Sive Morten
Special Consultant to the FPA
- Messages
- 18,659
Fundamentals
(Reuters) The dollar slid against major rivals on Friday as investors took advantage of a minor pullback in U.S. bond yields from recent highs and a holiday-shortened week to consolidate gains that had propelled the currency to a nearly 14-year peak.
Expectations of higher U.S. inflation and interest rate hikes by the Federal Reserve have driven the greenback to a more than 6 percent gain in the last two months, its strongest showing over a similar period since early 2015.
Most currency players expect the gains to continue. But the combination of the U.S. Thanksgiving holiday, the processing of corporate flows before the month-end and perceived risks looming for markets in the first half of December led some to cash in gains now.
"The latest consolidation has many investors wondering if it's time to sell dollars," said Kathy Lien, managing director of FX strategy at BK Asset Management in New York.
"While there is no question that the dollar is getting ahead of reality and as tempting as it may be to pick a top, the latest pullback is small which means the better trade should be buying the dollar's dips until Fed Chair Janet Yellen tells us otherwise."
In afternoon trading on Friday, U.S. 10-year Treasury yields were up slightly from the previous session at 2.359 percent, but off from Thursday's 16-month high of 2.417 percent. U.S. two-year yields slipped from a more than six-year high hit earlier in the session and were last at 1.130 percent. The step-back in yields drove a modest selloff in the dollar.
In early afternoon trading, the dollar index fell 0.3 percent to 101.42 after hitting an almost 14-month peak the previous session. The index posted its largest one-day fall since early November.
After hitting an 8-month high of 113.90 yen earlier, the dollar was down 0.2 percent against the yen at 113.11 yen, although it still ended the week with a 2 percent gain.
The euro rose 0.5 percent to $1.0601 after dropping to $1.0518 on Thursday, its lowest since March 2015.
Emerging market equities and currencies, meanwhile, have been hit hard by the specter of a possible Fed rate hike and potential U.S. trade protectionism under President-elect Donald Trump. The Turkish lira slumped to a record low even after the country's central bank raised interest rates for the first time in nearly three years on Thursday. The lira was hurt as European Union lawmakers called for a temporary halt to EU membership talks with Ankara.
Today we continue discusison of ECB QE Programme, as 8th of December comes closer. Last week we already has talked on this subject and today new add-on from Fathom Consulting:
ECB to tweak QE as it faces scarcity issues
by Fathom Consulting
- Despite the recent rally in euro area bond yields, the ECB is likely to run out of eligible German debt to buy before its QE programme ends next March.
- We believe the ECB will be forced to revise its existing bond buying programme when it meets next month. This will involve an extension of its QE programme, as well as technical adjustments — increasing the issue and issuer limit from 33% to 50%.
- Although this will buy the Bank time, in the best-case scenario, by September 2017 the same constraints will begin to bite.
On 8 December the spotlight will be on the European Central Bank (ECB). As we set out in a Newsletter last week, we maintain our view that the ECB will announce an extension of its QE programme by six months to September 2017, while keeping the amount of monthly purchases unchanged at €80 billion. But facing asset
purchase constraints, the ECB’s decision will be more complicated than merely extending its existing programme. Indeed, it is running out of eligible German bonds to buy under its biggest scheme, the public sector purchase programme (PSPP).
*The ECB’s QE programme consists of four separate programmes: the third covered bond purchase programme (CBPP3), the asset-backed securities purchase programme (ABSPP), the corporate sector purchase programme (CSPP) and the public sector purchase programme (PSPP). The PSPP accounts for 81% of the Eurosystem holdings, under which the ECB purchases debt of central governments, local and regional governments, supranational institutions and agencies located in the euro area.
As the US is Germany’s most important export market, it is hoped that Mr Trump’s pledge to unleash fiscal stimulus will benefit Germany and boost inflation. Reflecting this, and a return to risk-on sentiment, Germany’s sovereign bond yields have climbed noticeably in recent weeks, especially at the longer end of the curve. Although rising yields go against the ECB’s objective of reducing the cost of credit, could Mr Trump’s election victory resolve the problem of insufficient eligible German bonds for the ECB to buy? We suspect not. In this Newsletter, we examine the possible adjustments that the ECB could make, and whether or not they will work.
