Sive Morten
Special Consultant to the FPA
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Fundamentals
Last week, guys, was not overload with different events and data, so, it is just few that we could say new on fundamental component in our analysis. Yesterday, despite weaker than expected NFP data dollar still has become stronger and pushed EUR/USD to 1.19 still. This moment just confirms what we've said last week - big fundamental economic factors drive markets right now, and most important is interest rates cycle.
This factor is so strong that it overrules any other ones, including poor statistics. Investors right now so sure and aimed on dollar strength and higher interest rates that they deny negative effect of some additional inputs. This makes EUR negatively biased.
As Reuters reports the U.S. economy added fewer jobs than expected and although the unemployment rate dropped to near a 17-1/2-year low of 3.9 percent, this was because some jobless Americans left the labor force.
Average hourly earnings rose 4 cents, or 0.1 percent, last month after gaining 0.2 percent in March. That left the annual increase in average hourly earnings at 2.6 percent.
“It is probably a pause, but it is nothing to stop the market,” said Steven Englander, head of research and strategy at Rafiki Capital in New York.
In fact, dollar was up despite poor NFP report on a background of EU and UK poor numbers either. We will talk on UK and GBP tomorrow, here I just mention that GDP was just 0.1% that confirms recession in UK economy. As a result investors logic is simple - dollar should rise in near term just because ECB and BoE will keep flat policy and numbers there are even worse than in US:
The dollar has gained as investors bet that the Federal Reserve will continue raising rates while other central banks, including the European Central Bank (ECB), will act more slowly.
“The story in the last few days has been the disappointment over the ECB and the UK to start raising interest rates in the wake of the Fed, and unless we see data picking up meaningfully, the dollar will outperform in the coming weeks,” said Gavin Friend, senior markets strategist at NAB in London.
Taking in consideration all inputs, we could make a conclusion that USD strength has two different sources right now. First one is intrinsic, based on US domestic factors, such as interest rates, economy growth, implied inflation and others, and second one - weakness of rivals. In our case they are EUR and GBP, as we as a rule watch for them.
Speaking on first factor, here dollar upside potential could be limited. Recent data is not very impressive, overall expectations on Fed policy and inflation have not changed significantly. Next meeting will be on 13th of June, where investors expect next rate increasing. CME Fedwatch Tool shows 100% probability of this event. Next rate change should happen in autumn - either in September or November, and chances stand around 65-70%. But 4th rate hike in December (to 2.5%) now is valuing only at 37%:
So, as you can see investors sentiment on domestic factors has not changed significantly and even yields rally above 3% have not changed it.
What does it mean? It means that own dollar strength, based on its own driving factors is limited:
Erik Nelson, a currency strategist at Wells Fargo in New York, sees further upside in the greenback as likely limited, however, saying that pessimism over other economies may be overdone.
San Francisco Fed President John Williams said on Friday that he does not see any abrupt rise in inflation happening even as price gains have risen toward the central bank’s target.
Now we turn to second factor - rival's weakness. Here situation is more complex. In our previous research we have placed detailed view on EU - US economy relations and how it could impact on EUR/USD rate. Speaking in two words - ECB probably will keep anemic policy till the end of the year, and this could give additional support to USD.
On GBP - we will put detailed analysis tomorrow. Here we just say that recent UK inputs confirm our suggestion on economy weakness and no rate increase in May from BoE.
Another important conclusion that we could make - USD rivals probably will start moving differently and could loose habitual correlation, especially between EUR and GBP. Divergence of EU and UK economies will exacerbated even more as closer Brexit deadline will come.
"The outlook for continued, gradual Fed policy tightening and a much more cautious approach to normalization by other major central banks remains a big part of the dollar’s recent rally," Omer Esiner, chief market analyst at Commonwealth Foreign Exchange Inc in Washington D.C., said in a note.
As a bottom line, fundamental analysis leads us to conclusion that there are really high probability of reaching 1.15 area by EUR/USD within few months, just because of ECB flat policy till the end of the year. Action to 1.10-1.12 will demand probably additional factors either USD strength of EUR weakness.
COT Report
Recent CFTC data supports fundamental picture and shows unwind of bullish speculator positions on EUR and, against USD, in general.
The sharp recent rise in the dollar - it broke above a 200-day moving average this week for the first time in a year - took hedge funds and other investors by surprise. They had built up record short bets on the dollar and were forced to cover some of those positions, lifting the greenback even more.
