Sive Morten
Special Consultant to the FPA
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Fundamentals
(Reuters) - The dollar fell against a basket of major currencies on Friday, recording its biggest one-day fall in three weeks, on persistent doubts whether the Federal Reserve would raise interest rates again this year due to softening inflation data.
The greenback also broadly weakened versus commodity-linked currencies, which got a boost as global benchmark Brent futures recovered from a seven-month low.
Sterling rose for a third consecutive day after soon-to-depart Bank of England policymaker Kristin Forbes late on Thursday urged hiking UK rates immediately on fears that the pound's weakness could have a lasting upward effect on inflation.
Trading volume was muted in the absence of major economic data.
"This has been largely a week of consolidation among major currency pairings given the lack of economic data this week," said Omer Esiner, chief market strategist at Commonwealth Foreign Exchange in Washington.
The dollar index, which tracks the dollar against six major peers, fell 0.35 percent at 97.248, retreating further from a one-month peak reached on Tuesday.
The euro was up 0.44 percent at $1.1198, while the greenback slipped nearly 0.1 percent against the yen, to 111.25 yen.
The pound gained 0.4 percent at $1.2725.
The greenback rose earlier this week on comments from New York Fed President William Dudley, who said a tightening labor market would push up wages and cause U.S. inflation to reverse upward toward the Fed's 2 percent goal.
On Friday, St. Louis Fed chief President James Bullard said the central bank should wait on further rate hikes, while Cleveland Fed chief Loretta Mester said recent inflation weakness should not defer another rate rise this year.
Traders, however, were doubtful about another rate increase later this year as recent U.S. data on balance have fallen short of forecast.
On Friday, Markit's flash June reports on U.S. factory and services activity was weaker than expected, while the government said new-home sales rebounded more than expected in May.
"The data need to confirm the Fed's stance for another rate hike this year," Esiner said.
The futures market implied traders saw a 49 percent chance the Fed would raise rates in December FFZ7 FFF8, CME Group's FedWatch program showed.
Meanwhile, commodity-linked currencies rose with a rebound in crude oil prices. Brent crude futures LCOc1 settled 0.7 percent higher at $45.54 a barrel after hitting their lowest level since November on Thursday.
The Australian dollar was up 0.5 percent at $0.7575, while the New Zealand dollar was up 0.3 percent at $0.7288.
Click tmsnrt.rs/2kIQHol for graphic on world FX rates in 2017
News in Charts: Euro area Economic Sentiment Indicator round-up
by Fathom Consulting
Economic sentiment across the world is on the up, with survey and hard economic data continuing to diverge, not only in the US, but across the euro area, too. Fathom’s suite of Economic Sentiment Indicators now includes Italy, Spain and Portugal, as well as an aggregate for the euro area as a whole. Germany’s ESI continues to outperform, with strong Ifo readings driving the indicator to a six-year high in May. However, Italy’s ESI has decisively moved away from the pack since the end of 2016 as markets re-focus their attention on the much-maligned nation. We favour German equities, maintaining our bullish view on the bloc’s largest economy, but see the risk of holding Italian equities as too high considering the country’s weak fundamentals and lack of positive economic sentiment.
That being said, the current upturn could continue for several quarters or even years. In our view, the lack of labour market price pressures means core inflation will continue to be weak, forcing the ECB to maintain a dovish bias. Loose policy will continue to support the upswing in economic sentiment and growth in the short term.
Expansion of our suite of indicators and key drivers
Our original suite of proprietary Economic Sentiment Indicators (ESIs) covered Germany, France, the UK and the US. We have now expanded this list to include Italy, Spain, Portugal and the euro area as a whole. As before, the methodology weights together a number of surveys to create a single time series using principal component analysis. The new series is then transformed so that it has the same mean and variance as actual GDP growth for each respective country. All of these indicators are now available through Thomson Reuters DataStream.
Euro area enjoys a cyclical upturn
On an aggregate level, the euro area has enjoyed a cyclical upturn for a number of months. Consumer confidence as well as businesses’ output expectations, both of which are often seen as good gauges of upcoming economic activity, have been on the rise in recent months. For example, the European Commission’s consumer sentiment index, a constituent of the euro area ESI, is hovering around ten-year highs.