Approaching the self-imposed limits
Due to self-imposed rules, the ECB is only allowed to buy 33% of any individual bond issue and from any individual issuer. In addition, it can only acquire bonds that have a residual maturity of between 2 and 30 years, and that yield more than the ECB’s deposit rate of -0.4%. It can, however, purchase debt issued by agencies and local and regional governments as a substitute for debt issued by the central government. Even so, the supply of eligible German bonds is near exhaustion. This is problematic because it prevents asset purchases being divided geographically between member states as stipulated by the ECB’s capital key.
Can the ECB even get to March?
The ECB does not provide detailed data on its holdings of debt, other than geographically, making it impossible for us to infer the exact amount of eligible debt left for the ECB to buy. That said, we can estimate the eligible amount outstanding using some sensible assumptions. If we ignore current bond yields, there is roughly €1.06 trillion of German sovereign, agency, and local and regional debt in the eligible maturity range. 33% of that amounts to €354 billion, €273 billion of which the ECB has already bought since the start of the PSPP in March 2015. That leaves around €80 billion for the ECB to buy, bearing in mind we assume all outstanding debt is yielding above the -0.4% floor. That is equivalent to five months of purchases, or enough to see the ECB through to the end of its QE programme in March 2017. Put differently, even if German bond yields of all maturities rose above the deposit rate threshold; the ECB would not be able to extend its QE programme without amending its PSPP to address the scarcity of eligible German debt.
At present, given the fact that yields on two, three, four and five year Bunds remain below -0.4%, the supply of German debt is likely to be exhausted before the end of the existing QE programme next March. At last month’s press conference, Mr Draghi admitted that an abrupt end to bond purchases is unlikely, implying that
the ECB will have to change the rules governing the scheme in order to increase the universe of eligible bonds, and soon.
Scrapping the deposit rate limit is unlikely
One way the ECB could change the terms of its PSPP would be to abandon the prohibition on purchases of bonds yielding below the deposit rate. Decreasing the lower limit, or even abandoning it entirely, would, in theory, unlock additional German bonds to buy. However, by purchasing bonds which yield below the deposit rate, the ECB would be making a guaranteed loss. As the ECB is not allowed to invest in assets that are guaranteed to make a loss, it would also have to lower the deposit rate, which we view as both highly improbable and undesirable. Furthermore, lowering the deposit rate would result in yields on short-duration German bonds decreasing by a similar magnitude and therefore would not help the ECB.
Capital key no longer fits the lock
The current PSPP allocates the ECB’s monthly asset purchases according to the amount each country contributes towards the ECB’s capital. With nearly 60% of the ECB’s PSPP between March 2015 and October 2016 absorbed by German, French and Italian debt, there is a lot of wriggle room for the ECB to relax the current allocation. This, however, would result in higher purchases of bonds from peripheral countries, which are generally highly indebted.
For that reason, relaxing the capital key will face political challenges, especially from Germany. Germany’s policymakers argue that if the ECB was allowed to purchase disproportionate amounts of peripheral debt, it would introduce an element of ‘moral hazard’. That is, peripheral governments would have less incentive to implement structural reforms.
Additionally, the capital key regulates not only what amount each country contributes to the ECB’s capital, but the ECB’s gains and losses are distributed in line with the capital key too. If the ECB were to make a loss on its holdings, Germany would have to pay for this loss disproportionately. Hence, changing the rule determining the allocation of the ECB’s bond purchases would introduce an element of fiscal transfer from Germany to the periphery. It is for this reason that, in our view, abandoning the current capital key rule in favour of another measure of allocation – for example according to volume of debt outstanding – would have the highest economic impact, but is also the most improbable option.
