Sive Morten
Special Consultant to the FPA
- Messages
- 18,669
Fundamentals
(Reuters) - The dollar dropped to seven-month lows on Friday after data showed the U.S. economy created fewer jobs than expected last month, which could derail a possible interest rate hike by the Federal Reserve in the second half of this year.
The greenback fell to seven-month troughs against the euro and Swiss franc, while sliding to a two-week bottom versus the yen.
Data showed that U.S. nonfarm payrolls increased just 138,000 last month as the manufacturing, government and retail sectors lost jobs. The consensus forecast had been 185,000 new jobs.
March and April data was revised to show 66,000 fewer jobs created than previously reported. May's job gains marked a sharp deceleration from the 181,000 monthly average over the past 12 months.
The unemployment rate, however, fell to a 16-year low of 4.3 percent.
Despite the big miss in payrolls, analysts said this would not necessarily prevent the Fed from raising interest rates this month.
"This is a broadly grim jobs report, but not quite grim enough to blow the Fed off course," said David Lamb, head of dealing at FEXCO Corporate Payments in Edinburgh.
"The momentum - and expectation - for a June interest rate hike is sufficiently strong to ensure that (Fed Chair) Janet Yellen will still pull the trigger as expected on June 14th."
He noted, however, that the Fed's plan to push rates higher repeatedly later this year now looks far from certain.
In late trading, interest rate futures have priced in a 96 percent chance of a Fed rate increase on June 14, according to the CME's FedWatch.
Traders continue to see a slightly less than an even chance for one more rate hike before the end of the year, based on the price of fed funds futures contracts traded at CME Group Inc's Chicago Board of Trade.
In late trading, the dollar index fell to a seven-month low and was last down 0.5 percent at 96.725
The euro was 0.6 percent higher against the dollar at $1.1276, after earlier rising to a seven-month peak of $1.1282.
Against the yen, the dollar fell to two week lows and last changed hands at 110.44 yen, down 0.8 percent.
The dollar also slid to seven-month troughs versus the Swiss franc, trading last at 0.9633 franc, down 0.9 percent.
How a quicker pace of tightening by the Fed would affect the US economy
by Fathom Consulting
Political uncertainty may have cast a cloud over Donald Trump’s ability to loosen fiscal policy, but we still think that the FOMC will raise the fed funds rate by another 150 basis points between now and the end of next year. We estimate that this would increase the annual borrowing costs of businesses and households by nearly $150 billion. To the extent that this tips unproductive firms out of business, it would ultimately be beneficial for the economy. But, in aggregate, US households and corporates have improved their balance sheets and many have locked in low borrowing costs for the foreseeable future, immunising them from higher interest expense, for now. We also expect wages and inflation to rise significantly over the next few years, meaning that real interest rates will remain low for some time. Against this backdrop we think that economic growth will accelerate.
The health of the US corporate sector has been repeatedly questioned by analysts over the past few years: equity valuations look lofty; credit spreads are low; debt is close to its all-time high as a share of GDP. In addition, the IMF recently cited higher US corporate leverage as a potential risk to global financial stability. It might seem, therefore, that US corporates are in a bad way. In aggregate though, we think that corporate sector balance sheets are, in fact, in much better shape now than they were in the past.
Corporate sector debt may be close to an all-time high as a share of GDP, but the corporate sector is a larger part of the economy now than it has been in the past, a point reflected in the high level of profits relative to GDP, illustrated by the chart below.
Even though some firms have faced headwinds such as a stronger dollar, higher wage costs and lower oil prices in recent years, corporate profits remain solid. Indeed, the ratio of corporate debt to profitability is much lower now than it has been in the past, and if the corporate tax rate were slashed from 35% to 15%, as proposed by Donald Trump, after-tax profits would rise significantly.
The IMF may have flagged the risks posed by the US corporate sector in its recent financial stability report, but this warning was linked to a hypothetical scenario in which risk-taking increased in response to changes in the fiscal policy of the US government. The very same report noted that, in aggregate, US corporate sector balance sheets are strong and that proposed changes to the US tax code would encourage firms to favour equity financing over debt financing. These admissions received little coverage in the media.
