Sive Morten
Special Consultant to the FPA
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- 18,648
Fundamentals
Last week market's attention mostly was hooked by Fed minutes. In general, release was treated mostly positive, and supportive for current Fed hawkish strategy. Overall situation with interest rates and inflation forecast makes some market participants think that Fed could take even tighter steps and rise rate 4 times this year. Still, according to Fedfund watch tool by CME, chances on this are not very high. Thus, investors expect first rate change to 1.75% in March with 83% probability, to 2% in June with 66% prob., and to 2.25% in Nov-Dec with ~36% probability. Chances on 2.5% rate now stand rather low, approximately 21.%. At the same time, this odds have risen for 5% since 24th of January, when 4th rate increase was treated with just 17% chances.
Source: cmegroup.com
Last week, on 21st of February US 10-year bonds have reached 2.91% yield level and now some opinion appears that dollar was a bit overextended down without any confirmed reasons but mostly on emotional expectations of strong EU growth.
According to recent Reuters FX review, "rising Treasury yields, a view that the dollar’s sell-off had been overdone, and minutes from the Fed’s January rate-setting meeting that offered a relatively upbeat tone helped the index notch a gain of 0.9 percent this week.
“You have seen sentiment around the dollar shift,” said Charles Tomes, senior investment analyst and trader at Manulife Asset Management, in Boston.
“A lot of market participants are taking some risk off the table if they did have longs in other strategies,” he said."
On coming week all eyes will be on Federal Reserve Chair Jerome Powell’s first semi-annual testimony to Congress. It will take place on Tuesday and everybody will watch for updates on the central bank’s view.
Second issue that could make impact on EUR/USD is coming government elections in Italy on March 4th.
On March 4th as well a German Social Democrats’ poll of its members on joining another coalition government with Chancellor Angela Merkel’s conservatives. May be they will not have decisive meaning for the market, but still, this could hold investors from increasing long positions on EUR and wait till the end of the week.
This week Fathom consulting has made a release concerning US stock market. They think that US bubble hardly will blow in 2018 as overall global economy shows strong upside momentum, which accompanied with tax cut programme should boost corporate earnings. This should be also support for USD, as demand for US assets will support demand for US currency as well, especially with more attractive yields levels. Mostly they rely on their own sentiment indicator which is a good tool for understanding situation in general. It shows another increasing to 6.1% in January.
Some flows already are re-distributed from Australia and NZ. Australia was a carry trade leader for few recent years as they keep relatively high rate and healthy economy with low debt burden, AAA rating which was attractive for investors. Right now situation is changing. "The Australian and New Zealand dollars slipped as investors bet interest rates in the two countries will remain at record lows while the United States continues to tighten policy."
So, coming week probably will be a waiting tome as two major events should come - first testimony of new Fed chairman and - big political events in EU on Sunday.
COT Report
Last week shows first careful bearish steps in CFTC data. Although price has not changed significantly, net long position has dropped while open interest has increased. These changes stand with small numbers, but direction is important. It means that new shorts have come to EUR...
Technical analysis
Monthly
So, guys, as we've mentioned on Forum in different threads - situation really stands tricky as on EUR as on DXY. Today we will take a look at DXY, just because nothing to add to EUR analysis. On Friday video we said that will be waiting for butterfly pattern and see what will happen.
Usually, when situation stands tricky and unclear - I'm waiting for the time when it will be clear again. Usually it happens when some clear patterns appear that agree with overall context.
on Monthly of Dollar index situation stands according our expectations. Market indeed shows response to strong support area, at least it is kept by this area. Area itself is rather strong as it includes major all time 3/8 Fib level, although price stands slightly below it now.
When we do not have direct AB-CD extensions to estimate target, we use different tools. Here we also see that downside action has reached precisely 1.27 extension of last upside swing. Overall action reminds megaphone (widening top) pattern.
