Sive Morten
Special Consultant to the FPA
- Messages
- 18,659
Fundamentals
(Reuters) The dollar rose to its highest in nine months against a basket of major currencies on Friday and posted its best week in a year as investors packed on bets that the administration of President-elect Donald Trump would pump up U.S. inflation.
Investors expect Trump's proposals to deport illegal immigrants, renegotiate free-trade deals and unleash large fiscal stimulus measures will boost U.S. inflation.
The dollar also extended gains against the Chinese yuan and Mexican peso to historic levels on expectations that emerging markets will suffer most if Trump turns his protectionist rhetoric into action.
"Everybody loves U.S. assets, so hence why the emerging markets currencies and equities and obviously their own bonds are all under pressure," said Dean Popplewell, chief currency strategist at Oanda in Toronto.
"We continue to see the squeeze in emerging markets. Certainly people will want to move their capital, stateside at the moment, and with higher rates and reflation and inflation U.S. Treasuries will eventually be coveted," he added.
China fixed the yuan another 0.2 percent lower at 6.8120 per dollar and less tightly controlled offshore rates reached as high as 6.85 yuan pointing to expectations of more losses. It was the lowest for the yuan against the dollar in six years.
Currencies associated with the Trans Pacific Partnership were lower across the board amid news on Friday that Trump's election had effectively made the trade deal with Asian and Latin American nations a nonstarter for the U.S. Congress.
As Trump won elections, Fathom consulting has made an update on its "Donald Dark" view. Here they come with conclusion that there is another, less dramatic, way still exists:
Another electoral shock. But ‘Trump Lite’ should triumph over ‘Donald Dark’
by Fathom Consulting
- For the second time this year, investors are in a state of panic following an antiestablishment vote at the polls. But when the dust has settled, what will Donald Trump’s victory mean for the US, and for the global economy?
- During the long election campaign, Donald Trump made countless extreme, and often contradictory promises. He undoubtedly poses a threat to the status quo. But he is unlikely to be the disaster for the US economy that many seem to fear.
- The most likely outcome is what we call ‘Trump Lite’, where the President is unwilling or unable to enact most of what he has promised. In this world, US economic growth strengthens a little in the near term, in response to greater fiscal stimulus, and further out, in response to a more rapid normalisation of monetary policy.
- The alternative is the world of ‘Donald Dark’. A new era of protectionism sees global trade as a share of global GDP fall sharply. This is good for American workers. But it is bad for emerging market economies, and a disaster for capitalists the world over.
Riding a wave of popular discontent against globalisation, immigration and the political and economic establishment seems to work. First Brexit. Now Donald Trump. Investors are shocked.
At the time of writing, global equities are down sharply in response to Trump’s win: equity futures suggest that the S&P 500 will open 2%-3% lower later today. Safe-haven assets such as the Japanese yen and gold have rallied and the probability assigned to a US rate hike later this year has fallen sharply.
Markets were betting on a Clinton victory, much as they had bet on a ‘remain’ vote in the UK’s EU referendum earlier this year. And like Brexit, Mr Trump’s agenda represents a step away from globalisation towards a more isolationist approach. Yet, for all of his flaws, the US economy could fare a lot better under Mr Trump than many expect.
For a start, Mr Trump may be unwilling or unable to push through the agenda he set out in his campaign speeches. Politicians often make promises that they do not plan to keep. It is doubtful whether Mr Trump really intends to deport 11 million undocumented immigrants, force Mexico to build a wall and start a trade war with China. Besides, even if he does attempt some or all of those things, a Republican-controlled Congress may yet slap him down.
Second, Mr Trump has pledged a massive fiscal splurge in the form of lower taxes and more spending on law enforcement and the military. Most of this is likely to get the backing of a Republican-controlled Congress, and will provide a meaningful boost to US economic growth in the near term. Furthermore, to the extent that this is inflationary and allows a faster normalisation of US monetary policy, we think that it will benefit the economy over the longer term too. We label this scenario ‘Trump Lite’.
Last but not least, cyclically, the US economy is already in decent shape: it grew at an annualised pace of 2.9% in Q3, consumer confidence is quite high, annual wage growth hit a new post-recession peak in October and the current level of job creation is well above the neutral level of 60,000 or so that we judge to be consistent with a stable unemployment rate.
The uncertainty posed by Mr Trump’s victory may prompt some firms to put investment on hold, but these doubts should be at least partially offset by Mr Trump’s plan to slash the corporate tax rate from 35% to 15%.