A longer debt maturity profile than in the past…
An increase in the fed funds rate would increase borrowing costs, but many firms have locked in low borrowing costs by issuing long-term debt at low rates of interest. Short-term debt as a share of total debt is close to its lowest on record; the ratio of corporate bonds to total corporate debt is close to an all-time high (at around 60%); and the average duration of US corporate bonds is more than seven years. For firms rolling over debt, it will typically be many years before any further pick-up in corporate yields feeds through to higher borrowing costs.
… but not all firms will be immune to higher rates
We have long argued that higher interest rates are the medicine that the economy needs to address its productivity problem.
We may have seen how, in aggregate, corporates are more profitable than they were in the past and rely less on short-term floating rate financing than they once did. But not all firms have wide profit margins, and not all firms have locked in low borrowing costs for the foreseeable future. There will be some firms that are more sensitive to higher rates than others. To the extent that higher interest rates push the unproductive ones out of business, this would ultimately be positive for the economy.
Non-corporate businesses would feel the pinch
The US national accounts split the non-financial business sector into corporate businesses and non-corporate businesses. The data presented thus far considers only the former. The latter consists of partnerships and limited liability companies, which are owned by households.
The distinction may sound trivial, but in the national income and product accounts (NIPA) the consumption of non-corporate businesses is included as part of personal consumption expenditures (PCE), and their income is part of personal income and thus feeds into household saving. Since these firms are small and have less access to capital markets (and less ability to issue long-term bonds), they would feel the pinch from a higher fed funds rate a lot sooner than corporate businesses, assuming that a large share of this debt is floating.
Households have less debt and save more
Overall though, the household sector is better placed to withstand a rise in interest rates now than it was in the past. For a start, household sector debt is a lot lower than it was ten years ago, both as a share of GDP and as a share of disposable income. This remains the case when non-financial, non-corporate business debt is included in household sector debt.
Moreover, the personal savings ratio is higher than it was before the 2008 crash and the debt servicing ratio is close to an all-time low. In other words, households are saving more than they did, while debt repayment is less of a burden on household finances than it was in the past.
Significantly, the cost of servicing debt has not been very sensitive to changes in short-term or long-term interest rates in the past. Mortgage default rates have not been very sensitive to changes in borrowing costs either. The most plausible explanation for this is that unlike most other countries, mortgages issued in the US are generally issued with fixed rates of interest for 30 years.
According to data from the New York Fed’s Quarterly Report on Household Debt and Credit, released last week, mortgages account for around 70% of total household sector debt. Auto loans and student debt have risen significantly over the last few years, but these loans are issued with fixed interest rates and make up just one fifth of total household sector debt combined.
Interest rates on credit card loans, which are sensitive to changes in the fed funds rate, represent a declining share of household sector debt, and account for just 6% of the total. In other words, the vast majority of household debt in the US is issued at fixed rates of interest.
Admittedly, in the run up to the subprime crisis, around a third of new loans were issued with floating rates of interest, also known as adjustable rate mortgages (ARMs). Some of these loans had features that included low fixed rates of interest for an introductory period and then switched to higher variable rates of interest at a later stage. But these loans are a lot less common than they were and lending standards have significantly improved since 2008.
ARMs now account for less than 10% of all mortgages originated, much lower than during the peak of the subprime lending. The upshot is that households are even less sensitive to changes in interest rates than they were in the past.
Many households have also locked in low borrowing costs after refinancing their 30-year mortgages at very low rates of interest over the last few years.
How much would it all cost?
Using the aforementioned information we have estimated the direct costs associated with a 150 basis point increase in the fed funds rate, assuming that such an increase was fully passed on to households and businesses. We have also assumed that all non-corporate business debt is short-term and subject to floating rates.