Issue limit likely to be increased to 50%
In order to avoid becoming a dominant bond holder, the ECB is restricted from holding more than 33% of any individual bond issue or issuer. However, this limit could be reached before the end of the current programme for Germany. If the issue limit was increased from 33% to 50% this would increase the universe of eligible German bonds by roughly €109 billion. This would be enough to allow the ECB to extend purchases at the current pace until September 2017. The increase in the volume of eligible bonds is limited as the issue limit can only be applied to bonds without a collective action clause (CAC), which are those issued before 1 January 2013. Our calculation assumes all bonds before 1 January 2013 have no CAC. If the ECB held more than 33% of a CAC bond it would be able to veto the decision of all other bond holders in the event of restructuring. In some cases, exercising this veto may go against the Eurosystem’s prohibition of monetary financing.
Increasing the issue and issuer limit from 33% to 50% would be relatively uncontroversial from a political standpoint, while it would increase the amount of eligible debt considerably. This is why we expect Mr Draghi to announce an increase in the issue and issuer limit to 50% on 8 December.
Extending the maturity range beyond 30 years is another possible option. That, however, would only add around €0.2 billion to the pool of eligible German bonds – a negligible amount. Therefore, we consider it unlikely that the ECB will pursue this option.
COT Report
There is no report yet for last week, but we've got data for 15th of November. It shows that EUR drops but net speculative short position and open interest have contracted for approx. equal amount of 20K contracts. It means that EUR was dropping while traders were closing shorts. Although changes are not large, but it is definitely that changes in speculative position stands opposite to price action. It means that it could become a reason for some pause in bearish trend and meaningful retracement up. Unfortunately it is difficult to point precisely, when this could happen. As you can see this tendency stands for 3 weeks in a row. So, whether EUR will form another week of this kind of will take pause right now - this is mostly a question to technical part of research...
Technical
Monthly
So right now we know that fundamental background mostly looks bearish for EUR. Now big changes that we see on lower time frames becomes visible on monthly chart as well. Recent update from Fathom consulting about increasing limit on bond purchasing by ECB and widening of QE programme should make bearish job for EUR in medium-term perspective.
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, as EUR has dropped through YPP.
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. EUR has not broken through 1.04 lows yet, but probably this will happen very soon. Our next target on Monthly chart is parity - 1.618 Butterfly extension, YPS1 and trendline support.
It is especially interesting will be price action in relation to YPS1. Breaking it down will mean that long term bearish trend could continue in 2017.
Another intrigue could appear if EUR will form bullish stop grabber when it will hit 1.04 target... But this will happen in December probably.
Weekly
Here, guys, as you can see - nothing has changed drastically, as week takes the shape of doji. Range was small due Thanksgiving day in US. That's why our former analysis here mostly stands the same.
Weekly chart also shows bearish action. Downward action has accelerated and EUR almost has reached important 1.04 lows. Here we have two major patterns - AB=CD and Butterfly.
Here we can track market action step by step. First EUR has reached 0.618 extension and shown reasonable bounce that coincided with elections by the way. Now it is turned to extension mode and going to next one - AB=CD @ 1.04.
Most important thing with this target is its standing below previous lows around 1.0530. It means that market should get acceleration down as soon as it will break though it. And this will be bad day for those traders who will make bet on 1.04 lows support and expect upside bounce there. These lows are doomed.
This in turn, could lead EUR right to completion of 1.27 Butterfly around 1.01 and minor AB-CD 1.618 extension. Probably they will be reached simultaneously. Right now these targets stand below oversold and not as interesting as nearest one. We suspect that drop could happen on 8th of December as ECB will announce their perspectives on next week and QE program, as it was described in Fathom consulting research.
Daily
Here EUR still stands around last daily target - 1.618 extension of AB-CD pattern. Still situation stands tricky as you will see below. Meantime, on daily the most valuable issue for us is thrust, since it could become a background for DiNapoli directional pattern, although we haven't got yet any closes above 3x3 DMA.
4-hour
Here the major picture that we will track during next week. Market has formed butterfly pattern, but hardly meaningful upside retracement will happen here, because we have uncompleted AB=CD target on weekly chart @ 1.04 level. This leads us to conslusion that further drop is unavoidable soone rather than later. Recent low stands just 20 pips above major 1.05 lows. And major trick here means that EUR has to start upside action either right now or no upside action will be until 1.04 target will be hit.
