November after a series of strong U.S. economic data releases that make a near-term cut in interest rates unlikely.
U.S. growth nudged up in the third quarter, the government confirmed on Friday, and there are signs the economy maintained the moderate pace of expansion as the year ended, supported by a strong labor market.
Gross domestic product increased at a 2.1% annualized rate, the Commerce Department said on Friday in its third estimate of third-quarter GDP. That was unrevised from November’s estimate in line with economists’ expectations. Consumer spending was stronger than previously reported, and there were upgrades to business spending.
The GDP and personal consumption figures are “indicators of the strength of the economy going into 2020,” wrote analysts at Western Union Business Solutions. These figures “further strengthen the belief that the Federal Reserve will pause on interest rate cuts for the near future,” they wrote.
As we're coming closer to the end of the year, analysts start to look over horizon, trying to predict what expect us in next year. Thus, Fathom tries to do the same and here is their forecast for next year. In general, they expect slowdown in major economies but no recession yet.
Our US ESI (Economy Sentiment Indicator) has troughed, supporting evidence from the Fathom Leading Indicator (FLI) that the world’s largest economy will avoid recession next year. The November US ESI was 2.9%, up from a cycle low of 2.4% in September but still well below the 2019 high of 4.6%, recorded in May. The Federal Reserve’s mid-cycle adjustment has helped to boost confidence, which has been further supported by a reduction in trade-related uncertainty. Nonetheless, the US economy is entering a lower gear: we expect GDP growth to be 1% (annualised) in the fourth quarter, and expand by just 1.5% in 2020.
Similarly, Fathom’s euro area ESI has also fallen substantially since the start of 2018, driven by a fall in manufacturing sentiment. That said the ESI has stabilised in November at 0.3%. Although we expect activity to remain subdued over the coming few quarters, our modal forecast does not anticipate a further deterioration in euro area growth.
However, the latest reading from our Economic Sentiment Indicator (ESI) for Italy challenges this view with the indicator dropping to -0.4% in November, the weakest reading since the end of the euro area crisis. The fall was broad-based with declines in roughly two-thirds of the indicator’s subcomponents, with both consumer and business sentiment affected. However, Italian sentiment tends to be quite volatile, often exhibiting more mini-cycles and sending more false signals than in other countries. We therefore stick to our current view that Italy is likely to avoid another recession, though growth is likely to remain weak at just 0.2% next year.
Trade uncertainty has acted as a substantial headwind for growth in the euro area. With monetary policy almost out of ammo, there are now growing calls for fiscal stimulus. European governments have undertaken a substantial and sustained fiscal adjustment in recent years, with only a few member states still posting large deficits, and many running sizeable surpluses. As a result, investor concerns over debt sustainability appear to be fading, with Fathom’s proprietary probability of default indicators close to all-time lows. In line with evidence from academic studies, our Global Economic and Strategic Allocation Model (GESAM) suggests that fiscal multipliers are larger at the effective lower bound, lending increased support to these calls. Within reason we would support additional stimulus.
So, guys, what do we have on a surface. Impeachment factor is postponed on January and mostly depends on Senate voting. This is clear. By market reaction risks of impeachment now stand low as no reaction has followed even on Congress decision to impeach D. Trump. Besides, it is no big sense in impeachment with just few months till elections. May be I'm wrong, but I suggest that Democrats just scare of 2nd D.Trump term. They scare to lose elections 2020 again. And impeachment should help them to eliminate D. Trump candidature out from President rush totally. Because if he will be impeached, he will not be able to take part in elections at all. Once&if D. Trump will be impeached, he will lose president's legal immunity and they just will tear him to pieces in endless legal claims. This is the aim - to complete elections before they will start.