Also around multi-year highs, our euro area sentiment indicator shows the cyclical upturn is still in full swing. Our EAESI remained strong, but dipped slightly to 1.1% from 1.2% in April 2017.
Germany tops the charts
We have often drawn clients’ attention to Germany’s relatively high ESI and we can now see that Germany’s ESI also outperforms other euro area ESIs.
We have long argued that the German economy has outperformed because the fallout from the crisis has weighed less heavily on German productivity growth than elsewhere in the euro area. This is because, unlike the periphery, Germany did not build up excessive debt in the run-up to the financial crisis. Germany’s ESI, standing at 1.5% in May 2017, has kept moving consistently higher since the middle of 2016. The Ifo Business Climate Index provides a useful and widely-followed monthly measure of business confidence, and has been a key driver in the strength of Germany’s ESI. As the following chart shows, it has strengthened in recent months, and May’s figure of 114.6 is an all-time high.
Portugal showing signs of life
Moving across the currency bloc, Portugal’s economic recovery has gathered pace during the first three months of the year. Portuguese GDP growth in 2017 Q1 came in at 1%, back to pre-2008 levels, and almost twice the euro area average. Interestingly, Portugal and Italy are the only countries in our suite of indicators where GDP growth actually exceeds the rate implied by the surveys. However, in contrast to Italy, the PTESI implies a very strong quarterly growth rate of 0.8% in 2017 Q2.
Both Portuguese consumers and business owners are as confident about their situation as they have been for a number of years, with confidence among businesses in the services sector jumping nine index points in May compared to April 2017 according to the INE’s (Portugal’s National Institute of Statistics) measure.
Italy continues to underperform
Economic sentiment has been rising across the euro area countries with one exception: Italy. Since the beginning of 2016, Italy has decisively moved away from the pack and has seen both consumer and business sentiment fall. Indeed, Italy’s ESI has been in negative territory since February 2017.
The fall in Italy’s ESI is even more meaningful given that other countries’ ESIs have increased following France’s decision to reject far-right candidate Marine Le Pen in favour of centrist Emmanuel Macron in the country’s recent elections. We have highlighted Italy’s shortcomings to clients for some time. Admittedly, Italy’s economy has shown some resilience recently. Last year it grew 0.9%, its fastest pace since 2010. In the first quarter of this year it expanded by 0.4%, more than expected. However, its substantial stock of non-performing loans continues to clog up its fragile banking system and will continue to weigh on growth.
COT Report
EUR currency stands right now in some silence pit. It was in center of investors' attention in May on a background of French elections. While Investors have got acceptable results and ECB has not given any hints on new steps in financial policy - interest to EUR has reduced.
CFTC data shows solid drop in net speculative long positions last week, after solid bullish action in May, when net position was rising together with open interest. Open interest has dropped as well last week and it shows that part of longs have been closed.
But currently it could mean two different things. Actually, if we will take close look to CFTC chart, we will see that 80K level is all-time high for net long position of EUR (it was exceeded just ones, for 1 week in 2011 when position was 99K contracts). From this point of view, EUR is simply overextended and CFTC position is overbought. So recent decrease could mean just retracement and relief.
Second, it could mean trend shifting, but right now this version is weak. Mostly because Fed position has become weaker and investors have some doubts on one more rate increase in 2017 as inflation pressure has decreased. Indeed, recent poll and FFR data shows just 49% chance on rate increase in December. Taking in consideration article above, as situation in EU economy is improving, it is logical to watch for some retracement in bull trend on EUR by far. And how deep this retracement could be, we will try to estimate in technical part of recearch.
Technical
Monthly
In June EUR stands in very tight range, thus, monthly chart barely has changed since our last discussion.
Trend is bullish here but price is not at OB level that stands actually above 1.16 area. Last time we've come to conclusion that short-term price action looks mostly bullish, although it is not break yet long-term bearish behavior. Yearly Pivot Resistance finally has been tested.
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. Positive shifts in EUR economy also should provide backwind to EUR.
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.
As EUR now shows reaction on overbought situation by CFTC data - we need to estimate whether we will get retracement down and how deep it could be.
Weekly
Situation on weekly chart mostly shows indecision. After major 1.618 AB-CD target has been achieved market has turned to consolidation. High wave pattern here stands as confimation of this view. But to the credit of EUR, it has not shown solid drop despite on massive closing of long position as CFTC data indicates.