Admittedly, Mr Trump’s win poses several uncertainties and potential risks. His temperament is a threat to geopolitical stability. But the biggest risk to the economy is the possibility of a sharp reversal in globalisation. This could be triggered either by Mr Trump’s success emboldening isolationist political movements in other countries, or by Mr Trump starting a trade war with key trading partners such as China and Mexico. Although the US is a relatively closed economy, it would not be immune to a sharp downturn in global trade. Indeed, we project that if global trade as a share of global GDP were to fall back to levels seen in the early 1980s over the next five years or so then the US economy would suffer an outright recession. We call this scenario ‘Donald Dark’.
In putting together our latest quarterly forecast, we gave ‘Donald Dark’ a weight of just 15%. Our central scenario – a Hillary Clinton win – had a weight of 50%. Implicitly, with Donald Trump now in the White House, our risk scenario has around a 1-in-3 chance.
Trump Lite
In our central Trump scenario, which we call Trump Lite, nothing much changes. In this world, either Mr Trump backs down on his more controversial proposals, or he is unable to pass the laws he needs to enact them. Accordingly, we assume only a small number of deportations and minor trade disputes with China and Mexico. Broadly speaking, business carries on as usual.
Less immigration and less trade would be bad for US GDP growth, but we think that Mr Trump’s pro-business policies and fiscal package would offset this. Overall, we expect a small net positive boost to real US GDP in this scenario. Moreover, to the extent that Mr Trump’s fiscal policies are inflationary, his victory may enable faster normalisation of US interest rates. As we have highlighted in the past, we think that this would be good for the US economy.
Donald Dark
There is a risk that this all goes horribly wrong. The US President has relatively free reign to start a trade war by using existing US laws, thereby avoiding approval from Congress. A US President could, for example, slap tariffs and quotas on imports by invoking the International Emergency Economic Powers Act (1977) or sections of the Trade Act of 1974.
The legalities of these tariffs would be challenged in the courts by US firms and other countries, who are likely to retaliate. In short, things could get messy, with Trump’s presidency feeding the mood of isolationism and populist politics. It could also contribute to events such as a ‘hard Brexit’ and Marie le Pen doing well in the French presidential elections, both of which would fuel concerns about the future of the European Union.
In this world, we forecast a sharp fall in global trade, as well as a sharp slowdown in the annual rate of US population growth (from 0.8% to 0.2%) due to the mass deportation of illegal immigrants. US GDP falls sharply from baseline (see chart on first page) and the global economy enters a 2008-style recession.
For all of Mr Trump’s inflammatory rhetoric, we think that the most likely outcome of a Trump presidency would be something closer to Trump Lite. That said, investors should brace themselves for the risk of Donald Dark and hedge themselves against that outcome, where possible.
How to trade it?
In either world, the stand out trade would be to buy the US dollar. Assuming an initial risk-off reaction to a Trump victory, we think that the US dollar would rise due to safe haven demand.
It may seem curious that the US dollar would benefit from safe haven demand, even though the US is the source of these concerns, but that is exactly what happened during the 2008 global financial crisis
.
In the Donald Dark world, safe haven demand is likely to keep the dollar supported in the near- and medium-term. In our Trump Lite scenario, the initial appreciation of the dollar post-election may well be reversed, but as soon as it became clear that the US economy would continue to grow (indeed, grow faster than in our base case) the dollar would be likely to appreciate once again. Higher US interest rates as a result of better-than-expected economic outcomes and higher inflation would also drive the dollar higher in the medium-term.
We also thought that the US dollar would appreciate if Hillary Clinton wins, since US interest rates would climb faster than investors currently anticipate. Either way, in our view, now is a good time to buy the US dollar.
US Treasuries would also benefit from safe haven flows after a Trump victory. Under our Trump Lite scenario, we think that this would be short-lived. Whereas in the Donald Dark world, Treasuries would continue to benefit from safe haven flows.
Equities fare very poorly under our Donald Dark scenario due to a significantly weaker growth outlook. Diminished trade results in a smaller economic pie, with labour’s share of that pie rising significantly due to greater bargaining power for workers as the available pool of labour shrinks. This is a double-whammy for equity holders who suffer from both a smaller pie and reduced share of that smaller pie.
In Trump Lite, the economy is a little bigger than it otherwise would be, although since labour’s share of income also rises in this world, equity holders are worse off than they would be in the consensus implied baseline (at least, before considering any changes to the US tax code).
How did we get here and what now?