Out of political risk, markets totally should depend on economies performance. Currently it seems that US Dollar should keep domination role by two reasons. First is, Fed rate is higher and US economy performance is better now. Second - EU will meet first challenge of UK leaving. They will have to build new relationship and this hardly will pass unsigned as to EU as to UK economy. And, finally, the third factor is mutual merchant relations. US will improve its trading balance with China (it is already improving). Here is everything goes according to our long term view. This so-called "first stage" of US/China agreement in fact is China capitulation as they agrees to anything just to hold major trading partner. As we mentioned many times already - since trade war has started, situation in Chinese economy becomes worse and is still deteriorating. On "second stage" agreement, I'm sure that D. Trump will twist China's hands more, and will continue to do it till the edge that China could accept at all.
But this is not the end yet. EU is the next "tariffs" partner to US. Once D. Trump will squeeze everything from China - he will turn to EU. This is also huge source to improve trade balance. First steps are done already. Last week we mentioned tariffs on France 2.5 Bln. luxury goods export, this week they put sanctions on Swiss-Dutch company Allseas, which is building North Stream 2 pipeline. This event alone could impact on whole EU economy. Lack of Russian gas will turn demand to liquid one from US which is three times more expensive and reduce EU economy efficiency, which is already stand barely above zero.
Thus if we take a look on EUR/USD perspective from this point of view - it seems that some downside trend should be in 2020, if our suggestion on tariffs will take place.
And the last one - as statistics shows no recession by far, trends should be smooth, rates will stay low and stock market probably will show upward/flat kind of action. The only factor that could change everything in a blink of an eye is impeachment, although it's probability currently stands low.
On GBP we are not smart enough to assess all political and economical risks that stand around Brexit in long term. Thus, we will keep going with our trading plan, which suggests downside continuation within few weeks as Brexit reality comes on surface and it is not as cloudless as it was seemed before elections.
Technicals
Monthly
Monthly time frame is the one where technical factors meet fundamental once. Last week we've considered possible bullish scenario, which could take place if we're wrong about US tariffs on EU and if EU economy will show at least some improving. Right now investors keep net short positions on EUR, understanding the same risks that we've mentioned above and this is reasonable. Positive shifts in EU economy have to become stable and regular with no US tariffs on horizon.
From the technical point of view, we have October reversal month and Yearly Pivot Support 1. This year it holds downside action. We know the major feature of pivot supports - it has to hold downside action if this is a retracement. This is particular what we have right now.
Despite that EUR still can't get started upside action - October candle is still valid and keeps its reversal features, as lows stand intact. Now everything depends on EUR itself. It has to show more active upside performance, which we do not see yet. The vital point which determine everything is 1.09 lows. It seems that it is just two weeks till the new year, but lows also stand just 150 pips from current market.
Conversely - sudden drop below 1.09 area and YPS1 will unlock our bearish view and downside continuation back to 1.03 lows. EUR has to show breakout either above 1.12 area or below 1.09 to unleash larger time scale setups. Until we stand in this range - we deal with tactic short-term setups on daily and intraday charts.
Weekly
On weekly chart we've got just inside candle, which makes no impact on the picture. Here we see some worrying signs, such as bearish dynamic pressure and too slow upside action, inability even to challenge 1.12 resistance area, which looks a bit curious when you suggest bullish market.
To support monthly scenario weekly chart has to form bullish reversal, and preferably by some clear pattern. Currently it seems that we should focus on reverse H&S pattern. Current AB-CD pattern has XOP around 1.1450 Fib resistance and potential neckline. Right arm should be formed later around 1.1150 area.
This anticipated pattern is also useful as we could make judgement on EUR direction by comparing how it matches to the H&S project. While it follows it - it keeps bullish scenario. But if something goes wrong - this will be clear signal that sentiment changes and EUR turns downside.
Here is the low of "C" point has vital meaning, as drop below it tells that market destroys H&S setup. This will mean just one things - market will drop and put under question monthly bullish scenario as well.
Daily
Trend has turned bearish here. As market was not able to keep minor harmonic retracement value, it dropped more and now stands at strong daily support area of 1.1064 - 1.1076. I dare to suggest that it will be crucial for short-term EUR performance. Any bullish market should hold above it, especially just after COP target. If market break it down, next 5/8 level hardly will hold it as well. Thus, other words speaking, breakout of K-support will put under question reliability of the whole upside AB-CD pattern and significantly increase chances of its failure.