Trend still is bullish here and if retracement will start, the most probable area that could be reached is 1.0840-1.0930 K-support. This area also includes YPP, but what is even more important - it includes the gap, and it still stands unfilled.
Retracement probably should happen as market shows weakness in an area where it is irrational. Thus, EUR has broken through major resistance, but then suddenly stops in an area where actually, it has no serious barriers right to the 1.17 top.
We can use high wave pattern as signal one to get the moment. EUR should break 1.11 area and high wave lows to start retracement down. As we've said many times, high wave has specific value for traders - you can't trade it directly, but you could get a direction after it's range will be broken. That's what we will be watching for.
Daily
Trend has turned bearish here. Daily chart shows another K-support area around 1.10. By the end of the week it also could be accompanied by daily oversold and MPS1. Thus, it seems that it doesn't make sense to look at some lower levels by far. If retracement down will start - this will become most probable destiantion point of bearish action on coming week.
Hourly
Now about pattern. EUR is forming something that could be treated either as H&S pattern or Round Top or Reverse Cap and handle... This doesn't matter actually, because all of them act similar but have a bit different shape.
It seems that here we should get some AB-CD pattern right to our daily K-support area around 1.10 level:
At the same time we think that EUR should climb slightly higher, before reversal will happen. Here we have AB-CD pattern in progress and CD leg looks really fast. It means that EUR could reach Agreement around major 5/8 resistance @ 1.1230. Also it will be WPR1 level. That's why we also have to pay attention to possible bearish reversal patterns at the top of this AB-CD. For example, it will be much better if EUR will form butterfly sell right on top and finalize this AB-CD action by butterfly. But in general our trading plan already looks clear:
Conclusion:
As we've got from fundamental part of research - economic background is changing in favor of EUR. This could let EUR/USD to show bullish performance till the end of 2017.
In short-term perspective EUR has started technical retracement and the first level that we will be watching for as target of this retracement is 1.10 - strong support daily area. According to our trading plan, EUR could start move down from 1.1230 area. Appearing of butterfly "Sell" pattern around will be an advantage for us.
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 fell against a basket of major currencies on Friday, recording its biggest one-day fall in three weeks, on persistent doubts whether the Federal Reserve would raise interest rates again this year due to softening inflation data.
The greenback also broadly weakened versus commodity-linked currencies, which got a boost as global benchmark Brent futures recovered from a seven-month low.
Sterling rose for a third consecutive day after soon-to-depart Bank of England policymaker Kristin Forbes late on Thursday urged hiking UK rates immediately on fears that the pound's weakness could have a lasting upward effect on inflation.
Trading volume was muted in the absence of major economic data.
"This has been largely a week of consolidation among major currency pairings given the lack of economic data this week," said Omer Esiner, chief market strategist at Commonwealth Foreign Exchange in Washington.
The dollar index, which tracks the dollar against six major peers, fell 0.35 percent at 97.248, retreating further from a one-month peak reached on Tuesday.
The euro was up 0.44 percent at $1.1198, while the greenback slipped nearly 0.1 percent against the yen, to 111.25 yen.
The pound gained 0.4 percent at $1.2725.
The greenback rose earlier this week on comments from New York Fed President William Dudley, who said a tightening labor market would push up wages and cause U.S. inflation to reverse upward toward the Fed's 2 percent goal.
On Friday, St. Louis Fed chief President James Bullard said the central bank should wait on further rate hikes, while Cleveland Fed chief Loretta Mester said recent inflation weakness should not defer another rate rise this year.
Traders, however, were doubtful about another rate increase later this year as recent U.S. data on balance have fallen short of forecast.
On Friday, Markit's flash June reports on U.S. factory and services activity was weaker than expected, while the government said new-home sales rebounded more than expected in May.
"The data need to confirm the Fed's stance for another rate hike this year," Esiner said.
The futures market implied traders saw a 49 percent chance the Fed would raise rates in December FFZ7 FFF8, CME Group's FedWatch program showed.
Meanwhile, commodity-linked currencies rose with a rebound in crude oil prices. Brent crude futures LCOc1 settled 0.7 percent higher at $45.54 a barrel after hitting their lowest level since November on Thursday.