As a result, speculators' net short dollar bets fell to a seven-week low in the latest week, according to
calculations by Reuters and Commodity Futures Trading Commission data released on Friday.
On EUR we see continuation of process that has started couple of weeks ago - net long position is dropping:
Technicals
Monthly
Now guys, let's take a look what particular levels we should watch for, due our fundamental view...
Once we've said that retracement just to 1.21 area looks too small compares to the strength of monthly resistance, which suggests more serious response, and, in general, our conclusion was:
"yes" to fluctuations below YPR1, while "no" to upside breakout and moving to next 1.3860 area yet.
Market was standing just under this level month by month and it was seemed that EUR prepares for breakout. Now it looks like finally technical factors prevail, and EUR starts it meaningful retracement down.
First important issue here is break through 1.21 all time support/resistance border. Next support here is 1.14-1.15 area and we've mentioned it in our fundamental part above. This is also YPP. This is primary target on monthly chart.
Second is - reversal has happened after completion of harmonic swing and was stopped by 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. Yes, it is a lot of time till the end of the year still and YPR1 could be broken, but, if EUR will not break it, then technical factors give a hint on EUR further drop and predict USD advantage in fundamental balance between US and EU, although driving factors of this process are unknown.
Finally, EUR is coming closer to MACDP line and in May-June we should keep an eye on possible bullish grabber.
Weekly
Weekly TF has two different setups of different timing. Sorry, guys, that chart a bit overloaded with details and lines.
Short-term setup suggests upside bounce as EUR has completed our setup and hit 1.19 K-support area. Pay attention that here we have hidden Fib levels, based on gap reaction point in April 2017. In fact, we have DiNapoli bullish "Stretch" pattern here as EUR also has hit weekly OS.
Longer term analysis is closely related to our fundamental view. Now it is easy to recognize potential H&S pattern here which satisfies all necessary conditions - 1.618 ratio, downside acceleration on 2nd half of the pattern, left side takes the shape of butterfly, which happens very often.
As 1.19 K-area is rather strong, we probably should get some AB=CD pattern, which, in turn should lead EUR right to 1.14-1.15 area of neckline. Then upside bounce to 1.20 should follow - and this will become moment of truth that has big relation to changing of fundamental background.
Particular speaking, if ECB will start its policy tightening, at least by some hints and hawkish rhetoric - EUR could re-establish upside action and no H&S will be formed.
Conversely, standing anemic till the end of the year will push EUR/USD to H&S target around 1.10 area.
So, it could be really big and interesting journey ahead, guys.
Daily
Daily TF is mostly focused on short-term setup - possible upside bounce due strong support area that we've mentioned above. Here is just one tricky moment stands - uncompleted XOP target around 1.1830 area.
This is not the problem for us, as we mostly watch for chances to go short, while it could be a problem for scalp long traders.
For us - it is not a problem whether upside retracement will happen prior XOP completion (this could be even better) or after this. On daily chart we're mostly watching for B&B "Sell" from 1.21 area. If EUR will reach 1.21 and keep XOP untouched - all the better, because XOP will work as a magnet and increase chances on downside action. While if XOP will be touched first and retracement will follow second - this will not harm B&B setup anyway.
But for those who would like to go long - untouched XOP could become a headache as you will have to take risk of possible drop to 1.1830 and it is impossible to escape it.
Intraday
Now EUR shows some bullish signs, and indeed, bounce could happen prior XOP will be hit, but we can't guarantee that. On 4-hour chart DRPO "Buy" could be formed:
While on 1H EUR already has completed our Friday butterfly "Buy". It is only 1.27 target as NFP was poor. Nevertheless, this is bullish pattern:
The only thing that we could recommend to reduce potential loss, if EUR will still go to XOP... you could wait for more bullish confirmation. For example, wait for upside breakout of hourly channel and turning of butterfly into reverse H&S, or may be "222" Buy will be formed. This should let you to place stops based on H&S or "222" pattern and ignore daily XOP.
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.
Fundamental picture gives high chances on reaching 1.15 area and upside bounce to 1.20 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 we will work with upside bounce on daily chart and potential B&B "Sell" trade.