The emergence of Mr Trump as a political force reflects a mood of growing discontent (in the developed world at least) about immigration, globalisation, inequality and the benefits of free trade. Low earners in rich countries feel that globalisation has not worked for them. Judging by the fall of labour’s share of income and the widening gap between the real income growth of the richest and poorest households, that concern may be valid.
Indeed, as Edward Luce from the Financial Times noted in a recent article, “if Mr Trump loses it will be due to character – not because of his message”. The forces that have brought Donald Trump this close to the Presidency are akin to those unleashed by the Brexit referendum in the UK, and to those behind the rise of extremist parties across the developed world. Those forces are likely to remain in place whether or not Mr Trump prevails.
COT Report
So, as you can see fundamentals mostly form moderately bullish view for USD and hence, bearish - for EUR. This mostly corresponds to our long-term analysis that suggests further drop on EUR. CFTC data also brings no surprises on this subject here and mostly confirms what we have said above. Net speculative short position continues to grow as well as open interest. This tells on opening new shorts positions week by week
Technical
Monthly
So right now we know that fundamental background mostly looks bearish for EUR. Despite significant volatility on daily chart, monthly picture changes slowly. November candle still stands inside of the range of previous month, but based on action that we see - it has chances to become another bearish sign. If it would appear on top - we could call it as "reversal candle" again. It has higher top and probably will close below October lows...
Currently EUR stands at rather strong wide support area. This is lower border of downward channel and all-time 5/8 Fib support. Here EUR has formed Butterfly "buy" and it has reached first 1.27 extension here. Probably it needs some time to pass through this level and supportive fundamental background of US strength that finally are coming probably.
EUR is forming typical reversal candle in May. Price has moved above April top and closed below April's lows. It could not get extended continuation, but usually market shows downward continuation within next 1-3 candles.
Sometimes reversal candles lead to collapse, as it was on EUR around 1.40 area. Thrust down has started particularly by reversal candle in March 2014.
Speaking on big scale bearish signs, we have these ones:
EUR was not able to reach YPR1 and returned right back down to YPP. Following this logic next destination could be YPS1 right around parity and 1.618 butterfly target. This is just another destination point that we have here.
Appearing of reversal candle brings nothing good to bulls. Currently we can't precisely forecast the consequences of its appearing, but even minor results will bring some months of downward action inside current 1.04 -1.15 consolidation... Although potential bearish impact could be even stronger.
Finally we have another bearish sign that looks like bearish dynamic pressure. Take a look that although trend holds bullish - market shows inablitity to move up, even from strong support area. Next strong support stands precisely at parity and will become a culmination of downward action, since this level includes support line, YPS1 and butterfly 1.618 target. Brexit results hardly will bring prosperity to EU and probably will become another bearish driving factor for EUR. We aleardy see consequences of Brexit on GBP, so, some negative impact on EUR also will happen, this is just a question of time.
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 will be re-established only when EUR will erase reversal candle and overcome its top above 1.16. Second, if EUR will still keep moderate bearish sentiment, downside potential hardly will be lower than parity, due recent Fed dovish adjustments to its policy for 2017-2018.
Weekly
Weekly chart also shows bearish action last week. Actually we've taken a look at this picture briefly in one of daily videos. As you can see last week is bearish grabber and bearish reversal week simultaneously.
Last week, due uncertainty on elections background we also have discussed bullish butterfly. Theoretically it will be valid even until 1.0530 lows, but right now, on bearish fundametal background and bearish action we return back to our long-term bearish setup.
Actually there is another reason, why we think about bearish continuation. This is large AB=CD pattern, or better to say most recent action. Take a look, as EUR has reached 0.618 extension, it has turned to reasonable upside bounce. This bounce coincides with election turmoil, but right now market has dropped below 0.618 target, which means that current action is continuation of CD leg. That's being said, EUR is going to next target. Natural market behavior suggest extension mode right to AB=CD target @ 1.04 level.
At the same time, this 1.04 target stands below previous lows around 1.0530. It means that market should get acceleration down as soon as it will break though it. This in turn, could lead EUR right to completion of 1.27 Butterfly around 1.01. But it stands below oversold, so let's focus first on first target. In nearest few weeks we should get clear signs that market really stands in downward extension and CD leg is really continuing...
Daily
On daily chart recent 2 sessions were relatively quiet, market creeps with daily oversold level. In fact, EUR has no strong support below current level, except MPS1, as all Fib levels already have been broken. It means that may be some minor bounce could happen as soon as EUR will touch MPS1. Next destination point should be 1.06 area - 1.618 extension of AB-CD pattern:
To be continued...