Because if EUR will drop back to 1.0517 level - it definitely will challenge 1.05. Any stop triggering around this area will lead to further downward acceleration and most of all - reaching of 1.04 target. Only after this event chances on retracement will appear again.
Current upside action looks anemic. EUR has chance to form, say, small H&S pattern here to keep phantom chances on bounce, but, as we've said - if EUR will return back to recent lows here - be prepared for further drop and challenging of 1.05 lows.
Conclusion:
We still keep the same long-term view on EUR and it still looks bearish. Our next long-term target stands around parity.
On a way down we will have some intermediate targets as well, and next one stands around 1.04 area.
The technical portion of Sive's analysis owes a great deal to Joe DiNapoli's methods, and uses a number of Joe's proprietary indicators. Please note that Sive's analysis is his own view of the market and is not endorsed by Joe DiNapoli or any related companies.
(Reuters) The dollar slid against major rivals on Friday as investors took advantage of a minor pullback in U.S. bond yields from recent highs and a holiday-shortened week to consolidate gains that had propelled the currency to a nearly 14-year peak.
Expectations of higher U.S. inflation and interest rate hikes by the Federal Reserve have driven the greenback to a more than 6 percent gain in the last two months, its strongest showing over a similar period since early 2015.
Most currency players expect the gains to continue. But the combination of the U.S. Thanksgiving holiday, the processing of corporate flows before the month-end and perceived risks looming for markets in the first half of December led some to cash in gains now.
"The latest consolidation has many investors wondering if it's time to sell dollars," said Kathy Lien, managing director of FX strategy at BK Asset Management in New York.
"While there is no question that the dollar is getting ahead of reality and as tempting as it may be to pick a top, the latest pullback is small which means the better trade should be buying the dollar's dips until Fed Chair Janet Yellen tells us otherwise."
In afternoon trading on Friday, U.S. 10-year Treasury yields were up slightly from the previous session at 2.359 percent, but off from Thursday's 16-month high of 2.417 percent. U.S. two-year yields slipped from a more than six-year high hit earlier in the session and were last at 1.130 percent. The step-back in yields drove a modest selloff in the dollar.
In early afternoon trading, the dollar index fell 0.3 percent to 101.42 after hitting an almost 14-month peak the previous session. The index posted its largest one-day fall since early November.
After hitting an 8-month high of 113.90 yen earlier, the dollar was down 0.2 percent against the yen at 113.11 yen, although it still ended the week with a 2 percent gain.
The euro rose 0.5 percent to $1.0601 after dropping to $1.0518 on Thursday, its lowest since March 2015.
Emerging market equities and currencies, meanwhile, have been hit hard by the specter of a possible Fed rate hike and potential U.S. trade protectionism under President-elect Donald Trump. The Turkish lira slumped to a record low even after the country's central bank raised interest rates for the first time in nearly three years on Thursday. The lira was hurt as European Union lawmakers called for a temporary halt to EU membership talks with Ankara.
Today we continue discusison of ECB QE Programme, as 8th of December comes closer. Last week we already has talked on this subject and today new add-on from Fathom Consulting:
ECB to tweak QE as it faces scarcity issues
by Fathom Consulting
- Despite the recent rally in euro area bond yields, the ECB is likely to run out of eligible German debt to buy before its QE programme ends next March.
- We believe the ECB will be forced to revise its existing bond buying programme when it meets next month. This will involve an extension of its QE programme, as well as technical adjustments — increasing the issue and issuer limit from 33% to 50%.
- Although this will buy the Bank time, in the best-case scenario, by September 2017 the same constraints will begin to bite.
On 8 December the spotlight will be on the European Central Bank (ECB). As we set out in a Newsletter last week, we maintain our view that the ECB will announce an extension of its QE programme by six months to September 2017, while keeping the amount of monthly purchases unchanged at €80 billion. But facing asset
purchase constraints, the ECB’s decision will be more complicated than merely extending its existing programme. Indeed, it is running out of eligible German bonds to buy under its biggest scheme, the public sector purchase programme (PSPP).