Downside action was rather strong and straight. As a result DXY has formed bearish reversal swing. Normal behavior of the markets usually shows deep upside retracement after reversal swing. This is quite reliable feature because it comes from nature of the markets. As Dollar was in long-term upside trend - strong upside momentum is still here and it couldn't be faded immediately, it needs time to calm down. Only strong and unexpected political, economical process could speed up this process or totally ignore it.
That's being said, while market still holds above major support area - this scenario can't be taken off the table.
As we can see - Yearly Pivot support 1 stands at 87 area. In general index could drop to it without breaking overall situation. This will be normal action for any market - retrace to PS1 on a bull trend. While support 1 holds retracement - uptrend is still valid.
Speaking on upside targets, with "deep" retracement up we could understand action, say, to YPP around 95 as it has not been tested yet. It will be approximately 1/2-5/8 bounce up.
So, monthly picture shows that this is not good time yet for taking short position.
Weekly
Weekly picture stands as quintessence of uncertainty. Trend stands bearish by far here, but could we say that market is not preparing for upside bounce? Not quite. Price has formed bullish reversal pattern, which is butterfly "Buy".
Also we see that bullish divergence is growing, but has not been formed yet.
Major problem here stands with shy upside reaction that could be treated two-fold. From one point of view - this is potential, as we could say that market stands at strong support and reaction is still too small, so it should be bigger.
From another point of view - shy reaction on strong support could indicate very strong bearish pressure.
This is also might be true, because take a look at reaction on major monthly 3/8 support around 91 area. It was rather small, market has not shown even minor 30% bounce out there.
But, what is also important - we have rising volatility precisely at this level, but not on major 3/8. Volatility indicates more aggressive struggle of opposite sides. Some bullish reserves have stepped in here, and this could change balance, if their strength will be sufficient for that.
So, weekly chart just shows the nature of the problem. Answers we should search somewhere on daily and intraday charts. But - as longer market will stay at level without bounce as weaker it will be, i.e. chances on breakout will be rising.
Daily
This chart probably shows more bullish signs rather than bearish. First is W&R of the bottom, which is typical for Double Bottom patterns and the same reversal session as on EUR. But what seems even more important is overall dollar background now, which could be described as "May be dollar is not as weak as we thought" and speed of upside recovery. This is very important. Recall how hopeless downside action was looking last Friday. It was big drop against US inflation statistics result, it was action against common sense, actually.
But this week market has recovered. This is difficult to expect when bears indeed control market. Mostly it could mean that drop was a "last challenge" and could indicate inability of bears to push market lower.
Also do not forget about overextended long positions on EUR...
Technically, except WR, we have strong bullish divergence, a kind of "MACD Hook" as many called this issue, when lines have not been crossed significantly. Some analog of DiNapoli grabber. Yes, bearish engulfing around daily OB could trigger some minor drop, but, IMO bulls have minor advantage...
Intraday
Here, on a way up market has not formed any meaningful retracement, which is curious after so furious plunge on week before. Now market is forming clear pennant pattern here. Classic technical analysis tells that this is bullish continuation pattern. Even as retracement has started market is coiling around nearest minor 3/8 support.
Also, guys, if you will take a look at other markets, GBP and Gold in particular - you'll see that they weren't able to complete minor reverse H&S patterns on 4-hour charts. This could be a confirmation of dollar strength in short-term perspective.
Upside breakout will give us butterfly "sell". First it should push market right to daily Fib level of 91.30 area.
Downside breakout will not mean that situation has turned bearish, but it could be just AB=CD retracement to K-area around 89.35-89.40 level. Which, in turn, also could give us bullish pattern - "222" Buy.
So, we do not care much on pennant result, as upside breakout will lead to starting retracement a bit later and we will be able to take long position anyway. Downside breakout could give us "222" Buy pattern, if, of course, it will not be a collapse of despair.
Conclusion:
Dollar Index stands right now in situation that is very difficult for analysis. Indirect factors suggest USD strength, but they were not implemented yet by price action.
In the beginning of the week - all eyes on intraday pennant. Lazy downside breakout will be the sign of possible upside continuation and could give "222" Buy pattern.