Meantime, as we just come to K-support area - it lets taking of scalp long trades, because if upside action should start somewhere, it most probable starts from here.
Intraday
On 4H chart we already talked about similarity of two price actions, when we've talked about too extended upside retracement, which still has triggered downside continuation. Now we need to pay attention to another feature. Take a look, last time EUR has not reached XOP target and turned up from Fib level support area. Now situation could repeat again. We have XOP target 30 pips under daily K-support, while OP is already passed. Yes, overall price action stands strong, showing tail close and downside acceleration through OP. Situation, no doubts, looks bearish.
Still, as market stands at K-support, we should keep in mind similar situation that has happened last week and do not ignore bullish patterns that could be formed around.
This week doesn't show superb action, except, may be GBP, because investors have taken some relief as all major events were released the week before. Major driving factors were statistics, new thoughts on Brexit and impeachment rush.
In general, as we've mentioned earlier, activity on FX market is dropping. It happens not only because of coming Christmas, but dues some other background as well.
Average daily foreign exchange trading volumes fell 4.2% year-on-year in November, CLS said on Monday, as long-running trade talks between the United States and China and the run-up to the British election suppressed broader market volatility. CLS, a major settler of trades in the foreign exchange market, said in a statement that November’s volumes dropped to$1.61 trillion, down from last year’s $1.68 trillion. The November 2019 daily average was also down 10% from October’s number, however.
The decline in FX turnover was the second consecutive month on CLS platforms. Banks have increasingly routed more volumes on their internal platforms this year, according to a recent Bank for International Settlements report. Foreign exchange volumes have generally been rising in 2019 despite near record-low volatility.
However, uncertainty about whether the U.S. and China would agree a deal to resolve part of their trade war and about who would win last week’s general election in Britain encouraged more forex traders last month to sit on the sidelines and wait for clarity.
The most impressive action we've got on GBP. Once election euphoria has released markets - it comes to reality and investors start to think about Brexit practice and problems that UK will meet on the way out of EU. The British pound fell on Tuesday after reports UK Prime Minister Boris Johnson was seeking a hard line on Britain’s transition period after Brexit, effectively creating a new cliff in its negotiations with Brussels.
Johnson’s revised Withdrawal Agreement Bill would require the United Kingdom to have arrangements to leave the European Union be in place by Dec. 31 next year, UK broadcaster ITV reported on Monday.
The move dashes hopes Johnson would take a flexible approach to the end-2020 deadline for a trade deal with the EU after Britain leaves the bloc, which now looks almost certain to happen on Jan. 31 following the landslide Conservative election win.
“Common sense suggests that crafting a trade deal would take at least more than a year, so markets had assumed that the transition period will be extended,” said Masafumi Yamamoto, chief currency strategist at Mizuho Securities. “It seems like the big majority Johnson won is enabling him to take a hard line approach, which the market doesn’t like so much... Considering the UK economy looks set to deteriorate as people and companies start to leave the country because of Brexit, sterling’s short-covering rally is over,” he added.
The pound extended its slide on Wednesday, as Britain’s fixing of a fresh Brexit deadline rekindled fears of a chaotic exit from the European Union, while the dollar won back lost ground.
“With the level of frothiness in positioning, I think people had priced in very smooth sailing throughout 2020,” said Chris Weston, head of research at Melbourne brokerage Pepperstone. “This has given us a snap back to reality. If you thought Brexit was solved, and we’re going to see very, very smooth times ahead, then that’s not quite going to be the case.”
Asked if the government would legislate to rule out any extension of the transition beyond 2020, one of Johnson’s most senior ministers, Michael Gove, said: “Exactly, absolutely.” In Brussels, officials said the timetable was “rigid” and likely to limit the scope of any deal.
The pound was little changed by data showing the UK economy grew 0.4% in the third quarter, an upward revision from the previous estimate of 0.3%.