*The ECB’s QE programme consists of four separate programmes: the third covered bond purchase programme (CBPP3), the asset-backed securities purchase programme (ABSPP), the corporate sector purchase programme (CSPP) and the public sector purchase programme (PSPP). The PSPP accounts for 81% of the Eurosystem holdings, under which the ECB purchases debt of central governments, local and regional governments, supranational institutions and agencies located in the euro area.
As the US is Germany’s most important export market, it is hoped that Mr Trump’s pledge to unleash fiscal stimulus will benefit Germany and boost inflation. Reflecting this, and a return to risk-on sentiment, Germany’s sovereign bond yields have climbed noticeably in recent weeks, especially at the longer end of the curve. Although rising yields go against the ECB’s objective of reducing the cost of credit, could Mr Trump’s election victory resolve the problem of insufficient eligible German bonds for the ECB to buy? We suspect not. In this Newsletter, we examine the possible adjustments that the ECB could make, and whether or not they will work.
Approaching the self-imposed limits
Due to self-imposed rules, the ECB is only allowed to buy 33% of any individual bond issue and from any individual issuer. In addition, it can only acquire bonds that have a residual maturity of between 2 and 30 years, and that yield more than the ECB’s deposit rate of -0.4%. It can, however, purchase debt issued by agencies and local and regional governments as a substitute for debt issued by the central government. Even so, the supply of eligible German bonds is near exhaustion. This is problematic because it prevents asset purchases being divided geographically between member states as stipulated by the ECB’s capital key.
Can the ECB even get to March?
The ECB does not provide detailed data on its holdings of debt, other than geographically, making it impossible for us to infer the exact amount of eligible debt left for the ECB to buy. That said, we can estimate the eligible amount outstanding using some sensible assumptions. If we ignore current bond yields, there is roughly €1.06 trillion of German sovereign, agency, and local and regional debt in the eligible maturity range. 33% of that amounts to €354 billion, €273 billion of which the ECB has already bought since the start of the PSPP in March 2015. That leaves around €80 billion for the ECB to buy, bearing in mind we assume all outstanding debt is yielding above the -0.4% floor. That is equivalent to five months of purchases, or enough to see the ECB through to the end of its QE programme in March 2017. Put differently, even if German bond yields of all maturities rose above the deposit rate threshold; the ECB would not be able to extend its QE programme without amending its PSPP to address the scarcity of eligible German debt.
At present, given the fact that yields on two, three, four and five year Bunds remain below -0.4%, the supply of German debt is likely to be exhausted before the end of the existing QE programme next March. At last month’s press conference, Mr Draghi admitted that an abrupt end to bond purchases is unlikely, implying that
the ECB will have to change the rules governing the scheme in order to increase the universe of eligible bonds, and soon.
Scrapping the deposit rate limit is unlikely
One way the ECB could change the terms of its PSPP would be to abandon the prohibition on purchases of bonds yielding below the deposit rate. Decreasing the lower limit, or even abandoning it entirely, would, in theory, unlock additional German bonds to buy. However, by purchasing bonds which yield below the deposit rate, the ECB would be making a guaranteed loss. As the ECB is not allowed to invest in assets that are guaranteed to make a loss, it would also have to lower the deposit rate, which we view as both highly improbable and undesirable. Furthermore, lowering the deposit rate would result in yields on short-duration German bonds decreasing by a similar magnitude and therefore would not help the ECB.
Capital key no longer fits the lock
The current PSPP allocates the ECB’s monthly asset purchases according to the amount each country contributes towards the ECB’s capital. With nearly 60% of the ECB’s PSPP between March 2015 and October 2016 absorbed by German, French and Italian debt, there is a lot of wriggle room for the ECB to relax the current allocation. This, however, would result in higher purchases of bonds from peripheral countries, which are generally highly indebted.
For that reason, relaxing the capital key will face political challenges, especially from Germany. Germany’s policymakers argue that if the ECB was allowed to purchase disproportionate amounts of peripheral debt, it would introduce an element of ‘moral hazard’. That is, peripheral governments would have less incentive to implement structural reforms.
