Sive Morten
Special Consultant to the FPA
- Messages
- 18,735
Fundamentals
(Reuters) - The euro hit a more than four-week high against the dollar on Friday after a report that the European Central Bank had discussed the possibility of raising interest rates before the end of its quantitative easing program.
Sources told Reuters some ECB policymakers had suggested hiking rates from their current record lows before the end of QE stimulus, but that the discussion was brief, and the idea did not have broad support.
"I have no idea whether the reports are correct or not but it shows where we are," said Axel Merk, president and portfolio manager at Merk Hard Currency Fund in Palo Alto, California.
"It shows that the discussions (at the ECB) are leaning towards, 'How do we get out of QE?' ... There's been a fundamental shift, but it's a fundamental shift that's been gradually sinking in."
Merk noted multiple reports from euro zone countries supporting the premise that the economy is gaining traction. The ECB raised its growth and inflation targets for the euro zone in 2018 following its March meeting Wednesday.
The euro rose more than 1.1 percent against the dollar to a high of $1.0698, its strongest since Feb. 9. It was the euro's largest one-day gain since June 3, 2016. That helped the continental currency to its second consecutive weekly gain against the dollar.
The dollar index, which tracks the greenback against six major world currencies, fell to its lowest since Feb. 28.
The index fell 0.34 percent for the week, its first weekly loss in five weeks.
The dollar also was weighed down by the February U.S. non-farm payrolls report that showed wages rose less than expected. That tempered expectations for a spate of interest rate increases this year by the Federal Reserve.
"Once again the wage number continues to overshadow," said Joe Manimbo, senior market analyst at Western Union Business Solutions in Washington. "And with wages rising in lackluster fashion, that has tempered expectations for the Fed to raise rates at a faster pace this year."
Fed fund futures prices showed investors see a 93 percent chance of an increase in U.S. overnight interest rates this month, according to CME Group's FedWatch tool. But that number was close to 90 percent before the data was released.
The greenback was slightly lower against the yen after touching a seven-week high of 115.50 yen. The dollar last traded at 114.78 yen. For the week, it fell 0.2 percent, its first weekly fall in four.
US jobless claims at new 43-year low – what it means
by Fathom Consulting (report of March, 6)
The ongoing decline in US jobless claims is striking, but they are not as useful as a barometer for the US labour market as they once were.
US unemployment insurance is capped at 26 weeks and with long-term unemployment still elevated, the unemployment benefits of many have simply expired. This might explain why the ratio of continuing claims to total unemployment is close to the lowest on record, as highlighted by the chart below.
Short-term unemployment, by contrast, is close to a 40-year low, explaining the impressive declines in initial jobless claims. If structural unemployment has risen, those already in work should be able to command higher salaries. With wages rising, business and consumer confidence high, and a fiscal splurge on the horizon, we think that the Trump reflation trade still has legs.
In a speech on Friday evening, Janet Yellen gave a very clear signal that the Federal Open Market Committee would raise the fed funds rate when it meets next week. With this in mind, we now expect three 25 basis point increases in the fed funds rate this year, compared to our previous forecast of two. We still expect four 25 basis point increases next year.
Although the Committee now appears set to tighten sooner than we had previously imagined, one additional 25 basis point increase will not have a material impact on GDP growth or inflation. In other words, we still think that the Fed will let the economy run a little hot. Indeed, based on our revised forecast, real economic growth and inflation will still exceed 3% in 2017 and 2018, and the real fed funds rate will remain negative for the foreseeable future.
On this basis, we still anticipate further increases in the US dollar, US Treasury yields and US equities.
COT Report
CFTC data shows nothing special. In last 3-4 weeks we do not see any strong dynamic. Yes, overall position is changing, but not drastically and rather weak. Still on 7th of March we see that net short position has increased. This has happened despite well-expected good NFP release and rate hike on 10th of March. Although change in speculative position was shy, it could mean that current rally is mosty technical and could last for a short time only. At least, CFTC data and recent uspide EUR rally shows opposite direction.
