Sive Morten
Special Consultant to the FPA
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Fundamentals
Last week was not loaded too much with different fundamental events. We continue to look at situation from a point of view that we've specified two weeks ago. To not repeat it again and again, I just keep link here.This is major factor on market right now, and it should drive it for few months or even longer, depending on how situation will develop.
Our task is to view on new inputs and adjust (or confirm) initial scenario. This major question among investors is - how stable and durable USD rally will be.
Shaun Osborne, chief FX strategist at Scotiabank in Toronto, however, said the dollar’s rally was more about extreme short positioning that needed to unwind.”We continue to view dollar gains as a temporary issue reflecting excessive short positioning and concerns European growth momentum has slowed and may impair the ECB’s (European Central Bank) willingness to move away from quantitative easing later this year,” Osborne said.
In a note to clients, however, strategists at Citibank said the dollar rally would not last long, citing the U.S. budget deficit, which is projected to balloon to more than $1 trillion in 2019. That would contribute to a 5 percent drop in the dollar index over the next 12 months.
Taking in consideration some processes in EU chances on long-term dollar rally are melting. With "long-term" I mean 1-2 years and back to parity. And major process is taking direction to independence. Now we hear first public statements on this subject from EU representatives. First time when we've mentioned this was 1-2 years ago - recall that we've talked above NATO reforming, and EU independence from US, but nobody believed. Now it becomes a reality.
EU takes separate course in Iran deal and North Stream-2 project. EU companies have invested really big money in Iran projects after sanctions were cancelled. Now they do not want to loose new market just because US wants it. Iran is not just its own market. Iran is a door to big projects in Middle East where EU high technologies are more than welcome. This is big cluster of new markets, that includes Iran itself, Iraq, Libya, North Africa, Egypt, Lebanon, and Syria of course. Besides, Syria needs a recovery and multi billions contracts could be made for those who will express loyalty. Of course, EU doesn't want to loose this piece of cake.
Second - Germany and France has made a statement that EU needs to develop and start building its own army, because Europe can't rely on US protection any more. This is first step in integration of EU-Russia defense area.
Third - two most powerful political forces in Italy call to stop sanctions against Russia. And, as you know this week is Italy elections.
All these moments point that EUR within 6-12 months could get additional boost due growing of economy momentum in core EU countries. This, in turn, could make ECB to change its policy, but hardly first signs will
come earlier than October-November.
Nevertheless, the political course that EU is choosing right now, in favor of independence from US control, leads us to adjusting of our targets. Now, there are more and more chances that 1.08-1.10 area will become ultimate level that could be met till the end of the year.
In shorter term perspective however, dollar probably will continue to strengthen. Reaching of 1.14-1.15 area within few weeks looks probable. Recently US 10-year yield has increased 3% area, and this should support dollar:
Piotr Matys, FX strategist at Rabobank in London, said based on technical analysis it is possible that the dollar index had a “valid bullish breakout.”
“It is reasonable to assume that the U.S. dollar index is likely to revisit the next important tops at 94.219 and 95.149 in the coming weeks,” Matys said. “A close above these levels would strengthen the upside bias.”
COT chart shows that EUR long position has contracted a bit more last week. But, it is important to mention two things. Open interest has dropped, so recent decrease stands due unwind of overextended long positions, but no new shorts are coming on market right now. Open interest has dropped for very significant value - around 100K contracts, from 515 to 405K.
As a bottom line, our nearest target on EUR stands around 1.14-1.15 area, ultimate target is 1.10 and chances that it will be met has diminished. Drop below 1.10 area right has small chances to happen.
In the week ahead, investors are looking to Wednesday’s release of minutes from the Federal Reserve’s latest monetary policy meeting for clues about the pace of the current tightening cycle.
On Thursday, minutes from the last European Central Bank gathering will also be released.
Technicals
Monthly
Here we still keep an eye on two major issues. First one is 1.15 support area, which should become next natural destination point on EUR including YPP, as soon as price already has broken through 1.21.
As we have mentioned previously - 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.
Second issue - potential bullish grabber as EUR is coming closer to MACDP line in May-June. MACDP value for May stands at 1.1650. As we still have 2 weeks till the end of the month and current lows around 1.1750 - it is very probable that MACDP could be reached in May.
Weekly
So, in shorter term EUR shows itself very bearish. Even strong K-support area with daily XOP target and OS was not able to hold it. EUR has dropped lower and broken through MPS1 as well. Both these issues tell that this is not a retracement within previous uptrend. Second - market is very bearish right now and our task is to search chances to go short.