“I think sterling could start to do better again if we see signs of stronger economic data and progress in UK-EU negotiations on the future relationship,” Standard Chartered’s Graham said.
The Bank of England kept rates steady on Thursday, saying it was too soon to tell how much Johnson’s election win would lift the Brexit uncertainty that has clouded the economy. As expected, Andrew Bailey was announced as the bank’s new governor on Friday. Sterling did not move on the news.
George Buckley, chief European economist at Nomura, said Bailey’s role went beyond monetary policymaking: “Financial regulation could be a big part of the next year for him, given that there’s going to be a lot of debate about any deal (with the EU) that can be had... He’s a solid choice.”
Industrial production rebounded in the United States in November, mainly because a strike by General Motors Co workers ended. Housing starts and building permits were both reported to have grown more than expected and October JOLTS job openings were better than forecast, suggesting that the U.S. labor market remains strong.
Expectations the Fed will cut rates from the current 150-175 basis point level are 2.2% for the January meeting, 4.3% for March and 12% for April, according to CME Group’s FedWatch tool. The same tool shows a 50% chance that rates will remain at current levels through December 2020.
Last week we showed you total probability table of possible rate change. It shows that early signs of rate easing could appear only in Nov-Dec 2020:
“Bottom line: the U.S. economy remains on solid footing even as the rest of the world struggles,” wrote analysts at Brown Brothers Harriman.
The dollar index “is up two days in a row for the first time since the last week of November, and has recouped over a third of its December swoon. Sterling is testing the Dec. 12 low near $1.3050 and a break below would set up a test of the November 22 low near $1.2825,” the Brown Brothers Harriman analysts wrote.
German business morale rose more than expected in December, a survey showed on Wednesday, another sign that a manufacturing slump in Europe’s largest economy may be bottoming out after overall output shrank earlier in the year. The data, however, failed to help the falling euro.
U.S. Trade Representative Robert Lighthizer said the United States may raise tariffs on European goods as it tries to shrink its chronic trade deficit with the continent, re-igniting worries about the export-driven euro.
Dollar traders were sanguine after a majority of lawmakers in the U.S. House of Representatives voted to impeach Trump. “It is unlikely that the Senate will support the motion when it votes in January, as is required to remove Trump from office,” ANZ economists wrote in a note.
“The most significant piece of news overnight has been the German December IFO survey, which... has shown evidence that the German economy may be in the process of pulling itself up by its boot straps,” said Ray Attrill, Sydney-based head of forex strategy at National Australia Bank. “Improvement in the German – and broader Eurozone – economy – is fundamental to our expectation for a softer U.S. dollar and stronger Euro next year.”
Sterling was precariously poised as it headed for its worst week in more than two years on Friday, hobbled by familiar fears of a chaotic British exit from the European Union, while firm data helped the dollar arrest its recent slide. Cable has given up all the gains won after Prime Minister Boris Johnson was re-elected last week and has slumped 2.3% against the dollar since Monday. It has fared even worse against the euro, headed for its largest weekly loss since July 2017.
“The market was always a little bit naive in a way to think that a Tory election win was going to remove the fog of Brexit,” said Ray Attrill, head of FX strategy at National Australia Bank. “There were obviously some longs in weak hands that got forced out.”
The dollar recorded its best week since early November after a series of strong U.S. economic data releases that make a near-term cut in interest rates unlikely.
U.S. growth nudged up in the third quarter, the government confirmed on Friday, and there are signs the economy maintained the moderate pace of expansion as the year ended, supported by a strong labor market.
Gross domestic product increased at a 2.1% annualized rate, the Commerce Department said on Friday in its third estimate of third-quarter GDP. That was unrevised from November’s estimate in line with economists’ expectations. Consumer spending was stronger than previously reported, and there were upgrades to business spending.
The GDP and personal consumption figures are “indicators of the strength of the economy going into 2020,” wrote analysts at Western Union Business Solutions. These figures “further strengthen the belief that the Federal Reserve will pause on interest rate cuts for the near future,” they wrote.