Technical
Monthly
So last week action was rather dramatic. As we've discussed in our daily videos - technical context was not sufficient for taking long position, while fundamental background was mostly uncertain. As a result, EUR has jumped mostly on surprising hawkish tones in Draghi speech, rumors of possible rate hike in EUR prior ending of QE and mismatch of US wage growh to expectations in NFP report. These three factors have pushed EUR higher.
Still, CFTC data, Fathom consulting opinion suggest that this is temporal behavior, mostly speculative reaction on short-term events.
Monthly chart mostly stands the same as it is too large for daily action. Price continues it's coiling around YPP.
On large scale we mostly agree that that fundamental background mostly looks bearish for EUR/USD for 2017-2018. Potentially more hawkish Fed policy, ECB QE prolongation, coming elections in many EU countries, bringing more uncertainty. After GB, separatistic sentiment start to appear in other countries of EU, as Italy, France, Netherlands, Spain that are not satisfied with Brussels domination in governing EU.
Speaking on big picture, On a way down, guys, EUR has passed through all major Fib levels. Last one was at 1.12 area and now we do not have any other ones below current market. Also price has dropped below 1.27 extension of this big butterfly. Thus, on monthly chart the only logical destination point stands at parity - 1.618 butterfly extension, chanell trend line support and YPS1.
Besides, right now EUR is testing YPP, but unsuccessfully yet.
Also take a look at different behavior near low border of channel. Previously when market has touched it - it shows immediate upside pullback, it was V-shape reversal. Right now behavior is absolutely different, price just hangs on the border and shows no upside action. Any tight consolidation near trendline could become a sign of coming breakout.
Thus, based on monthly chart we could make two major conclusions. First is - real bullish trend could be re-established only if EUR will erase reversal candle and overcome its top above 1.16. Our next target on Monthly chart is parity - 1.618 Butterfly extension, YPS1 and trendline support.
In general guys, we think that steps that already have been announced by ECB and Fed should be enough to push EUR right to parity during "price-in" process, when market will "anticipate" them. But this picture is not static, it's dynamic. And iti will depend on real action from Fed, Trump administration and ECB.
Nevertheless, right now we do not see any criminal action that could invalid our existed analysis. Price has not broken yet overall bearish tendency here.
Really long-term Bullish perspectives
Concerning bullish perspectives... they exist here, but they stand at even larger picture:
Picture shows classical action. Take a look that since 1999 - EUR was forming upside reversal swing that lasts till Dec 2007. Now market stands in deep retracement - this is typical action as new upside reversal swing has been formed. Based on this picture EUR is approaching to area where this retracement should over and it could get chance to starts extension leg of bull trend that could lead EUR as far as to 1.76-1.82 area. Also you could recognize here some signs of reverse H&S pattern. That's why on big weekly picture we also have made a suggestion on big H&S pattern with head around parity....
Weekly
As market shows strong reaction on Fed promising of rate increase, let's talk on bullish perspectives that could be based on this event. Last week we said that we're coming to 2-week doom&gloom. First week of NFP release is completed. Based on passed week rally, we already see how dramatic it was. Despite good NFP data (at first glance), EUR has jumped higher.
Second one of Fed decision is yet to be started. Here investors will watch not on rate hike itself, but on comments. What Yellen will say about perspectives. The major task to keep existed tendency is to get confirmation that 2 more rate changes are still on the table.We think that this is consensus expectation. Thus, depending on how real comment will flirt around consensus will determine FX market behavior. That's why we think that our 2nd week also could bring a lot of doom&gloom action.
So, let's see what could happen. Right now on a way up EUR has reached 1.0830 - 3/8 major resistance, tested YPP and now we're watching whether price will form AB-CD upside action or retracement will be limited by just single leg up. Honestly speaking, here, even reaching of 5/8 resistance is acceptable. It means that if our daily H&S pattern will work and EUR will reach 1.10 area - this will not erase yet long-term bearish picture. Besides, 1.08-1.09 range is rather strong, since it's weekly K-resistance, that also is Agreement and includes YPP. Hardly profit taking process that we see right now will be sufficient to break it through.
It means that upside retracement could just re-test 1.0830 level and complete minor 0.618 AB-CD target.
On a way down our final destination stands the same - 1.618 point coincides with 1.618 butterfly target around 0.97-1.0 area. Although we have multiple targets inside 1.0-1.05 area, ther are all minor ones.