At the same time, EUR shows the behavior that I call as "Creeping with oversold". This action looks like step down motion, when price step by Oversold level steps and shows just minor harmonic pullback as soon as this level touched. As major support level has been broken - this action probably will continue, because now we do not have any strong supports till 1.14-1.15 area.
It means that on daily and intraday charts we should not expect some solid retracement and mostly watch for harmonic swings and bearish continuation patterns.
Our longer term analysis mostly stands the same and 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.
According to current expectations ECB will keep soft policy at least till the end of 2018, when QE programme should be over. This should let H&S to be formed. But perspective of its completion and target meeting is not as cloudless. To reach 1.10 target ECB probably should remain dovish longer or Fed should take more aggressive steps. Otherwise, once H&S will be completed - it could fail later, if ECB will change the course.
Daily
So, as we've mentioned last week in our daily video - reaction on XOP was rather shy, and in general EUR shows bearish behavior. DRPO "Buy" pattern that we've expected to get - has not been formed. Despite that price stands not too far from previous lows, and it is possible to get DRPO by price shape, but market mechanics that we see right now doesn't correspond to idea of DRPO pattern. DRPO is capitulation of bears, when the has failed to push price lower on second bottom of DRPO. This suggests fast upside recovery. But here we see just growing of selling power.
On coming week EUR probably will continue "Creeping with OS" price action. It means that our floor will be somewhere around 1.1650 - as on weekly as on daily OS level, WPS1.
Since we do not have doubts of bearish trend right now - upside bounce could reach either WPP, or WPR1. Smaller retracement is more probable, because major levels already has been broken, as well as XOP target:
Intraday
On 4H time frame EUR has support of 1.27 extension of previous retracement up, small W&R and bullish grabber of weaker type:
On 1H TF we also have butterfly "Buy" pattern. As it has been formed, it seems that market will show upside bounce first and drop to OS level second. There are two valid harmonic swings on hourly chart. First one coincides with distance to WPP, while larger one, equals to daily XOP reaction, points on WPR1. That's being said, first area where market could give chance for short entry stands around WPP:
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 1.20-1.21 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 we expect that EUR will continue "Creeping with oversold" price action. Upside retracement hardly will be significant. So, first level where short entry will be possible stands around WPP 1.18-1.1850. Floor for coming week should be around 1.1650.
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 was not loaded too much with different fundamental events. We continue to look at situation from a point of view that we've specified two weeks ago. To not repeat it again and again, I just keep link here.This is major factor on market right now, and it should drive it for few months or even longer, depending on how situation will develop.
Our task is to view on new inputs and adjust (or confirm) initial scenario. This major question among investors is - how stable and durable USD rally will be.
Shaun Osborne, chief FX strategist at Scotiabank in Toronto, however, said the dollar’s rally was more about extreme short positioning that needed to unwind.”We continue to view dollar gains as a temporary issue reflecting excessive short positioning and concerns European growth momentum has slowed and may impair the ECB’s (European Central Bank) willingness to move away from quantitative easing later this year,” Osborne said.
In a note to clients, however, strategists at Citibank said the dollar rally would not last long, citing the U.S. budget deficit, which is projected to balloon to more than $1 trillion in 2019. That would contribute to a 5 percent drop in the dollar index over the next 12 months.
Taking in consideration some processes in EU chances on long-term dollar rally are melting. With "long-term" I mean 1-2 years and back to parity. And major process is taking direction to independence. Now we hear first public statements on this subject from EU representatives. First time when we've mentioned this was 1-2 years ago - recall that we've talked above NATO reforming, and EU independence from US, but nobody believed. Now it becomes a reality.
EU takes separate course in Iran deal and North Stream-2 project. EU companies have invested really big money in Iran projects after sanctions were cancelled. Now they do not want to loose new market just because US wants it. Iran is not just its own market. Iran is a door to big projects in Middle East where EU high technologies are more than welcome. This is big cluster of new markets, that includes Iran itself, Iraq, Libya, North Africa, Egypt, Lebanon, and Syria of course. Besides, Syria needs a recovery and multi billions contracts could be made for those who will express loyalty. Of course, EU doesn't want to loose this piece of cake.
Second - Germany and France has made a statement that EU needs to develop and start building its own army, because Europe can't rely on US protection any more. This is first step in integration of EU-Russia defense area.
Third - two most powerful political forces in Italy call to stop sanctions against Russia. And, as you know this week is Italy elections.
All these moments point that EUR within 6-12 months could get additional boost due growing of economy momentum in core EU countries. This, in turn, could make ECB to change its policy, but hardly first signs will
come earlier than October-November.