As we're coming closer to the end of the year, analysts start to look over horizon, trying to predict what expect us in next year. Thus, Fathom tries to do the same and here is their forecast for next year. In general, they expect slowdown in major economies but no recession yet.
Our US ESI (Economy Sentiment Indicator) has troughed, supporting evidence from the Fathom Leading Indicator (FLI) that the world’s largest economy will avoid recession next year. The November US ESI was 2.9%, up from a cycle low of 2.4% in September but still well below the 2019 high of 4.6%, recorded in May. The Federal Reserve’s mid-cycle adjustment has helped to boost confidence, which has been further supported by a reduction in trade-related uncertainty. Nonetheless, the US economy is entering a lower gear: we expect GDP growth to be 1% (annualised) in the fourth quarter, and expand by just 1.5% in 2020.
Similarly, Fathom’s euro area ESI has also fallen substantially since the start of 2018, driven by a fall in manufacturing sentiment. That said the ESI has stabilised in November at 0.3%. Although we expect activity to remain subdued over the coming few quarters, our modal forecast does not anticipate a further deterioration in euro area growth.
However, the latest reading from our Economic Sentiment Indicator (ESI) for Italy challenges this view with the indicator dropping to -0.4% in November, the weakest reading since the end of the euro area crisis. The fall was broad-based with declines in roughly two-thirds of the indicator’s subcomponents, with both consumer and business sentiment affected. However, Italian sentiment tends to be quite volatile, often exhibiting more mini-cycles and sending more false signals than in other countries. We therefore stick to our current view that Italy is likely to avoid another recession, though growth is likely to remain weak at just 0.2% next year.
Trade uncertainty has acted as a substantial headwind for growth in the euro area. With monetary policy almost out of ammo, there are now growing calls for fiscal stimulus. European governments have undertaken a substantial and sustained fiscal adjustment in recent years, with only a few member states still posting large deficits, and many running sizeable surpluses. As a result, investor concerns over debt sustainability appear to be fading, with Fathom’s proprietary probability of default indicators close to all-time lows. In line with evidence from academic studies, our Global Economic and Strategic Allocation Model (GESAM) suggests that fiscal multipliers are larger at the effective lower bound, lending increased support to these calls. Within reason we would support additional stimulus.
So, guys, what do we have on a surface. Impeachment factor is postponed on January and mostly depends on Senate voting. This is clear. By market reaction risks of impeachment now stand low as no reaction has followed even on Congress decision to impeach D. Trump. Besides, it is no big sense in impeachment with just few months till elections. May be I'm wrong, but I suggest that Democrats just scare of 2nd D.Trump term. They scare to lose elections 2020 again. And impeachment should help them to eliminate D. Trump candidature out from President rush totally. Because if he will be impeached, he will not be able to take part in elections at all. Once&if D. Trump will be impeached, he will lose president's legal immunity and they just will tear him to pieces in endless legal claims. This is the aim - to complete elections before they will start.
Out of political risk, markets totally should depend on economies performance. Currently it seems that US Dollar should keep domination role by two reasons. First is, Fed rate is higher and US economy performance is better now. Second - EU will meet first challenge of UK leaving. They will have to build new relationship and this hardly will pass unsigned as to EU as to UK economy. And, finally, the third factor is mutual merchant relations. US will improve its trading balance with China (it is already improving). Here is everything goes according to our long term view. This so-called "first stage" of US/China agreement in fact is China capitulation as they agrees to anything just to hold major trading partner. As we mentioned many times already - since trade war has started, situation in Chinese economy becomes worse and is still deteriorating. On "second stage" agreement, I'm sure that D. Trump will twist China's hands more, and will continue to do it till the edge that China could accept at all.
But this is not the end yet. EU is the next "tariffs" partner to US. Once D. Trump will squeeze everything from China - he will turn to EU. This is also huge source to improve trade balance. First steps are done already. Last week we mentioned tariffs on France 2.5 Bln. luxury goods export, this week they put sanctions on Swiss-Dutch company Allseas, which is building North Stream 2 pipeline. This event alone could impact on whole EU economy. Lack of Russian gas will turn demand to liquid one from US which is three times more expensive and reduce EU economy efficiency, which is already stand barely above zero.
