Sive Morten
Special Consultant to the FPA
- Messages
- 18,559
Fundamentals
This week guys, hasn't given us a lot of events and new inputs. Mostly all attention was focused on G7 meeting, trade war and resolving of Italian political lack of consensus among parties for unite government creation.
Trade war topic indicates two different process. Relation between allies in economical sphere - EU-US trade relations, US-China and US - NAFTA, this is what we have on surface. At the same time it has a hidden process of EU economical vector.
Speaking on tariffs itself - nothing has changed there and piking continues. US stands in advantage and any other country will loose more that it will get if it will apply counter tariffs. Last week we've put an example how US could surf among suppliers of commodities across the world and make them confront each other.
Besides, new article from Fathom consulting on this subject shows that applying tariffs on US export to EU and China will hurt mostly themselves as US export is relatively small compares on EU and China export to US:
So, Fathom comes to the same conclusion - "As our chart highlights, the EU and China stand to lose more from a reduction in trade with the US than vice versa." So, it seems that US hooked up EU, NAFTA countries and China with tariffs and try to manipulate them by using this hook. Reality stands so that US "partners" have no real tools to counterpose US, at least in short-term.
That's why second process that stands a bit under curtain is EU searching for economical diversification and new markets. Now more and more statements come from EU on moving to independence from US policy. Despite all US restrictions and obstacles - North Stream 2 is almost legally permitted and agreed by all EU members. Last permition should be get from Denmark.
On last G7 meeting D. Trump said about Russia return to G7 company, while its become louder voice from EU on cancelling anti Russian sanctions. It is understandable, because Russia is a door to Middle East huge market for EU, and nearest process here is Syria after war recovery. EU would like to build healthy cooperation and get Middle East market of Iran, Syria, Lybia (a bit later). And this process slowly is moving on. Last meeting of Russian lawmakers with Bundestag collegues shows important statement - Russia invites Germany (and EU) in Syria. (use google translator to translate this article, its in russian).
These processes shows good long-term perspectives for EU economy, as unite economic space of EU, Russia, Middle East and Asia has unlimited potential for development. But in short-term perspective it could be worse first, due EU - US trade turmoil.
Second block of important events stands in relation to coming week - this is Fed, of course, and ECB meeting. There is no questions on Fed, last time we said that its 90+% probability of rate hike, but what ECB will answer?
Well, in general we do not expect some drastic steps from ECB. Despite good performance of EU economy in general, it has some "lacking" countries that make Central bank worry and do not hurry with rate change. Inflation has not reached yet desireable 2% and current EUR/USD exchange rate comfortable enough. All these moments lets us to make conclusion that ECB will not hurry with early stop of QE programme and probably lead it right to the end, as it should. Because ending of QE directly relates to new assessement of EU economy perspective and mentally prepares investors and ECB to more hawkish policy. We think that ECB will try to postpone this moment as long as possible. Situation is very comfortable right now - 3 rate change in US mostly is priced-in in current exchange rate and nobody expect ECB fast turn to rate increase, situation is well balanced.
“For what it’s worth, the ECB has recently decided to look through political events,” UBS said in a note to clients. “Moreover, some countries may have an interest in reducing the support to a populist government. After all, the QE program also entails buying Italian government bonds.”
“Accelerating the end-date announcement due to fears of an even more clouded economic outlook later on, fueled by policy uncertainty, would do little to enhance the ECB’s credibility” Societe Generale economist Anatoli Annenkov said.
“The ECB would again risk committing to action too far in advance and reacting excessively to oil price movements,” he added, referring to the 15 percent rise in Brent crude prices this year, which has pushed headline inflation higher.
But, it seems that 2019 should become an end of low rates era...
Speaking on Fed - here is basic comments that we're mostly agree:
“The domestic risks facing the US economy are arguably tilted to the upside,” ABN Amro economist Bill Diviney said.