The technical portion of Sive's analysis owes a great deal to Joe DiNapoli's methods, and uses a number of Joe's proprietary indicators. Please note that Sive's analysis is his own view of the market and is not endorsed by Joe DiNapoli or any related companies.
Last week, guys, was not overload with different events and data, so, it is just few that we could say new on fundamental component in our analysis. Yesterday, despite weaker than expected NFP data dollar still has become stronger and pushed EUR/USD to 1.19 still. This moment just confirms what we've said last week - big fundamental economic factors drive markets right now, and most important is interest rates cycle.
This factor is so strong that it overrules any other ones, including poor statistics. Investors right now so sure and aimed on dollar strength and higher interest rates that they deny negative effect of some additional inputs. This makes EUR negatively biased.
As Reuters reports the U.S. economy added fewer jobs than expected and although the unemployment rate dropped to near a 17-1/2-year low of 3.9 percent, this was because some jobless Americans left the labor force.
Average hourly earnings rose 4 cents, or 0.1 percent, last month after gaining 0.2 percent in March. That left the annual increase in average hourly earnings at 2.6 percent.
“It is probably a pause, but it is nothing to stop the market,” said Steven Englander, head of research and strategy at Rafiki Capital in New York.
In fact, dollar was up despite poor NFP report on a background of EU and UK poor numbers either. We will talk on UK and GBP tomorrow, here I just mention that GDP was just 0.1% that confirms recession in UK economy. As a result investors logic is simple - dollar should rise in near term just because ECB and BoE will keep flat policy and numbers there are even worse than in US:
The dollar has gained as investors bet that the Federal Reserve will continue raising rates while other central banks, including the European Central Bank (ECB), will act more slowly.
“The story in the last few days has been the disappointment over the ECB and the UK to start raising interest rates in the wake of the Fed, and unless we see data picking up meaningfully, the dollar will outperform in the coming weeks,” said Gavin Friend, senior markets strategist at NAB in London.
Taking in consideration all inputs, we could make a conclusion that USD strength has two different sources right now. First one is intrinsic, based on US domestic factors, such as interest rates, economy growth, implied inflation and others, and second one - weakness of rivals. In our case they are EUR and GBP, as we as a rule watch for them.
Speaking on first factor, here dollar upside potential could be limited. Recent data is not very impressive, overall expectations on Fed policy and inflation have not changed significantly. Next meeting will be on 13th of June, where investors expect next rate increasing. CME Fedwatch Tool shows 100% probability of this event. Next rate change should happen in autumn - either in September or November, and chances stand around 65-70%. But 4th rate hike in December (to 2.5%) now is valuing only at 37%:
So, as you can see investors sentiment on domestic factors has not changed significantly and even yields rally above 3% have not changed it.
What does it mean? It means that own dollar strength, based on its own driving factors is limited:
Erik Nelson, a currency strategist at Wells Fargo in New York, sees further upside in the greenback as likely limited, however, saying that pessimism over other economies may be overdone.
San Francisco Fed President John Williams said on Friday that he does not see any abrupt rise in inflation happening even as price gains have risen toward the central bank’s target.
Now we turn to second factor - rival's weakness. Here situation is more complex. In our previous research we have placed detailed view on EU - US economy relations and how it could impact on EUR/USD rate. Speaking in two words - ECB probably will keep anemic policy till the end of the year, and this could give additional support to USD.
On GBP - we will put detailed analysis tomorrow. Here we just say that recent UK inputs confirm our suggestion on economy weakness and no rate increase in May from BoE.
Another important conclusion that we could make - USD rivals probably will start moving differently and could loose habitual correlation, especially between EUR and GBP. Divergence of EU and UK economies will exacerbated even more as closer Brexit deadline will come.
"The outlook for continued, gradual Fed policy tightening and a much more cautious approach to normalization by other major central banks remains a big part of the dollar’s recent rally," Omer Esiner, chief market analyst at Commonwealth Foreign Exchange Inc in Washington D.C., said in a note.
As a bottom line, fundamental analysis leads us to conclusion that there are really high probability of reaching 1.15 area by EUR/USD within few months, just because of ECB flat policy till the end of the year. Action to 1.10-1.12 will demand probably additional factors either USD strength of EUR weakness.
COT Report
Recent CFTC data supports fundamental picture and shows unwind of bullish speculator positions on EUR and, against USD, in general.