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.
Last week market's attention mostly was hooked by Fed minutes. In general, release was treated mostly positive, and supportive for current Fed hawkish strategy. Overall situation with interest rates and inflation forecast makes some market participants think that Fed could take even tighter steps and rise rate 4 times this year. Still, according to Fedfund watch tool by CME, chances on this are not very high. Thus, investors expect first rate change to 1.75% in March with 83% probability, to 2% in June with 66% prob., and to 2.25% in Nov-Dec with ~36% probability. Chances on 2.5% rate now stand rather low, approximately 21.%. At the same time, this odds have risen for 5% since 24th of January, when 4th rate increase was treated with just 17% chances.
Source: cmegroup.com
Last week, on 21st of February US 10-year bonds have reached 2.91% yield level and now some opinion appears that dollar was a bit overextended down without any confirmed reasons but mostly on emotional expectations of strong EU growth.
According to recent Reuters FX review, "rising Treasury yields, a view that the dollar’s sell-off had been overdone, and minutes from the Fed’s January rate-setting meeting that offered a relatively upbeat tone helped the index notch a gain of 0.9 percent this week.
“You have seen sentiment around the dollar shift,” said Charles Tomes, senior investment analyst and trader at Manulife Asset Management, in Boston.
“A lot of market participants are taking some risk off the table if they did have longs in other strategies,” he said."
On coming week all eyes will be on Federal Reserve Chair Jerome Powell’s first semi-annual testimony to Congress. It will take place on Tuesday and everybody will watch for updates on the central bank’s view.
Second issue that could make impact on EUR/USD is coming government elections in Italy on March 4th.
On March 4th as well a German Social Democrats’ poll of its members on joining another coalition government with Chancellor Angela Merkel’s conservatives. May be they will not have decisive meaning for the market, but still, this could hold investors from increasing long positions on EUR and wait till the end of the week.
This week Fathom consulting has made a release concerning US stock market. They think that US bubble hardly will blow in 2018 as overall global economy shows strong upside momentum, which accompanied with tax cut programme should boost corporate earnings. This should be also support for USD, as demand for US assets will support demand for US currency as well, especially with more attractive yields levels. Mostly they rely on their own sentiment indicator which is a good tool for understanding situation in general. It shows another increasing to 6.1% in January.
Some flows already are re-distributed from Australia and NZ. Australia was a carry trade leader for few recent years as they keep relatively high rate and healthy economy with low debt burden, AAA rating which was attractive for investors. Right now situation is changing. "The Australian and New Zealand dollars slipped as investors bet interest rates in the two countries will remain at record lows while the United States continues to tighten policy."
So, coming week probably will be a waiting tome as two major events should come - first testimony of new Fed chairman and - big political events in EU on Sunday.
COT Report
Last week shows first careful bearish steps in CFTC data. Although price has not changed significantly, net long position has dropped while open interest has increased. These changes stand with small numbers, but direction is important. It means that new shorts have come to EUR...
Technical analysis
Monthly
So, guys, as we've mentioned on Forum in different threads - situation really stands tricky as on EUR as on DXY. Today we will take a look at DXY, just because nothing to add to EUR analysis. On Friday video we said that will be waiting for butterfly pattern and see what will happen.
Usually, when situation stands tricky and unclear - I'm waiting for the time when it will be clear again. Usually it happens when some clear patterns appear that agree with overall context.
on Monthly of Dollar index situation stands according our expectations. Market indeed shows response to strong support area, at least it is kept by this area. Area itself is rather strong as it includes major all time 3/8 Fib level, although price stands slightly below it now.
When we do not have direct AB-CD extensions to estimate target, we use different tools. Here we also see that downside action has reached precisely 1.27 extension of last upside swing. Overall action reminds megaphone (widening top) pattern.