“A significant amount of fiscal stimulus is coming on stream when the economy is by many measures close to full capacity, and growing at an above-potential pace.”
An overheating labor market would argue for quicker tightening but inflation is expected to stabilize around target and the Fed is likely to be careful in any move above the neutral rate, which neither stimulates not cools the economy.
Another issue to watch will be the Fed’s assessment of the growing external risk from an increasingly long list of sources, like a global trade war, or sovereign risk in places like Italy, Turkey or Argentina.
So, although volatility probably will rise, we do not expect big changes to overall balanced view on as ECB as Fed policy.
P.S.
Separate topic is Brexit bill vote, that also could bring volatility, especially on GBP...
COT Report doesn't bring something new this week, as net position barely has changed. Open interest has increased slightly, which could mean that some new positions were taken around strong weekly support area:
Technicals
Monthly
June month stands as inside one by far and makes no impact on long-term picture. Thus, mostly all that we've said last time is still valid. Major interest is a consequences on monthly bullish grabber, of course...
Long term technical picture keeps chances on positive changes for EU. One of the issues that we were keeping eye on - bullish grabber on monthly chart, has been formed. Theoretically it suggests action above 1.26 top. But we understand that to make this possible, EU will have to mitigate impact of second factor in hands of US that we've talked about. Or, situation in US economy should change drastically somehow.
Anyway, from technical point of view - grabbers lows takes special meaning right now. They are invalidation point of the grabber and also important lows around YPP.
Reversal down has happened after completion of harmonic swing and around YPR1. The fact that EUR has failed to break through YPR1 tells that upside rally from 1.03 to 1.26 was just a retracement within larger bear trend. Now it is particularly interesting how EUR will behave around YPP. Drop below it will open road to YPS1 at ~1.09 which corresponds to our fundamental 1.10 target.
Conversely EUR ability to hold above YPP and keeping grabber valid could become a reversal point if corresponding fundamental factors will appear.
Within few weeks we will work with upside respect of strong monthly support, so moment of truth is postponed by far, but not for too long, some months probably.
Weekly
So, on weekly chart our basic scenario suggests upside bounce back to 1.20-1.21 area, where market should form right arm of our H&S pattern. If, by that time, when arm will be completed, no major shifts in EU/US balance will happen - drop to 1.10 could become a reality. Whole action will take approximately 6 month. 1.09 - 1.10 area is major 5/8 Fib support and YPS1.
Alternative scenarios, such as immediate downside breakout and failure of H&S pattern in 1.20 area, if EUR will not stop but continue upside action now look less probable. This week was the first upside one out from strong support area. As a result, something like morning star pattern has been formed. Now price is coiling arond MPP.
Take a look how accurately monthly pivots stands. MPS1 coincides with major support, while MPR1 is matched to top of the shoulder. This will be additional indicator. EUR failure to pass through MPR1 will confirm that upside action is retracement and increase confidence with H&S pattern.
Still, as we've said earlier - many things will depend on fundamentals, which we will monitor. This should let us to adjust/keep trading plan correspondingly.
Currently we do not see any flaws in our view and no signs of invalidation.
Daily
So, we've tracked daily picture rather close in recent two sessions. Trend has turned bullish here and mostly we could say that X4 harmonic upside swing has been completed as EUR has hit our target for last week at 1.1850.
Despite that EUR stands rather tight under strong resistance area, we would suggest still that chances on deeper pullback are better than on immediate upside continuation. Just because daily resistance is rather strong, this is K-area and previous bearish momentum was very strong. Now reasonable downside 5/8 retracement has not happened yet, but it should be.
Following this logic I will not surprise to see a kind of "222" pattern here, or even double bottom.
As we will get as Fed as ECB meeting on coming week - they could push EUR higher immediately if Fed + ECB comments will be EUR supportive. Next target stands at our predefined level of 1.20-1.21. This will be MPR1 and 5/8 Fib resistance. Probably it also will coincide with daily OB.