(Reuters) The dollar rose to its highest in nine months against a basket of major currencies on Friday and posted its best week in a year as investors packed on bets that the administration of President-elect Donald Trump would pump up U.S. inflation.
Investors expect Trump's proposals to deport illegal immigrants, renegotiate free-trade deals and unleash large fiscal stimulus measures will boost U.S. inflation.
The dollar also extended gains against the Chinese yuan and Mexican peso to historic levels on expectations that emerging markets will suffer most if Trump turns his protectionist rhetoric into action.
"Everybody loves U.S. assets, so hence why the emerging markets currencies and equities and obviously their own bonds are all under pressure," said Dean Popplewell, chief currency strategist at Oanda in Toronto.
"We continue to see the squeeze in emerging markets. Certainly people will want to move their capital, stateside at the moment, and with higher rates and reflation and inflation U.S. Treasuries will eventually be coveted," he added.
China fixed the yuan another 0.2 percent lower at 6.8120 per dollar and less tightly controlled offshore rates reached as high as 6.85 yuan pointing to expectations of more losses. It was the lowest for the yuan against the dollar in six years.
Currencies associated with the Trans Pacific Partnership were lower across the board amid news on Friday that Trump's election had effectively made the trade deal with Asian and Latin American nations a nonstarter for the U.S. Congress.
As Trump won elections, Fathom consulting has made an update on its "Donald Dark" view. Here they come with conclusion that there is another, less dramatic, way still exists:
Another electoral shock. But ‘Trump Lite’ should triumph over ‘Donald Dark’
by Fathom Consulting
- For the second time this year, investors are in a state of panic following an antiestablishment vote at the polls. But when the dust has settled, what will Donald Trump’s victory mean for the US, and for the global economy?
- During the long election campaign, Donald Trump made countless extreme, and often contradictory promises. He undoubtedly poses a threat to the status quo. But he is unlikely to be the disaster for the US economy that many seem to fear.
- The most likely outcome is what we call ‘Trump Lite’, where the President is unwilling or unable to enact most of what he has promised. In this world, US economic growth strengthens a little in the near term, in response to greater fiscal stimulus, and further out, in response to a more rapid normalisation of monetary policy.
- The alternative is the world of ‘Donald Dark’. A new era of protectionism sees global trade as a share of global GDP fall sharply. This is good for American workers. But it is bad for emerging market economies, and a disaster for capitalists the world over.
Riding a wave of popular discontent against globalisation, immigration and the political and economic establishment seems to work. First Brexit. Now Donald Trump. Investors are shocked.
At the time of writing, global equities are down sharply in response to Trump’s win: equity futures suggest that the S&P 500 will open 2%-3% lower later today. Safe-haven assets such as the Japanese yen and gold have rallied and the probability assigned to a US rate hike later this year has fallen sharply.
Markets were betting on a Clinton victory, much as they had bet on a ‘remain’ vote in the UK’s EU referendum earlier this year. And like Brexit, Mr Trump’s agenda represents a step away from globalisation towards a more isolationist approach. Yet, for all of his flaws, the US economy could fare a lot better under Mr Trump than many expect.
For a start, Mr Trump may be unwilling or unable to push through the agenda he set out in his campaign speeches. Politicians often make promises that they do not plan to keep. It is doubtful whether Mr Trump really intends to deport 11 million undocumented immigrants, force Mexico to build a wall and start a trade war with China. Besides, even if he does attempt some or all of those things, a Republican-controlled Congress may yet slap him down.
Second, Mr Trump has pledged a massive fiscal splurge in the form of lower taxes and more spending on law enforcement and the military. Most of this is likely to get the backing of a Republican-controlled Congress, and will provide a meaningful boost to US economic growth in the near term. Furthermore, to the extent that this is inflationary and allows a faster normalisation of US monetary policy, we think that it will benefit the economy over the longer term too. We label this scenario ‘Trump Lite’.
Last but not least, cyclically, the US economy is already in decent shape: it grew at an annualised pace of 2.9% in Q3, consumer confidence is quite high, annual wage growth hit a new post-recession peak in October and the current level of job creation is well above the neutral level of 60,000 or so that we judge to be consistent with a stable unemployment rate.
The uncertainty posed by Mr Trump’s victory may prompt some firms to put investment on hold, but these doubts should be at least partially offset by Mr Trump’s plan to slash the corporate tax rate from 35% to 15%.