Downside action was rather strong and straight. As a result DXY has formed bearish reversal swing. Normal behavior of the markets usually shows deep upside retracement after reversal swing. This is quite reliable feature because it comes from nature of the markets. As Dollar was in long-term upside trend - strong upside momentum is still here and it couldn't be faded immediately, it needs time to calm down. Only strong and unexpected political, economical process could speed up this process or totally ignore it.
That's being said, while market still holds above major support area - this scenario can't be taken off the table.
As we can see - Yearly Pivot support 1 stands at 87 area. In general index could drop to it without breaking overall situation. This will be normal action for any market - retrace to PS1 on a bull trend. While support 1 holds retracement - uptrend is still valid.
Speaking on upside targets, with "deep" retracement up we could understand action, say, to YPP around 95 as it has not been tested yet. It will be approximately 1/2-5/8 bounce up.
So, monthly picture shows that this is not good time yet for taking short position.
Weekly
Weekly picture stands as quintessence of uncertainty. Trend stands bearish by far here, but could we say that market is not preparing for upside bounce? Not quite. Price has formed bullish reversal pattern, which is butterfly "Buy".
Also we see that bullish divergence is growing, but has not been formed yet.
Major problem here stands with shy upside reaction that could be treated two-fold. From one point of view - this is potential, as we could say that market stands at strong support and reaction is still too small, so it should be bigger.
From another point of view - shy reaction on strong support could indicate very strong bearish pressure.
This is also might be true, because take a look at reaction on major monthly 3/8 support around 91 area. It was rather small, market has not shown even minor 30% bounce out there.
But, what is also important - we have rising volatility precisely at this level, but not on major 3/8. Volatility indicates more aggressive struggle of opposite sides. Some bullish reserves have stepped in here, and this could change balance, if their strength will be sufficient for that.
So, weekly chart just shows the nature of the problem. Answers we should search somewhere on daily and intraday charts. But - as longer market will stay at level without bounce as weaker it will be, i.e. chances on breakout will be rising.
Daily
This chart probably shows more bullish signs rather than bearish. First is W&R of the bottom, which is typical for Double Bottom patterns and the same reversal session as on EUR. But what seems even more important is overall dollar background now, which could be described as "May be dollar is not as weak as we thought" and speed of upside recovery. This is very important. Recall how hopeless downside action was looking last Friday. It was big drop against US inflation statistics result, it was action against common sense, actually.
But this week market has recovered. This is difficult to expect when bears indeed control market. Mostly it could mean that drop was a "last challenge" and could indicate inability of bears to push market lower.
Also do not forget about overextended long positions on EUR...
Technically, except WR, we have strong bullish divergence, a kind of "MACD Hook" as many called this issue, when lines have not been crossed significantly. Some analog of DiNapoli grabber. Yes, bearish engulfing around daily OB could trigger some minor drop, but, IMO bulls have minor advantage...
Intraday
Here, on a way up market has not formed any meaningful retracement, which is curious after so furious plunge on week before. Now market is forming clear pennant pattern here. Classic technical analysis tells that this is bullish continuation pattern. Even as retracement has started market is coiling around nearest minor 3/8 support.
Also, guys, if you will take a look at other markets, GBP and Gold in particular - you'll see that they weren't able to complete minor reverse H&S patterns on 4-hour charts. This could be a confirmation of dollar strength in short-term perspective.
Upside breakout will give us butterfly "sell". First it should push market right to daily Fib level of 91.30 area.
Downside breakout will not mean that situation has turned bearish, but it could be just AB=CD retracement to K-area around 89.35-89.40 level. Which, in turn, also could give us bullish pattern - "222" Buy.
So, we do not care much on pennant result, as upside breakout will lead to starting retracement a bit later and we will be able to take long position anyway. Downside breakout could give us "222" Buy pattern, if, of course, it will not be a collapse of despair.
Conclusion:
Dollar Index stands right now in situation that is very difficult for analysis. Indirect factors suggest USD strength, but they were not implemented yet by price action.
In the beginning of the week - all eyes on intraday pennant. Lazy downside breakout will be the sign of possible upside continuation and could give "222" Buy pattern.
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.