It is obvious that everything could happen, but following technical picture purely, I would suggest that we should get better chance to go long here and it is no need to rush and jump in right now.
Intraday
On intraday charts, guys, our task is relatively simple. Our B&B "Buy" trade has started after EUR has completed our first retracement target - re-testing of neckline of our reverse H&S pattern here. So if you have jumped in, you could move stops to breakeven and, may be take 1/2 profit (or may be close position totally) as soon as B&B will hit its classical target - 5/8 resistance of downside action, depending on whether you would like to make a bet on immediate upside continuation. In this case target will be 1.1905 - XOP of our AB-CD here. But EUR has to hold above 1.1750 lows.
Those of you who doesn't have any position - keep an eye on 1.1750 lows. This is harmonic swing as well, guys, and neckline. If EUR will drop below it - it will mean that retracement that we've talked above is started.
Here is how our B&B Buy is going. It has started not from OP as we've expected but 25 pips lower, from XOP and Agreement support. It minimum target stands at 1.1796 and, as you can see, it has not been reached yet.
Thus, those of you who would like to participate - could wait for minor retracement on Monday. As you can see EUR will open very close to WPP and price could test it right in the beginning of the week:
Conclusion:
Fundamental picture puts EU and EUR in tricky position, where it depends on US and its trade policy as major driving factor right now for EU economy sentiment is tariffs and sanctions. Taking in consideration that US economy and yields are warming up, this makes USD looks stronger in perspectives of few months. We do not expect that Fed and ECB meeting on coming week will change situation.
Fundamental picture gives high chances on reaching 1.15 area (which is done already) and upside bounce to 1.20-1.21 later, but further action either to 1.10 or to new highs above 1.26 will depend on fundamental balance and ECB policy in particular.
On coming week our major attention is stuck to 1.1750 lows. While EUR will hold above them, it will keep chances on immediate upside continuation. Breakout of this level will confirm our thoughts of deeper retracement.
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.
This week guys, hasn't given us a lot of events and new inputs. Mostly all attention was focused on G7 meeting, trade war and resolving of Italian political lack of consensus among parties for unite government creation.
Trade war topic indicates two different process. Relation between allies in economical sphere - EU-US trade relations, US-China and US - NAFTA, this is what we have on surface. At the same time it has a hidden process of EU economical vector.
Speaking on tariffs itself - nothing has changed there and piking continues. US stands in advantage and any other country will loose more that it will get if it will apply counter tariffs. Last week we've put an example how US could surf among suppliers of commodities across the world and make them confront each other.
Besides, new article from Fathom consulting on this subject shows that applying tariffs on US export to EU and China will hurt mostly themselves as US export is relatively small compares on EU and China export to US:
So, Fathom comes to the same conclusion - "As our chart highlights, the EU and China stand to lose more from a reduction in trade with the US than vice versa." So, it seems that US hooked up EU, NAFTA countries and China with tariffs and try to manipulate them by using this hook. Reality stands so that US "partners" have no real tools to counterpose US, at least in short-term.
That's why second process that stands a bit under curtain is EU searching for economical diversification and new markets. Now more and more statements come from EU on moving to independence from US policy. Despite all US restrictions and obstacles - North Stream 2 is almost legally permitted and agreed by all EU members. Last permition should be get from Denmark.
On last G7 meeting D. Trump said about Russia return to G7 company, while its become louder voice from EU on cancelling anti Russian sanctions. It is understandable, because Russia is a door to Middle East huge market for EU, and nearest process here is Syria after war recovery. EU would like to build healthy cooperation and get Middle East market of Iran, Syria, Lybia (a bit later). And this process slowly is moving on. Last meeting of Russian lawmakers with Bundestag collegues shows important statement - Russia invites Germany (and EU) in Syria. (use google translator to translate this article, its in russian).