Admittedly, Mr Trump’s win poses several uncertainties and potential risks. His temperament is a threat to geopolitical stability. But the biggest risk to the economy is the possibility of a sharp reversal in globalisation. This could be triggered either by Mr Trump’s success emboldening isolationist political movements in other countries, or by Mr Trump starting a trade war with key trading partners such as China and Mexico. Although the US is a relatively closed economy, it would not be immune to a sharp downturn in global trade. Indeed, we project that if global trade as a share of global GDP were to fall back to levels seen in the early 1980s over the next five years or so then the US economy would suffer an outright recession. We call this scenario ‘Donald Dark’.
In putting together our latest quarterly forecast, we gave ‘Donald Dark’ a weight of just 15%. Our central scenario – a Hillary Clinton win – had a weight of 50%. Implicitly, with Donald Trump now in the White House, our risk scenario has around a 1-in-3 chance.
Trump Lite
In our central Trump scenario, which we call Trump Lite, nothing much changes. In this world, either Mr Trump backs down on his more controversial proposals, or he is unable to pass the laws he needs to enact them. Accordingly, we assume only a small number of deportations and minor trade disputes with China and Mexico. Broadly speaking, business carries on as usual.
Less immigration and less trade would be bad for US GDP growth, but we think that Mr Trump’s pro-business policies and fiscal package would offset this. Overall, we expect a small net positive boost to real US GDP in this scenario. Moreover, to the extent that Mr Trump’s fiscal policies are inflationary, his victory may enable faster normalisation of US interest rates. As we have highlighted in the past, we think that this would be good for the US economy.
Donald Dark
There is a risk that this all goes horribly wrong. The US President has relatively free reign to start a trade war by using existing US laws, thereby avoiding approval from Congress. A US President could, for example, slap tariffs and quotas on imports by invoking the International Emergency Economic Powers Act (1977) or sections of the Trade Act of 1974.
The legalities of these tariffs would be challenged in the courts by US firms and other countries, who are likely to retaliate. In short, things could get messy, with Trump’s presidency feeding the mood of isolationism and populist politics. It could also contribute to events such as a ‘hard Brexit’ and Marie le Pen doing well in the French presidential elections, both of which would fuel concerns about the future of the European Union.
In this world, we forecast a sharp fall in global trade, as well as a sharp slowdown in the annual rate of US population growth (from 0.8% to 0.2%) due to the mass deportation of illegal immigrants. US GDP falls sharply from baseline (see chart on first page) and the global economy enters a 2008-style recession.
For all of Mr Trump’s inflammatory rhetoric, we think that the most likely outcome of a Trump presidency would be something closer to Trump Lite. That said, investors should brace themselves for the risk of Donald Dark and hedge themselves against that outcome, where possible.
How to trade it?
In either world, the stand out trade would be to buy the US dollar. Assuming an initial risk-off reaction to a Trump victory, we think that the US dollar would rise due to safe haven demand.
It may seem curious that the US dollar would benefit from safe haven demand, even though the US is the source of these concerns, but that is exactly what happened during the 2008 global financial crisis
.
In the Donald Dark world, safe haven demand is likely to keep the dollar supported in the near- and medium-term. In our Trump Lite scenario, the initial appreciation of the dollar post-election may well be reversed, but as soon as it became clear that the US economy would continue to grow (indeed, grow faster than in our base case) the dollar would be likely to appreciate once again. Higher US interest rates as a result of better-than-expected economic outcomes and higher inflation would also drive the dollar higher in the medium-term.
We also thought that the US dollar would appreciate if Hillary Clinton wins, since US interest rates would climb faster than investors currently anticipate. Either way, in our view, now is a good time to buy the US dollar.
US Treasuries would also benefit from safe haven flows after a Trump victory. Under our Trump Lite scenario, we think that this would be short-lived. Whereas in the Donald Dark world, Treasuries would continue to benefit from safe haven flows.
Equities fare very poorly under our Donald Dark scenario due to a significantly weaker growth outlook. Diminished trade results in a smaller economic pie, with labour’s share of that pie rising significantly due to greater bargaining power for workers as the available pool of labour shrinks. This is a double-whammy for equity holders who suffer from both a smaller pie and reduced share of that smaller pie.
In Trump Lite, the economy is a little bigger than it otherwise would be, although since labour’s share of income also rises in this world, equity holders are worse off than they would be in the consensus implied baseline (at least, before considering any changes to the US tax code).
How did we get here and what now?