The Australian dollar was up 0.5 percent at $0.7575, while the New Zealand dollar was up 0.3 percent at $0.7288.
Click tmsnrt.rs/2kIQHol for graphic on world FX rates in 2017
News in Charts: Euro area Economic Sentiment Indicator round-up
by Fathom Consulting
Economic sentiment across the world is on the up, with survey and hard economic data continuing to diverge, not only in the US, but across the euro area, too. Fathom’s suite of Economic Sentiment Indicators now includes Italy, Spain and Portugal, as well as an aggregate for the euro area as a whole. Germany’s ESI continues to outperform, with strong Ifo readings driving the indicator to a six-year high in May. However, Italy’s ESI has decisively moved away from the pack since the end of 2016 as markets re-focus their attention on the much-maligned nation. We favour German equities, maintaining our bullish view on the bloc’s largest economy, but see the risk of holding Italian equities as too high considering the country’s weak fundamentals and lack of positive economic sentiment.
That being said, the current upturn could continue for several quarters or even years. In our view, the lack of labour market price pressures means core inflation will continue to be weak, forcing the ECB to maintain a dovish bias. Loose policy will continue to support the upswing in economic sentiment and growth in the short term.
Expansion of our suite of indicators and key drivers
Our original suite of proprietary Economic Sentiment Indicators (ESIs) covered Germany, France, the UK and the US. We have now expanded this list to include Italy, Spain, Portugal and the euro area as a whole. As before, the methodology weights together a number of surveys to create a single time series using principal component analysis. The new series is then transformed so that it has the same mean and variance as actual GDP growth for each respective country. All of these indicators are now available through Thomson Reuters DataStream.
Euro area enjoys a cyclical upturn
On an aggregate level, the euro area has enjoyed a cyclical upturn for a number of months. Consumer confidence as well as businesses’ output expectations, both of which are often seen as good gauges of upcoming economic activity, have been on the rise in recent months. For example, the European Commission’s consumer sentiment index, a constituent of the euro area ESI, is hovering around ten-year highs.
Also around multi-year highs, our euro area sentiment indicator shows the cyclical upturn is still in full swing. Our EAESI remained strong, but dipped slightly to 1.1% from 1.2% in April 2017.
Germany tops the charts
We have often drawn clients’ attention to Germany’s relatively high ESI and we can now see that Germany’s ESI also outperforms other euro area ESIs.
We have long argued that the German economy has outperformed because the fallout from the crisis has weighed less heavily on German productivity growth than elsewhere in the euro area. This is because, unlike the periphery, Germany did not build up excessive debt in the run-up to the financial crisis. Germany’s ESI, standing at 1.5% in May 2017, has kept moving consistently higher since the middle of 2016. The Ifo Business Climate Index provides a useful and widely-followed monthly measure of business confidence, and has been a key driver in the strength of Germany’s ESI. As the following chart shows, it has strengthened in recent months, and May’s figure of 114.6 is an all-time high.
Portugal showing signs of life
Moving across the currency bloc, Portugal’s economic recovery has gathered pace during the first three months of the year. Portuguese GDP growth in 2017 Q1 came in at 1%, back to pre-2008 levels, and almost twice the euro area average. Interestingly, Portugal and Italy are the only countries in our suite of indicators where GDP growth actually exceeds the rate implied by the surveys. However, in contrast to Italy, the PTESI implies a very strong quarterly growth rate of 0.8% in 2017 Q2.
Both Portuguese consumers and business owners are as confident about their situation as they have been for a number of years, with confidence among businesses in the services sector jumping nine index points in May compared to April 2017 according to the INE’s (Portugal’s National Institute of Statistics) measure.
Italy continues to underperform
Economic sentiment has been rising across the euro area countries with one exception: Italy. Since the beginning of 2016, Italy has decisively moved away from the pack and has seen both consumer and business sentiment fall. Indeed, Italy’s ESI has been in negative territory since February 2017.
The fall in Italy’s ESI is even more meaningful given that other countries’ ESIs have increased following France’s decision to reject far-right candidate Marine Le Pen in favour of centrist Emmanuel Macron in the country’s recent elections. We have highlighted Italy’s shortcomings to clients for some time. Admittedly, Italy’s economy has shown some resilience recently. Last year it grew 0.9%, its fastest pace since 2010. In the first quarter of this year it expanded by 0.4%, more than expected. However, its substantial stock of non-performing loans continues to clog up its fragile banking system and will continue to weigh on growth.