Thus if we take a look on EUR/USD perspective from this point of view - it seems that some downside trend should be in 2020, if our suggestion on tariffs will take place.
And the last one - as statistics shows no recession by far, trends should be smooth, rates will stay low and stock market probably will show upward/flat kind of action. The only factor that could change everything in a blink of an eye is impeachment, although it's probability currently stands low.
On GBP we are not smart enough to assess all political and economical risks that stand around Brexit in long term. Thus, we will keep going with our trading plan, which suggests downside continuation within few weeks as Brexit reality comes on surface and it is not as cloudless as it was seemed before elections.
Technicals
Monthly
Monthly time frame is the one where technical factors meet fundamental once. Last week we've considered possible bullish scenario, which could take place if we're wrong about US tariffs on EU and if EU economy will show at least some improving. Right now investors keep net short positions on EUR, understanding the same risks that we've mentioned above and this is reasonable. Positive shifts in EU economy have to become stable and regular with no US tariffs on horizon.
From the technical point of view, we have October reversal month and Yearly Pivot Support 1. This year it holds downside action. We know the major feature of pivot supports - it has to hold downside action if this is a retracement. This is particular what we have right now.
Despite that EUR still can't get started upside action - October candle is still valid and keeps its reversal features, as lows stand intact. Now everything depends on EUR itself. It has to show more active upside performance, which we do not see yet. The vital point which determine everything is 1.09 lows. It seems that it is just two weeks till the new year, but lows also stand just 150 pips from current market.
Conversely - sudden drop below 1.09 area and YPS1 will unlock our bearish view and downside continuation back to 1.03 lows. EUR has to show breakout either above 1.12 area or below 1.09 to unleash larger time scale setups. Until we stand in this range - we deal with tactic short-term setups on daily and intraday charts.
Weekly
On weekly chart we've got just inside candle, which makes no impact on the picture. Here we see some worrying signs, such as bearish dynamic pressure and too slow upside action, inability even to challenge 1.12 resistance area, which looks a bit curious when you suggest bullish market.
To support monthly scenario weekly chart has to form bullish reversal, and preferably by some clear pattern. Currently it seems that we should focus on reverse H&S pattern. Current AB-CD pattern has XOP around 1.1450 Fib resistance and potential neckline. Right arm should be formed later around 1.1150 area.
This anticipated pattern is also useful as we could make judgement on EUR direction by comparing how it matches to the H&S project. While it follows it - it keeps bullish scenario. But if something goes wrong - this will be clear signal that sentiment changes and EUR turns downside.
Here is the low of "C" point has vital meaning, as drop below it tells that market destroys H&S setup. This will mean just one things - market will drop and put under question monthly bullish scenario as well.
Daily
Trend has turned bearish here. As market was not able to keep minor harmonic retracement value, it dropped more and now stands at strong daily support area of 1.1064 - 1.1076. I dare to suggest that it will be crucial for short-term EUR performance. Any bullish market should hold above it, especially just after COP target. If market break it down, next 5/8 level hardly will hold it as well. Thus, other words speaking, breakout of K-support will put under question reliability of the whole upside AB-CD pattern and significantly increase chances of its failure.
Meantime, as we just come to K-support area - it lets taking of scalp long trades, because if upside action should start somewhere, it most probable starts from here.
Intraday
On 4H chart we already talked about similarity of two price actions, when we've talked about too extended upside retracement, which still has triggered downside continuation. Now we need to pay attention to another feature. Take a look, last time EUR has not reached XOP target and turned up from Fib level support area. Now situation could repeat again. We have XOP target 30 pips under daily K-support, while OP is already passed. Yes, overall price action stands strong, showing tail close and downside acceleration through OP. Situation, no doubts, looks bearish.
Still, as market stands at K-support, we should keep in mind similar situation that has happened last week and do not ignore bullish patterns that could be formed around.