Finally, butterfly could become part of large reverse H&S pattern, that we have discussed above. But whether it will be formed or not will depend on fundamental factors, D. Trump ficsal policy, US economy data and Fed reaction. And this figure is the one of longer-term.
Thus, we have more or less single road to parity, but later, around it we will get a crossroads...If there will be something bearish that wasn't priced in yet - EUR could drop even further. If not - H&S will start to form...
But while market stands above 1.05 - we have no choice but continue journey with upside retracement. THe minimal target that it could meet is re-testing of 1.0830 level.
Daily
So, on Friday our major comment was - "bullish context exists, but it looks not suffcient for taking long position." So, we said, if you feel confidence you could try... But in reality this bet still was on fundamental surprise. First is ECB comments, second - weaker than expected wage growth (low inflation).
Despite the reasons that have pushed EUR higher - it was able to keep daily reverse H&S pattern and start upside action after right shoulder's lows have been formed. Our bullish grabber has worked nice.
As we've estimated, next target should be neckline that is based on 0.618 AB-CD extension @ 1.08 area. This is also our well-known Fib level and YPP. Price right now stands at overbought. That's why in the beginning of the week, some technical retracement could happen.
Intraday
On 4-hour chart we also see that EUR stands at our 1.07 resistance and completed AB-CD target (slightly even exeeded). So, we have daily OB, Fib level and AB-CD target resistance. 1.618 extension stands around 1.0760 area.
Technical sutiaton on intraday charts suggests retracement on Monday. At the same time it should not be too deep. Fib levels' tree shows that most suitable level stands around WPP and K-support of 1.0620-1.0630. If market is really bullish, upward action should continue somewhere around this level. Thus, we will watch for bullish reversal patterns there:
Conclusion:
Despite changing of short-term sentiment, we do not think that it brings some real hazard to long-term bearish tendency yet. Thus, right now it is better to treat it as retracement as fundamental background slightly has changed.
Most part of the week we probably will deal with this upside action and preparation to Fed meeting. On Monday chances on minor pullback to 1.0620-1.0630 area are rather high.
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 euro hit a more than four-week high against the dollar on Friday after a report that the European Central Bank had discussed the possibility of raising interest rates before the end of its quantitative easing program.
Sources told Reuters some ECB policymakers had suggested hiking rates from their current record lows before the end of QE stimulus, but that the discussion was brief, and the idea did not have broad support.
"I have no idea whether the reports are correct or not but it shows where we are," said Axel Merk, president and portfolio manager at Merk Hard Currency Fund in Palo Alto, California.
"It shows that the discussions (at the ECB) are leaning towards, 'How do we get out of QE?' ... There's been a fundamental shift, but it's a fundamental shift that's been gradually sinking in."
Merk noted multiple reports from euro zone countries supporting the premise that the economy is gaining traction. The ECB raised its growth and inflation targets for the euro zone in 2018 following its March meeting Wednesday.
The euro rose more than 1.1 percent against the dollar to a high of $1.0698, its strongest since Feb. 9. It was the euro's largest one-day gain since June 3, 2016. That helped the continental currency to its second consecutive weekly gain against the dollar.
The dollar index, which tracks the greenback against six major world currencies, fell to its lowest since Feb. 28.
The index fell 0.34 percent for the week, its first weekly loss in five weeks.
The dollar also was weighed down by the February U.S. non-farm payrolls report that showed wages rose less than expected. That tempered expectations for a spate of interest rate increases this year by the Federal Reserve.
"Once again the wage number continues to overshadow," said Joe Manimbo, senior market analyst at Western Union Business Solutions in Washington. "And with wages rising in lackluster fashion, that has tempered expectations for the Fed to raise rates at a faster pace this year."
Fed fund futures prices showed investors see a 93 percent chance of an increase in U.S. overnight interest rates this month, according to CME Group's FedWatch tool. But that number was close to 90 percent before the data was released.
The greenback was slightly lower against the yen after touching a seven-week high of 115.50 yen. The dollar last traded at 114.78 yen. For the week, it fell 0.2 percent, its first weekly fall in four.