These processes shows good long-term perspectives for EU economy, as unite economic space of EU, Russia, Middle East and Asia has unlimited potential for development. But in short-term perspective it could be worse first, due EU - US trade turmoil.
Second block of important events stands in relation to coming week - this is Fed, of course, and ECB meeting. There is no questions on Fed, last time we said that its 90+% probability of rate hike, but what ECB will answer?
Well, in general we do not expect some drastic steps from ECB. Despite good performance of EU economy in general, it has some "lacking" countries that make Central bank worry and do not hurry with rate change. Inflation has not reached yet desireable 2% and current EUR/USD exchange rate comfortable enough. All these moments lets us to make conclusion that ECB will not hurry with early stop of QE programme and probably lead it right to the end, as it should. Because ending of QE directly relates to new assessement of EU economy perspective and mentally prepares investors and ECB to more hawkish policy. We think that ECB will try to postpone this moment as long as possible. Situation is very comfortable right now - 3 rate change in US mostly is priced-in in current exchange rate and nobody expect ECB fast turn to rate increase, situation is well balanced.
“For what it’s worth, the ECB has recently decided to look through political events,” UBS said in a note to clients. “Moreover, some countries may have an interest in reducing the support to a populist government. After all, the QE program also entails buying Italian government bonds.”
“Accelerating the end-date announcement due to fears of an even more clouded economic outlook later on, fueled by policy uncertainty, would do little to enhance the ECB’s credibility” Societe Generale economist Anatoli Annenkov said.
“The ECB would again risk committing to action too far in advance and reacting excessively to oil price movements,” he added, referring to the 15 percent rise in Brent crude prices this year, which has pushed headline inflation higher.
But, it seems that 2019 should become an end of low rates era...
Speaking on Fed - here is basic comments that we're mostly agree:
“The domestic risks facing the US economy are arguably tilted to the upside,” ABN Amro economist Bill Diviney said.
“A significant amount of fiscal stimulus is coming on stream when the economy is by many measures close to full capacity, and growing at an above-potential pace.”
An overheating labor market would argue for quicker tightening but inflation is expected to stabilize around target and the Fed is likely to be careful in any move above the neutral rate, which neither stimulates not cools the economy.
Another issue to watch will be the Fed’s assessment of the growing external risk from an increasingly long list of sources, like a global trade war, or sovereign risk in places like Italy, Turkey or Argentina.
So, although volatility probably will rise, we do not expect big changes to overall balanced view on as ECB as Fed policy.
P.S.
Separate topic is Brexit bill vote, that also could bring volatility, especially on GBP...
COT Report doesn't bring something new this week, as net position barely has changed. Open interest has increased slightly, which could mean that some new positions were taken around strong weekly support area:
Technicals
Monthly
June month stands as inside one by far and makes no impact on long-term picture. Thus, mostly all that we've said last time is still valid. Major interest is a consequences on monthly bullish grabber, of course...
Long term technical picture keeps chances on positive changes for EU. One of the issues that we were keeping eye on - bullish grabber on monthly chart, has been formed. Theoretically it suggests action above 1.26 top. But we understand that to make this possible, EU will have to mitigate impact of second factor in hands of US that we've talked about. Or, situation in US economy should change drastically somehow.
Anyway, from technical point of view - grabbers lows takes special meaning right now. They are invalidation point of the grabber and also important lows around YPP.
Reversal down has happened after completion of harmonic swing and around YPR1. The fact that EUR has failed to break through YPR1 tells that upside rally from 1.03 to 1.26 was just a retracement within larger bear trend. Now it is particularly interesting how EUR will behave around YPP. Drop below it will open road to YPS1 at ~1.09 which corresponds to our fundamental 1.10 target.
Conversely EUR ability to hold above YPP and keeping grabber valid could become a reversal point if corresponding fundamental factors will appear.
Within few weeks we will work with upside respect of strong monthly support, so moment of truth is postponed by far, but not for too long, some months probably.