Based on these assumptions, we estimate that the incremental expense for non-corporate businesses would be roughly US$ 75 billion per year, 0.5% of the US$ 14 trillion in disposable income of households. The incremental expense from credit cards and mortgages would be less than US$ 26 billion per year, or 0.2% of disposable income. The borrowing costs of the corporate sector would rise by less than US$ 40 billion per annum, little more than 2% of the value of total annual after-tax corporate profits.
Admittedly, these figures do not consider the additional burden that higher interest expense would place on the public finances or the indirect costs to households and corporates. Higher interest rates would increase the cost of new investment and may deter some new investment at the margin. It would also increase the cost of moving home since, to do so, households would need to take out new mortgages at higher rates of interest. Equity prices may fall and some would be vocal in their opposition to a higher fed funds rate.
But there are ways in which higher interest rates could have a positive effect on the economy too, such as improving the efficient allocation of resources and raising its productive potential. In addition, some businesses – including banks, pension funds and insurance companies – would directly benefit from higher interest rates.
What’s the bottom line?
Overall, businesses and households are in a better shape to cope with higher interest rates now than they were in the past. Most debt held by corporates and households is fixed at low rates of interest for the foreseeable future. Even if the Fed raised the fed funds rate by 150 basis points between now and the end of next year, the direct costs to the economy would be small in the grand scheme of things.
Crucially, although we expect the Fed to raise interest rates faster than most investors do, we also think that inflation and wages will rise a lot quicker than they have done over the last few years. In real terms, we still expect the fed funds rate to remain lower than it has done in any other tightening cycle since 1971 (see chart). The FOMC also expects to raise interest rates only gradually, judging by the ‘dot plot’ and the inflation forecasts of FOMC participants. Set against a backdrop of rising wages, increased government spending and tax cuts, we expect household spending and investment to rise significantly, more than offsetting the direct and indirect costs of higher nominal interest rates.
COT Report
Recent CFTC data shows typical behavior for bullish market. Within few weeks position has changed the sign from bearish into bullish. Open interest increases as well as net speculative long position. In fact, as it could be seen from history - EUR very rare was bullish. And right now we're coming to very important moment. In fact, EUR is coming to the ceil of speculative bullish positions. Previously it was around 70-72K contracts, one time it was a spike for one single week around 99K contracts:
This is of course, doesn't mean that EUR will have to turn down immedately. Sentiment charts are rather flexible, when position hits extreme level, price could flirt around for some weeks. But, definitely this will become a headwind for EUR. Either temporal retracement or reversal should happen, price should react somehow on this fundamental issue.
In fact we saw it previously on Gold and GBP, so on EUR should follow the same.
Technical
Monthly
Trend is bullish here but price is not at OB level that stands actually above 1.16 area. Last week we've come to conclusion that short-term price action looks mostly bullish, although it is not break yet long-term bearish behavior. As a result, market stands right now in two steps from Yearly Pivot Resistance. This actually was our short-term target...
Also we have some other interesting issues. First is bullish divergence with MACD indicator. Somehow we haven't got bullish grabbers there, although price flirted for 3-4 months with MACD line. Nevertheless, appearing of divergence usually leads to action above previous top, which is 1.1715 area.
Second, while rectangle was forming we saw two failure breakouts. First was, precisely at 1.1715 top and after it price dropped to 1.05 bottom. Second was recently - when market has reached 1.0340 but then returned back in consolidation. This moment also mostly supports an idea of upside continuation, at least to upper border.
Besides, if we will take a look at all-time EUR chart, we will see clear support/resistance zone around 1.18-1.19 area. It means that till the end of the year EUR could show upward continuation. This is also supported by Fundamental background. We think that Fed will not rise rate after June meeting and this will bring relax to EUR/USD, while major Fed rate power will crush EUR in 2018.
But these talks are mostly theoretical. In practical sphere, we're mostly interested in what will happen around YPR1 as COT sentiment shows that EUR/USD is a bit overextended upside.