US jobless claims at new 43-year low – what it means
by Fathom Consulting (report of March, 6)
The ongoing decline in US jobless claims is striking, but they are not as useful as a barometer for the US labour market as they once were.
US unemployment insurance is capped at 26 weeks and with long-term unemployment still elevated, the unemployment benefits of many have simply expired. This might explain why the ratio of continuing claims to total unemployment is close to the lowest on record, as highlighted by the chart below.
Short-term unemployment, by contrast, is close to a 40-year low, explaining the impressive declines in initial jobless claims. If structural unemployment has risen, those already in work should be able to command higher salaries. With wages rising, business and consumer confidence high, and a fiscal splurge on the horizon, we think that the Trump reflation trade still has legs.
In a speech on Friday evening, Janet Yellen gave a very clear signal that the Federal Open Market Committee would raise the fed funds rate when it meets next week. With this in mind, we now expect three 25 basis point increases in the fed funds rate this year, compared to our previous forecast of two. We still expect four 25 basis point increases next year.
Although the Committee now appears set to tighten sooner than we had previously imagined, one additional 25 basis point increase will not have a material impact on GDP growth or inflation. In other words, we still think that the Fed will let the economy run a little hot. Indeed, based on our revised forecast, real economic growth and inflation will still exceed 3% in 2017 and 2018, and the real fed funds rate will remain negative for the foreseeable future.
On this basis, we still anticipate further increases in the US dollar, US Treasury yields and US equities.
COT Report
CFTC data shows nothing special. In last 3-4 weeks we do not see any strong dynamic. Yes, overall position is changing, but not drastically and rather weak. Still on 7th of March we see that net short position has increased. This has happened despite well-expected good NFP release and rate hike on 10th of March. Although change in speculative position was shy, it could mean that current rally is mosty technical and could last for a short time only. At least, CFTC data and recent uspide EUR rally shows opposite direction.
Technical
Monthly
So last week action was rather dramatic. As we've discussed in our daily videos - technical context was not sufficient for taking long position, while fundamental background was mostly uncertain. As a result, EUR has jumped mostly on surprising hawkish tones in Draghi speech, rumors of possible rate hike in EUR prior ending of QE and mismatch of US wage growh to expectations in NFP report. These three factors have pushed EUR higher.
Still, CFTC data, Fathom consulting opinion suggest that this is temporal behavior, mostly speculative reaction on short-term events.
Monthly chart mostly stands the same as it is too large for daily action. Price continues it's coiling around YPP.
On large scale we mostly agree that that fundamental background mostly looks bearish for EUR/USD for 2017-2018. Potentially more hawkish Fed policy, ECB QE prolongation, coming elections in many EU countries, bringing more uncertainty. After GB, separatistic sentiment start to appear in other countries of EU, as Italy, France, Netherlands, Spain that are not satisfied with Brussels domination in governing EU.
Speaking on big picture, On a way down, guys, EUR has passed through all major Fib levels. Last one was at 1.12 area and now we do not have any other ones below current market. Also price has dropped below 1.27 extension of this big butterfly. Thus, on monthly chart the only logical destination point stands at parity - 1.618 butterfly extension, chanell trend line support and YPS1.
Besides, right now EUR is testing YPP, but unsuccessfully yet.
Also take a look at different behavior near low border of channel. Previously when market has touched it - it shows immediate upside pullback, it was V-shape reversal. Right now behavior is absolutely different, price just hangs on the border and shows no upside action. Any tight consolidation near trendline could become a sign of coming breakout.
Thus, based on monthly chart we could make two major conclusions. First is - real bullish trend could be re-established only if EUR will erase reversal candle and overcome its top above 1.16. Our next target on Monthly chart is parity - 1.618 Butterfly extension, YPS1 and trendline support.
In general guys, we think that steps that already have been announced by ECB and Fed should be enough to push EUR right to parity during "price-in" process, when market will "anticipate" them. But this picture is not static, it's dynamic. And iti will depend on real action from Fed, Trump administration and ECB.
Nevertheless, right now we do not see any criminal action that could invalid our existed analysis. Price has not broken yet overall bearish tendency here.