Weekly
So, on weekly chart our basic scenario suggests upside bounce back to 1.20-1.21 area, where market should form right arm of our H&S pattern. If, by that time, when arm will be completed, no major shifts in EU/US balance will happen - drop to 1.10 could become a reality. Whole action will take approximately 6 month. 1.09 - 1.10 area is major 5/8 Fib support and YPS1.
Alternative scenarios, such as immediate downside breakout and failure of H&S pattern in 1.20 area, if EUR will not stop but continue upside action now look less probable. This week was the first upside one out from strong support area. As a result, something like morning star pattern has been formed. Now price is coiling arond MPP.
Take a look how accurately monthly pivots stands. MPS1 coincides with major support, while MPR1 is matched to top of the shoulder. This will be additional indicator. EUR failure to pass through MPR1 will confirm that upside action is retracement and increase confidence with H&S pattern.
Still, as we've said earlier - many things will depend on fundamentals, which we will monitor. This should let us to adjust/keep trading plan correspondingly.
Currently we do not see any flaws in our view and no signs of invalidation.
Daily
So, we've tracked daily picture rather close in recent two sessions. Trend has turned bullish here and mostly we could say that X4 harmonic upside swing has been completed as EUR has hit our target for last week at 1.1850.
Despite that EUR stands rather tight under strong resistance area, we would suggest still that chances on deeper pullback are better than on immediate upside continuation. Just because daily resistance is rather strong, this is K-area and previous bearish momentum was very strong. Now reasonable downside 5/8 retracement has not happened yet, but it should be.
Following this logic I will not surprise to see a kind of "222" pattern here, or even double bottom.
As we will get as Fed as ECB meeting on coming week - they could push EUR higher immediately if Fed + ECB comments will be EUR supportive. Next target stands at our predefined level of 1.20-1.21. This will be MPR1 and 5/8 Fib resistance. Probably it also will coincide with daily OB.
It is obvious that everything could happen, but following technical picture purely, I would suggest that we should get better chance to go long here and it is no need to rush and jump in right now.
Intraday
On intraday charts, guys, our task is relatively simple. Our B&B "Buy" trade has started after EUR has completed our first retracement target - re-testing of neckline of our reverse H&S pattern here. So if you have jumped in, you could move stops to breakeven and, may be take 1/2 profit (or may be close position totally) as soon as B&B will hit its classical target - 5/8 resistance of downside action, depending on whether you would like to make a bet on immediate upside continuation. In this case target will be 1.1905 - XOP of our AB-CD here. But EUR has to hold above 1.1750 lows.
Those of you who doesn't have any position - keep an eye on 1.1750 lows. This is harmonic swing as well, guys, and neckline. If EUR will drop below it - it will mean that retracement that we've talked above is started.
Here is how our B&B Buy is going. It has started not from OP as we've expected but 25 pips lower, from XOP and Agreement support. It minimum target stands at 1.1796 and, as you can see, it has not been reached yet.
Thus, those of you who would like to participate - could wait for minor retracement on Monday. As you can see EUR will open very close to WPP and price could test it right in the beginning of the week:
Conclusion:
Fundamental picture puts EU and EUR in tricky position, where it depends on US and its trade policy as major driving factor right now for EU economy sentiment is tariffs and sanctions. Taking in consideration that US economy and yields are warming up, this makes USD looks stronger in perspectives of few months. We do not expect that Fed and ECB meeting on coming week will change situation.
Fundamental picture gives high chances on reaching 1.15 area (which is done already) and upside bounce to 1.20-1.21 later, but further action either to 1.10 or to new highs above 1.26 will depend on fundamental balance and ECB policy in particular.
On coming week our major attention is stuck to 1.1750 lows. While EUR will hold above them, it will keep chances on immediate upside continuation. Breakout of this level will confirm our thoughts of deeper retracement.
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.