Thus, monthly chart leads us to following conclusions. In perspective of 1.5-2 years, EUR has worse perspectives compares to USD, but till the end of 2017 it could show upward action, even to 1.18 all time resistance area, as we think that Fed will rise rate only twice in 2017. But on coming week our primary view will be upon price action around 1.1310 resistance.
Weekly
Last week we've talked on major concern - whether EUR will show any meaningful retracement before major targets will be completed. Price action showed no retracement and EUR moves straight up to 1.1310 target now.
Since there are just 30-40 pips till the target, on coming week we could get meaningful retracement. COT data also shows that EUR is a bit overextended. As Fed meeting stands just 2 weeks ahead, major EU events have passed and price at important target - investors could turn to some profit taking, contracting positions before Fed meeting.
Daily
Last week our suggestion was correct, when we've discussed situatin on daily chart - that EUR should move higher before something else will happen. Right now price is coming to predefined area - YPR1, AB-CD 1.618 target, and, take a look - top of Trump's election day.
Theoretically market could climb even higher, right to MPR1 and daily overbought area around 1.14, but odds suggest that major reaction should happen around 1.13, rather than around 1.14...
First destination of retracement (if we will get any of course), will be an area around MPP that has not been tested yet and daily oversold - 1.1050-1.11:
4-hour
This is probably major chart for coming week. Again, our MACD divergence has worked nice as price jumped above previous tops.
Right now we have butterfly "sell" pattern is forming here. It has two special features. First one is thrusting candle right to 1.27 target. It means that there are great chances that price will continue to 1.618 target around 1.1335 area. This area also coincides with WPR1.
Second, when you see butterfly and watching for some bearish reversal pattern, since retracement stands somehwere around - very probable that you will get H&S. Butterflies very often become first half of H&S pattern. That is what we will be watching for.
The practical conclusion that we could make for Mon trading session - don't go short until butterfly will not hit 1.618 extension.
Conclusion:
On coming week we suggest to see some signs of retracement. As soon as next upside target around 1.1340 area will be reached.
Still, it is too early to talk on breaking long-term bearish tendency.
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 dollar dropped to seven-month lows on Friday after data showed the U.S. economy created fewer jobs than expected last month, which could derail a possible interest rate hike by the Federal Reserve in the second half of this year.
The greenback fell to seven-month troughs against the euro and Swiss franc, while sliding to a two-week bottom versus the yen.
Data showed that U.S. nonfarm payrolls increased just 138,000 last month as the manufacturing, government and retail sectors lost jobs. The consensus forecast had been 185,000 new jobs.
March and April data was revised to show 66,000 fewer jobs created than previously reported. May's job gains marked a sharp deceleration from the 181,000 monthly average over the past 12 months.
The unemployment rate, however, fell to a 16-year low of 4.3 percent.
Despite the big miss in payrolls, analysts said this would not necessarily prevent the Fed from raising interest rates this month.
"This is a broadly grim jobs report, but not quite grim enough to blow the Fed off course," said David Lamb, head of dealing at FEXCO Corporate Payments in Edinburgh.
"The momentum - and expectation - for a June interest rate hike is sufficiently strong to ensure that (Fed Chair) Janet Yellen will still pull the trigger as expected on June 14th."
He noted, however, that the Fed's plan to push rates higher repeatedly later this year now looks far from certain.
In late trading, interest rate futures have priced in a 96 percent chance of a Fed rate increase on June 14, according to the CME's FedWatch.
Traders continue to see a slightly less than an even chance for one more rate hike before the end of the year, based on the price of fed funds futures contracts traded at CME Group Inc's Chicago Board of Trade.
In late trading, the dollar index fell to a seven-month low and was last down 0.5 percent at 96.725
The euro was 0.6 percent higher against the dollar at $1.1276, after earlier rising to a seven-month peak of $1.1282.
Against the yen, the dollar fell to two week lows and last changed hands at 110.44 yen, down 0.8 percent.
The dollar also slid to seven-month troughs versus the Swiss franc, trading last at 0.9633 franc, down 0.9 percent.