Really long-term Bullish perspectives
Concerning bullish perspectives... they exist here, but they stand at even larger picture:
Picture shows classical action. Take a look that since 1999 - EUR was forming upside reversal swing that lasts till Dec 2007. Now market stands in deep retracement - this is typical action as new upside reversal swing has been formed. Based on this picture EUR is approaching to area where this retracement should over and it could get chance to starts extension leg of bull trend that could lead EUR as far as to 1.76-1.82 area. Also you could recognize here some signs of reverse H&S pattern. That's why on big weekly picture we also have made a suggestion on big H&S pattern with head around parity....
Weekly
As market shows strong reaction on Fed promising of rate increase, let's talk on bullish perspectives that could be based on this event. Last week we said that we're coming to 2-week doom&gloom. First week of NFP release is completed. Based on passed week rally, we already see how dramatic it was. Despite good NFP data (at first glance), EUR has jumped higher.
Second one of Fed decision is yet to be started. Here investors will watch not on rate hike itself, but on comments. What Yellen will say about perspectives. The major task to keep existed tendency is to get confirmation that 2 more rate changes are still on the table.We think that this is consensus expectation. Thus, depending on how real comment will flirt around consensus will determine FX market behavior. That's why we think that our 2nd week also could bring a lot of doom&gloom action.
So, let's see what could happen. Right now on a way up EUR has reached 1.0830 - 3/8 major resistance, tested YPP and now we're watching whether price will form AB-CD upside action or retracement will be limited by just single leg up. Honestly speaking, here, even reaching of 5/8 resistance is acceptable. It means that if our daily H&S pattern will work and EUR will reach 1.10 area - this will not erase yet long-term bearish picture. Besides, 1.08-1.09 range is rather strong, since it's weekly K-resistance, that also is Agreement and includes YPP. Hardly profit taking process that we see right now will be sufficient to break it through.
It means that upside retracement could just re-test 1.0830 level and complete minor 0.618 AB-CD target.
On a way down our final destination stands the same - 1.618 point coincides with 1.618 butterfly target around 0.97-1.0 area. Although we have multiple targets inside 1.0-1.05 area, ther are all minor ones.
Finally, butterfly could become part of large reverse H&S pattern, that we have discussed above. But whether it will be formed or not will depend on fundamental factors, D. Trump ficsal policy, US economy data and Fed reaction. And this figure is the one of longer-term.
Thus, we have more or less single road to parity, but later, around it we will get a crossroads...If there will be something bearish that wasn't priced in yet - EUR could drop even further. If not - H&S will start to form...
But while market stands above 1.05 - we have no choice but continue journey with upside retracement. THe minimal target that it could meet is re-testing of 1.0830 level.
Daily
So, on Friday our major comment was - "bullish context exists, but it looks not suffcient for taking long position." So, we said, if you feel confidence you could try... But in reality this bet still was on fundamental surprise. First is ECB comments, second - weaker than expected wage growth (low inflation).
Despite the reasons that have pushed EUR higher - it was able to keep daily reverse H&S pattern and start upside action after right shoulder's lows have been formed. Our bullish grabber has worked nice.
As we've estimated, next target should be neckline that is based on 0.618 AB-CD extension @ 1.08 area. This is also our well-known Fib level and YPP. Price right now stands at overbought. That's why in the beginning of the week, some technical retracement could happen.
Intraday
On 4-hour chart we also see that EUR stands at our 1.07 resistance and completed AB-CD target (slightly even exeeded). So, we have daily OB, Fib level and AB-CD target resistance. 1.618 extension stands around 1.0760 area.
Technical sutiaton on intraday charts suggests retracement on Monday. At the same time it should not be too deep. Fib levels' tree shows that most suitable level stands around WPP and K-support of 1.0620-1.0630. If market is really bullish, upward action should continue somewhere around this level. Thus, we will watch for bullish reversal patterns there:
Conclusion:
Despite changing of short-term sentiment, we do not think that it brings some real hazard to long-term bearish tendency yet. Thus, right now it is better to treat it as retracement as fundamental background slightly has changed.
Most part of the week we probably will deal with this upside action and preparation to Fed meeting. On Monday chances on minor pullback to 1.0620-1.0630 area are rather high.
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.
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