COT Report
EUR currency stands right now in some silence pit. It was in center of investors' attention in May on a background of French elections. While Investors have got acceptable results and ECB has not given any hints on new steps in financial policy - interest to EUR has reduced.
CFTC data shows solid drop in net speculative long positions last week, after solid bullish action in May, when net position was rising together with open interest. Open interest has dropped as well last week and it shows that part of longs have been closed.
But currently it could mean two different things. Actually, if we will take close look to CFTC chart, we will see that 80K level is all-time high for net long position of EUR (it was exceeded just ones, for 1 week in 2011 when position was 99K contracts). From this point of view, EUR is simply overextended and CFTC position is overbought. So recent decrease could mean just retracement and relief.
Second, it could mean trend shifting, but right now this version is weak. Mostly because Fed position has become weaker and investors have some doubts on one more rate increase in 2017 as inflation pressure has decreased. Indeed, recent poll and FFR data shows just 49% chance on rate increase in December. Taking in consideration article above, as situation in EU economy is improving, it is logical to watch for some retracement in bull trend on EUR by far. And how deep this retracement could be, we will try to estimate in technical part of recearch.
Technical
Monthly
In June EUR stands in very tight range, thus, monthly chart barely has changed since our last discussion.
Trend is bullish here but price is not at OB level that stands actually above 1.16 area. Last time we've come to conclusion that short-term price action looks mostly bullish, although it is not break yet long-term bearish behavior. Yearly Pivot Resistance finally has been tested.
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. Positive shifts in EUR economy also should provide backwind to EUR.
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.
As EUR now shows reaction on overbought situation by CFTC data - we need to estimate whether we will get retracement down and how deep it could be.
Weekly
Situation on weekly chart mostly shows indecision. After major 1.618 AB-CD target has been achieved market has turned to consolidation. High wave pattern here stands as confimation of this view. But to the credit of EUR, it has not shown solid drop despite on massive closing of long position as CFTC data indicates.
Trend still is bullish here and if retracement will start, the most probable area that could be reached is 1.0840-1.0930 K-support. This area also includes YPP, but what is even more important - it includes the gap, and it still stands unfilled.
Retracement probably should happen as market shows weakness in an area where it is irrational. Thus, EUR has broken through major resistance, but then suddenly stops in an area where actually, it has no serious barriers right to the 1.17 top.
We can use high wave pattern as signal one to get the moment. EUR should break 1.11 area and high wave lows to start retracement down. As we've said many times, high wave has specific value for traders - you can't trade it directly, but you could get a direction after it's range will be broken. That's what we will be watching for.
Daily
Trend has turned bearish here. Daily chart shows another K-support area around 1.10. By the end of the week it also could be accompanied by daily oversold and MPS1. Thus, it seems that it doesn't make sense to look at some lower levels by far. If retracement down will start - this will become most probable destiantion point of bearish action on coming week.
Hourly
Now about pattern. EUR is forming something that could be treated either as H&S pattern or Round Top or Reverse Cap and handle... This doesn't matter actually, because all of them act similar but have a bit different shape.
It seems that here we should get some AB-CD pattern right to our daily K-support area around 1.10 level:
At the same time we think that EUR should climb slightly higher, before reversal will happen. Here we have AB-CD pattern in progress and CD leg looks really fast. It means that EUR could reach Agreement around major 5/8 resistance @ 1.1230. Also it will be WPR1 level. That's why we also have to pay attention to possible bearish reversal patterns at the top of this AB-CD. For example, it will be much better if EUR will form butterfly sell right on top and finalize this AB-CD action by butterfly. But in general our trading plan already looks clear:
Conclusion:
As we've got from fundamental part of research - economic background is changing in favor of EUR. This could let EUR/USD to show bullish performance till the end of 2017.
In short-term perspective EUR has started technical retracement and the first level that we will be watching for as target of this retracement is 1.10 - strong support daily area. According to our trading plan, EUR could start move down from 1.1230 area. Appearing of butterfly "Sell" pattern around will be an advantage for us.
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.