How a quicker pace of tightening by the Fed would affect the US economy
by Fathom Consulting
Political uncertainty may have cast a cloud over Donald Trump’s ability to loosen fiscal policy, but we still think that the FOMC will raise the fed funds rate by another 150 basis points between now and the end of next year. We estimate that this would increase the annual borrowing costs of businesses and households by nearly $150 billion. To the extent that this tips unproductive firms out of business, it would ultimately be beneficial for the economy. But, in aggregate, US households and corporates have improved their balance sheets and many have locked in low borrowing costs for the foreseeable future, immunising them from higher interest expense, for now. We also expect wages and inflation to rise significantly over the next few years, meaning that real interest rates will remain low for some time. Against this backdrop we think that economic growth will accelerate.
The health of the US corporate sector has been repeatedly questioned by analysts over the past few years: equity valuations look lofty; credit spreads are low; debt is close to its all-time high as a share of GDP. In addition, the IMF recently cited higher US corporate leverage as a potential risk to global financial stability. It might seem, therefore, that US corporates are in a bad way. In aggregate though, we think that corporate sector balance sheets are, in fact, in much better shape now than they were in the past.
Corporate sector debt may be close to an all-time high as a share of GDP, but the corporate sector is a larger part of the economy now than it has been in the past, a point reflected in the high level of profits relative to GDP, illustrated by the chart below.
Even though some firms have faced headwinds such as a stronger dollar, higher wage costs and lower oil prices in recent years, corporate profits remain solid. Indeed, the ratio of corporate debt to profitability is much lower now than it has been in the past, and if the corporate tax rate were slashed from 35% to 15%, as proposed by Donald Trump, after-tax profits would rise significantly.
The IMF may have flagged the risks posed by the US corporate sector in its recent financial stability report, but this warning was linked to a hypothetical scenario in which risk-taking increased in response to changes in the fiscal policy of the US government. The very same report noted that, in aggregate, US corporate sector balance sheets are strong and that proposed changes to the US tax code would encourage firms to favour equity financing over debt financing. These admissions received little coverage in the media.
A longer debt maturity profile than in the past…
An increase in the fed funds rate would increase borrowing costs, but many firms have locked in low borrowing costs by issuing long-term debt at low rates of interest. Short-term debt as a share of total debt is close to its lowest on record; the ratio of corporate bonds to total corporate debt is close to an all-time high (at around 60%); and the average duration of US corporate bonds is more than seven years. For firms rolling over debt, it will typically be many years before any further pick-up in corporate yields feeds through to higher borrowing costs.
… but not all firms will be immune to higher rates
We have long argued that higher interest rates are the medicine that the economy needs to address its productivity problem.
We may have seen how, in aggregate, corporates are more profitable than they were in the past and rely less on short-term floating rate financing than they once did. But not all firms have wide profit margins, and not all firms have locked in low borrowing costs for the foreseeable future. There will be some firms that are more sensitive to higher rates than others. To the extent that higher interest rates push the unproductive ones out of business, this would ultimately be positive for the economy.
Non-corporate businesses would feel the pinch
The US national accounts split the non-financial business sector into corporate businesses and non-corporate businesses. The data presented thus far considers only the former. The latter consists of partnerships and limited liability companies, which are owned by households.
The distinction may sound trivial, but in the national income and product accounts (NIPA) the consumption of non-corporate businesses is included as part of personal consumption expenditures (PCE), and their income is part of personal income and thus feeds into household saving. Since these firms are small and have less access to capital markets (and less ability to issue long-term bonds), they would feel the pinch from a higher fed funds rate a lot sooner than corporate businesses, assuming that a large share of this debt is floating.
Households have less debt and save more
Overall though, the household sector is better placed to withstand a rise in interest rates now than it was in the past. For a start, household sector debt is a lot lower than it was ten years ago, both as a share of GDP and as a share of disposable income. This remains the case when non-financial, non-corporate business debt is included in household sector debt.