The emergence of Mr Trump as a political force reflects a mood of growing discontent (in the developed world at least) about immigration, globalisation, inequality and the benefits of free trade. Low earners in rich countries feel that globalisation has not worked for them. Judging by the fall of labour’s share of income and the widening gap between the real income growth of the richest and poorest households, that concern may be valid.
Indeed, as Edward Luce from the Financial Times noted in a recent article, “if Mr Trump loses it will be due to character – not because of his message”. The forces that have brought Donald Trump this close to the Presidency are akin to those unleashed by the Brexit referendum in the UK, and to those behind the rise of extremist parties across the developed world. Those forces are likely to remain in place whether or not Mr Trump prevails.
COT Report
So, as you can see fundamentals mostly form moderately bullish view for USD and hence, bearish - for EUR. This mostly corresponds to our long-term analysis that suggests further drop on EUR. CFTC data also brings no surprises on this subject here and mostly confirms what we have said above. Net speculative short position continues to grow as well as open interest. This tells on opening new shorts positions week by week
Technical
Monthly
So right now we know that fundamental background mostly looks bearish for EUR. Despite significant volatility on daily chart, monthly picture changes slowly. November candle still stands inside of the range of previous month, but based on action that we see - it has chances to become another bearish sign. If it would appear on top - we could call it as "reversal candle" again. It has higher top and probably will close below October lows...
Currently EUR stands at rather strong wide support area. This is lower border of downward channel and all-time 5/8 Fib support. Here EUR has formed Butterfly "buy" and it has reached first 1.27 extension here. Probably it needs some time to pass through this level and supportive fundamental background of US strength that finally are coming probably.
EUR is forming typical reversal candle in May. Price has moved above April top and closed below April's lows. It could not get extended continuation, but usually market shows downward continuation within next 1-3 candles.
Sometimes reversal candles lead to collapse, as it was on EUR around 1.40 area. Thrust down has started particularly by reversal candle in March 2014.
Speaking on big scale bearish signs, we have these ones:
EUR was not able to reach YPR1 and returned right back down to YPP. Following this logic next destination could be YPS1 right around parity and 1.618 butterfly target. This is just another destination point that we have here.
Appearing of reversal candle brings nothing good to bulls. Currently we can't precisely forecast the consequences of its appearing, but even minor results will bring some months of downward action inside current 1.04 -1.15 consolidation... Although potential bearish impact could be even stronger.
Finally we have another bearish sign that looks like bearish dynamic pressure. Take a look that although trend holds bullish - market shows inablitity to move up, even from strong support area. Next strong support stands precisely at parity and will become a culmination of downward action, since this level includes support line, YPS1 and butterfly 1.618 target. Brexit results hardly will bring prosperity to EU and probably will become another bearish driving factor for EUR. We aleardy see consequences of Brexit on GBP, so, some negative impact on EUR also will happen, this is just a question of time.
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 will be re-established only when EUR will erase reversal candle and overcome its top above 1.16. Second, if EUR will still keep moderate bearish sentiment, downside potential hardly will be lower than parity, due recent Fed dovish adjustments to its policy for 2017-2018.
Weekly
Weekly chart also shows bearish action last week. Actually we've taken a look at this picture briefly in one of daily videos. As you can see last week is bearish grabber and bearish reversal week simultaneously.
Last week, due uncertainty on elections background we also have discussed bullish butterfly. Theoretically it will be valid even until 1.0530 lows, but right now, on bearish fundametal background and bearish action we return back to our long-term bearish setup.
Actually there is another reason, why we think about bearish continuation. This is large AB=CD pattern, or better to say most recent action. Take a look, as EUR has reached 0.618 extension, it has turned to reasonable upside bounce. This bounce coincides with election turmoil, but right now market has dropped below 0.618 target, which means that current action is continuation of CD leg. That's being said, EUR is going to next target. Natural market behavior suggest extension mode right to AB=CD target @ 1.04 level.
At the same time, this 1.04 target stands below previous lows around 1.0530. It means that market should get acceleration down as soon as it will break though it. This in turn, could lead EUR right to completion of 1.27 Butterfly around 1.01. But it stands below oversold, so let's focus first on first target. In nearest few weeks we should get clear signs that market really stands in downward extension and CD leg is really continuing...
Daily
On daily chart recent 2 sessions were relatively quiet, market creeps with daily oversold level. In fact, EUR has no strong support below current level, except MPS1, as all Fib levels already have been broken. It means that may be some minor bounce could happen as soon as EUR will touch MPS1. Next destination point should be 1.06 area - 1.618 extension of AB-CD pattern:
To be continued...