The sharp recent rise in the dollar - it broke above a 200-day moving average this week for the first time in a year - took hedge funds and other investors by surprise. They had built up record short bets on the dollar and were forced to cover some of those positions, lifting the greenback even more.
As a result, speculators' net short dollar bets fell to a seven-week low in the latest week, according to
calculations by Reuters and Commodity Futures Trading Commission data released on Friday.
On EUR we see continuation of process that has started couple of weeks ago - net long position is dropping:
Technicals
Monthly
Now guys, let's take a look what particular levels we should watch for, due our fundamental view...
Once we've said that retracement just to 1.21 area looks too small compares to the strength of monthly resistance, which suggests more serious response, and, in general, our conclusion was:
"yes" to fluctuations below YPR1, while "no" to upside breakout and moving to next 1.3860 area yet.
Market was standing just under this level month by month and it was seemed that EUR prepares for breakout. Now it looks like finally technical factors prevail, and EUR starts it meaningful retracement down.
First important issue here is break through 1.21 all time support/resistance border. Next support here is 1.14-1.15 area and we've mentioned it in our fundamental part above. This is also YPP. This is primary target on monthly chart.
Second is - reversal has happened after completion of harmonic swing and was stopped by 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. Yes, it is a lot of time till the end of the year still and YPR1 could be broken, but, if EUR will not break it, then technical factors give a hint on EUR further drop and predict USD advantage in fundamental balance between US and EU, although driving factors of this process are unknown.
Finally, EUR is coming closer to MACDP line and in May-June we should keep an eye on possible bullish grabber.
Weekly
Weekly TF has two different setups of different timing. Sorry, guys, that chart a bit overloaded with details and lines.
Short-term setup suggests upside bounce as EUR has completed our setup and hit 1.19 K-support area. Pay attention that here we have hidden Fib levels, based on gap reaction point in April 2017. In fact, we have DiNapoli bullish "Stretch" pattern here as EUR also has hit weekly OS.
Longer term analysis is closely related to our fundamental view. Now it is easy to recognize potential H&S pattern here which satisfies all necessary conditions - 1.618 ratio, downside acceleration on 2nd half of the pattern, left side takes the shape of butterfly, which happens very often.
As 1.19 K-area is rather strong, we probably should get some AB=CD pattern, which, in turn should lead EUR right to 1.14-1.15 area of neckline. Then upside bounce to 1.20 should follow - and this will become moment of truth that has big relation to changing of fundamental background.
Particular speaking, if ECB will start its policy tightening, at least by some hints and hawkish rhetoric - EUR could re-establish upside action and no H&S will be formed.
Conversely, standing anemic till the end of the year will push EUR/USD to H&S target around 1.10 area.
So, it could be really big and interesting journey ahead, guys.
Daily
Daily TF is mostly focused on short-term setup - possible upside bounce due strong support area that we've mentioned above. Here is just one tricky moment stands - uncompleted XOP target around 1.1830 area.
This is not the problem for us, as we mostly watch for chances to go short, while it could be a problem for scalp long traders.
For us - it is not a problem whether upside retracement will happen prior XOP completion (this could be even better) or after this. On daily chart we're mostly watching for B&B "Sell" from 1.21 area. If EUR will reach 1.21 and keep XOP untouched - all the better, because XOP will work as a magnet and increase chances on downside action. While if XOP will be touched first and retracement will follow second - this will not harm B&B setup anyway.
But for those who would like to go long - untouched XOP could become a headache as you will have to take risk of possible drop to 1.1830 and it is impossible to escape it.
Intraday
Now EUR shows some bullish signs, and indeed, bounce could happen prior XOP will be hit, but we can't guarantee that. On 4-hour chart DRPO "Buy" could be formed:
While on 1H EUR already has completed our Friday butterfly "Buy". It is only 1.27 target as NFP was poor. Nevertheless, this is bullish pattern:
The only thing that we could recommend to reduce potential loss, if EUR will still go to XOP... you could wait for more bullish confirmation. For example, wait for upside breakout of hourly channel and turning of butterfly into reverse H&S, or may be "222" Buy will be formed. This should let you to place stops based on H&S or "222" pattern and ignore daily XOP.
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.
Fundamental picture gives high chances on reaching 1.15 area and upside bounce to 1.20 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 we will work with upside bounce on daily chart and potential B&B "Sell" trade.
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.