Moreover, the personal savings ratio is higher than it was before the 2008 crash and the debt servicing ratio is close to an all-time low. In other words, households are saving more than they did, while debt repayment is less of a burden on household finances than it was in the past.
Significantly, the cost of servicing debt has not been very sensitive to changes in short-term or long-term interest rates in the past. Mortgage default rates have not been very sensitive to changes in borrowing costs either. The most plausible explanation for this is that unlike most other countries, mortgages issued in the US are generally issued with fixed rates of interest for 30 years.
According to data from the New York Fed’s Quarterly Report on Household Debt and Credit, released last week, mortgages account for around 70% of total household sector debt. Auto loans and student debt have risen significantly over the last few years, but these loans are issued with fixed interest rates and make up just one fifth of total household sector debt combined.
Interest rates on credit card loans, which are sensitive to changes in the fed funds rate, represent a declining share of household sector debt, and account for just 6% of the total. In other words, the vast majority of household debt in the US is issued at fixed rates of interest.
Admittedly, in the run up to the subprime crisis, around a third of new loans were issued with floating rates of interest, also known as adjustable rate mortgages (ARMs). Some of these loans had features that included low fixed rates of interest for an introductory period and then switched to higher variable rates of interest at a later stage. But these loans are a lot less common than they were and lending standards have significantly improved since 2008.
ARMs now account for less than 10% of all mortgages originated, much lower than during the peak of the subprime lending. The upshot is that households are even less sensitive to changes in interest rates than they were in the past.
Many households have also locked in low borrowing costs after refinancing their 30-year mortgages at very low rates of interest over the last few years.
How much would it all cost?
Using the aforementioned information we have estimated the direct costs associated with a 150 basis point increase in the fed funds rate, assuming that such an increase was fully passed on to households and businesses. We have also assumed that all non-corporate business debt is short-term and subject to floating rates.
Based on these assumptions, we estimate that the incremental expense for non-corporate businesses would be roughly US$ 75 billion per year, 0.5% of the US$ 14 trillion in disposable income of households. The incremental expense from credit cards and mortgages would be less than US$ 26 billion per year, or 0.2% of disposable income. The borrowing costs of the corporate sector would rise by less than US$ 40 billion per annum, little more than 2% of the value of total annual after-tax corporate profits.
Admittedly, these figures do not consider the additional burden that higher interest expense would place on the public finances or the indirect costs to households and corporates. Higher interest rates would increase the cost of new investment and may deter some new investment at the margin. It would also increase the cost of moving home since, to do so, households would need to take out new mortgages at higher rates of interest. Equity prices may fall and some would be vocal in their opposition to a higher fed funds rate.
But there are ways in which higher interest rates could have a positive effect on the economy too, such as improving the efficient allocation of resources and raising its productive potential. In addition, some businesses – including banks, pension funds and insurance companies – would directly benefit from higher interest rates.
What’s the bottom line?
Overall, businesses and households are in a better shape to cope with higher interest rates now than they were in the past. Most debt held by corporates and households is fixed at low rates of interest for the foreseeable future. Even if the Fed raised the fed funds rate by 150 basis points between now and the end of next year, the direct costs to the economy would be small in the grand scheme of things.
Crucially, although we expect the Fed to raise interest rates faster than most investors do, we also think that inflation and wages will rise a lot quicker than they have done over the last few years. In real terms, we still expect the fed funds rate to remain lower than it has done in any other tightening cycle since 1971 (see chart). The FOMC also expects to raise interest rates only gradually, judging by the ‘dot plot’ and the inflation forecasts of FOMC participants. Set against a backdrop of rising wages, increased government spending and tax cuts, we expect household spending and investment to rise significantly, more than offsetting the direct and indirect costs of higher nominal interest rates.