Nevertheless, the political course that EU is choosing right now, in favor of independence from US control, leads us to adjusting of our targets. Now, there are more and more chances that 1.08-1.10 area will become ultimate level that could be met till the end of the year.
In shorter term perspective however, dollar probably will continue to strengthen. Reaching of 1.14-1.15 area within few weeks looks probable. Recently US 10-year yield has increased 3% area, and this should support dollar:
Piotr Matys, FX strategist at Rabobank in London, said based on technical analysis it is possible that the dollar index had a “valid bullish breakout.”
“It is reasonable to assume that the U.S. dollar index is likely to revisit the next important tops at 94.219 and 95.149 in the coming weeks,” Matys said. “A close above these levels would strengthen the upside bias.”
COT chart shows that EUR long position has contracted a bit more last week. But, it is important to mention two things. Open interest has dropped, so recent decrease stands due unwind of overextended long positions, but no new shorts are coming on market right now. Open interest has dropped for very significant value - around 100K contracts, from 515 to 405K.
As a bottom line, our nearest target on EUR stands around 1.14-1.15 area, ultimate target is 1.10 and chances that it will be met has diminished. Drop below 1.10 area right has small chances to happen.
In the week ahead, investors are looking to Wednesday’s release of minutes from the Federal Reserve’s latest monetary policy meeting for clues about the pace of the current tightening cycle.
On Thursday, minutes from the last European Central Bank gathering will also be released.
Technicals
Monthly
Here we still keep an eye on two major issues. First one is 1.15 support area, which should become next natural destination point on EUR including YPP, as soon as price already has broken through 1.21.
As we have mentioned previously - 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.
Second issue - potential bullish grabber as EUR is coming closer to MACDP line in May-June. MACDP value for May stands at 1.1650. As we still have 2 weeks till the end of the month and current lows around 1.1750 - it is very probable that MACDP could be reached in May.
Weekly
So, in shorter term EUR shows itself very bearish. Even strong K-support area with daily XOP target and OS was not able to hold it. EUR has dropped lower and broken through MPS1 as well. Both these issues tell that this is not a retracement within previous uptrend. Second - market is very bearish right now and our task is to search chances to go short.
At the same time, EUR shows the behavior that I call as "Creeping with oversold". This action looks like step down motion, when price step by Oversold level steps and shows just minor harmonic pullback as soon as this level touched. As major support level has been broken - this action probably will continue, because now we do not have any strong supports till 1.14-1.15 area.
It means that on daily and intraday charts we should not expect some solid retracement and mostly watch for harmonic swings and bearish continuation patterns.
Our longer term analysis mostly stands the same and 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.
According to current expectations ECB will keep soft policy at least till the end of 2018, when QE programme should be over. This should let H&S to be formed. But perspective of its completion and target meeting is not as cloudless. To reach 1.10 target ECB probably should remain dovish longer or Fed should take more aggressive steps. Otherwise, once H&S will be completed - it could fail later, if ECB will change the course.
Daily
So, as we've mentioned last week in our daily video - reaction on XOP was rather shy, and in general EUR shows bearish behavior. DRPO "Buy" pattern that we've expected to get - has not been formed. Despite that price stands not too far from previous lows, and it is possible to get DRPO by price shape, but market mechanics that we see right now doesn't correspond to idea of DRPO pattern. DRPO is capitulation of bears, when the has failed to push price lower on second bottom of DRPO. This suggests fast upside recovery. But here we see just growing of selling power.
On coming week EUR probably will continue "Creeping with OS" price action. It means that our floor will be somewhere around 1.1650 - as on weekly as on daily OS level, WPS1.
Since we do not have doubts of bearish trend right now - upside bounce could reach either WPP, or WPR1. Smaller retracement is more probable, because major levels already has been broken, as well as XOP target:
Intraday
On 4H time frame EUR has support of 1.27 extension of previous retracement up, small W&R and bullish grabber of weaker type:
On 1H TF we also have butterfly "Buy" pattern. As it has been formed, it seems that market will show upside bounce first and drop to OS level second. There are two valid harmonic swings on hourly chart. First one coincides with distance to WPP, while larger one, equals to daily XOP reaction, points on WPR1. That's being said, first area where market could give chance for short entry stands around WPP:
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 1.20-1.21 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 we expect that EUR will continue "Creeping with oversold" price action. Upside retracement hardly will be significant. So, first level where short entry will be possible stands around WPP 1.18-1.1850. Floor for coming week should be around 1.1650.
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.