COT Report
Recent CFTC data shows typical behavior for bullish market. Within few weeks position has changed the sign from bearish into bullish. Open interest increases as well as net speculative long position. In fact, as it could be seen from history - EUR very rare was bullish. And right now we're coming to very important moment. In fact, EUR is coming to the ceil of speculative bullish positions. Previously it was around 70-72K contracts, one time it was a spike for one single week around 99K contracts:
This is of course, doesn't mean that EUR will have to turn down immedately. Sentiment charts are rather flexible, when position hits extreme level, price could flirt around for some weeks. But, definitely this will become a headwind for EUR. Either temporal retracement or reversal should happen, price should react somehow on this fundamental issue.
In fact we saw it previously on Gold and GBP, so on EUR should follow the same.
Technical
Monthly
Trend is bullish here but price is not at OB level that stands actually above 1.16 area. Last week we've come to conclusion that short-term price action looks mostly bullish, although it is not break yet long-term bearish behavior. As a result, market stands right now in two steps from Yearly Pivot Resistance. This actually was our short-term target...
Also we have some other interesting issues. First is bullish divergence with MACD indicator. Somehow we haven't got bullish grabbers there, although price flirted for 3-4 months with MACD line. Nevertheless, appearing of divergence usually leads to action above previous top, which is 1.1715 area.
Second, while rectangle was forming we saw two failure breakouts. First was, precisely at 1.1715 top and after it price dropped to 1.05 bottom. Second was recently - when market has reached 1.0340 but then returned back in consolidation. This moment also mostly supports an idea of upside continuation, at least to upper border.
Besides, if we will take a look at all-time EUR chart, we will see clear support/resistance zone around 1.18-1.19 area. It means that till the end of the year EUR could show upward continuation. This is also supported by Fundamental background. We think that Fed will not rise rate after June meeting and this will bring relax to EUR/USD, while major Fed rate power will crush EUR in 2018.
But these talks are mostly theoretical. In practical sphere, we're mostly interested in what will happen around YPR1 as COT sentiment shows that EUR/USD is a bit overextended upside.
Thus, monthly chart leads us to following conclusions. In perspective of 1.5-2 years, EUR has worse perspectives compares to USD, but till the end of 2017 it could show upward action, even to 1.18 all time resistance area, as we think that Fed will rise rate only twice in 2017. But on coming week our primary view will be upon price action around 1.1310 resistance.
Weekly
Last week we've talked on major concern - whether EUR will show any meaningful retracement before major targets will be completed. Price action showed no retracement and EUR moves straight up to 1.1310 target now.
Since there are just 30-40 pips till the target, on coming week we could get meaningful retracement. COT data also shows that EUR is a bit overextended. As Fed meeting stands just 2 weeks ahead, major EU events have passed and price at important target - investors could turn to some profit taking, contracting positions before Fed meeting.
Daily
Last week our suggestion was correct, when we've discussed situatin on daily chart - that EUR should move higher before something else will happen. Right now price is coming to predefined area - YPR1, AB-CD 1.618 target, and, take a look - top of Trump's election day.
Theoretically market could climb even higher, right to MPR1 and daily overbought area around 1.14, but odds suggest that major reaction should happen around 1.13, rather than around 1.14...
First destination of retracement (if we will get any of course), will be an area around MPP that has not been tested yet and daily oversold - 1.1050-1.11:
4-hour
This is probably major chart for coming week. Again, our MACD divergence has worked nice as price jumped above previous tops.
Right now we have butterfly "sell" pattern is forming here. It has two special features. First one is thrusting candle right to 1.27 target. It means that there are great chances that price will continue to 1.618 target around 1.1335 area. This area also coincides with WPR1.
Second, when you see butterfly and watching for some bearish reversal pattern, since retracement stands somehwere around - very probable that you will get H&S. Butterflies very often become first half of H&S pattern. That is what we will be watching for.
The practical conclusion that we could make for Mon trading session - don't go short until butterfly will not hit 1.618 extension.
Conclusion:
On coming week we suggest to see some signs of retracement. As soon as next upside target around 1.1340 area will be reached.
Still, it is too early to talk on breaking long-term bearish tendency.
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.