Additionally, the capital key regulates not only what amount each country contributes to the ECB’s capital, but the ECB’s gains and losses are distributed in line with the capital key too. If the ECB were to make a loss on its holdings, Germany would have to pay for this loss disproportionately. Hence, changing the rule determining the allocation of the ECB’s bond purchases would introduce an element of fiscal transfer from Germany to the periphery. It is for this reason that, in our view, abandoning the current capital key rule in favour of another measure of allocation – for example according to volume of debt outstanding – would have the highest economic impact, but is also the most improbable option.
Issue limit likely to be increased to 50%
In order to avoid becoming a dominant bond holder, the ECB is restricted from holding more than 33% of any individual bond issue or issuer. However, this limit could be reached before the end of the current programme for Germany. If the issue limit was increased from 33% to 50% this would increase the universe of eligible German bonds by roughly €109 billion. This would be enough to allow the ECB to extend purchases at the current pace until September 2017. The increase in the volume of eligible bonds is limited as the issue limit can only be applied to bonds without a collective action clause (CAC), which are those issued before 1 January 2013. Our calculation assumes all bonds before 1 January 2013 have no CAC. If the ECB held more than 33% of a CAC bond it would be able to veto the decision of all other bond holders in the event of restructuring. In some cases, exercising this veto may go against the Eurosystem’s prohibition of monetary financing.
Increasing the issue and issuer limit from 33% to 50% would be relatively uncontroversial from a political standpoint, while it would increase the amount of eligible debt considerably. This is why we expect Mr Draghi to announce an increase in the issue and issuer limit to 50% on 8 December.
Extending the maturity range beyond 30 years is another possible option. That, however, would only add around €0.2 billion to the pool of eligible German bonds – a negligible amount. Therefore, we consider it unlikely that the ECB will pursue this option.
COT Report
There is no report yet for last week, but we've got data for 15th of November. It shows that EUR drops but net speculative short position and open interest have contracted for approx. equal amount of 20K contracts. It means that EUR was dropping while traders were closing shorts. Although changes are not large, but it is definitely that changes in speculative position stands opposite to price action. It means that it could become a reason for some pause in bearish trend and meaningful retracement up. Unfortunately it is difficult to point precisely, when this could happen. As you can see this tendency stands for 3 weeks in a row. So, whether EUR will form another week of this kind of will take pause right now - this is mostly a question to technical part of research...
Technical
Monthly
So right now we know that fundamental background mostly looks bearish for EUR. Now big changes that we see on lower time frames becomes visible on monthly chart as well. Recent update from Fathom consulting about increasing limit on bond purchasing by ECB and widening of QE programme should make bearish job for EUR in medium-term perspective.
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, as EUR has dropped through YPP.
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. EUR has not broken through 1.04 lows yet, but probably this will happen very soon. Our next target on Monthly chart is parity - 1.618 Butterfly extension, YPS1 and trendline support.
It is especially interesting will be price action in relation to YPS1. Breaking it down will mean that long term bearish trend could continue in 2017.
Another intrigue could appear if EUR will form bullish stop grabber when it will hit 1.04 target... But this will happen in December probably.
Weekly
Here, guys, as you can see - nothing has changed drastically, as week takes the shape of doji. Range was small due Thanksgiving day in US. That's why our former analysis here mostly stands the same.
Weekly chart also shows bearish action. Downward action has accelerated and EUR almost has reached important 1.04 lows. Here we have two major patterns - AB=CD and Butterfly.
Here we can track market action step by step. First EUR has reached 0.618 extension and shown reasonable bounce that coincided with elections by the way. Now it is turned to extension mode and going to next one - AB=CD @ 1.04.
Most important thing with this target is its standing below previous lows around 1.0530. It means that market should get acceleration down as soon as it will break though it. And this will be bad day for those traders who will make bet on 1.04 lows support and expect upside bounce there. These lows are doomed.
This in turn, could lead EUR right to completion of 1.27 Butterfly around 1.01 and minor AB-CD 1.618 extension. Probably they will be reached simultaneously. Right now these targets stand below oversold and not as interesting as nearest one. We suspect that drop could happen on 8th of December as ECB will announce their perspectives on next week and QE program, as it was described in Fathom consulting research.
Daily
Here EUR still stands around last daily target - 1.618 extension of AB-CD pattern. Still situation stands tricky as you will see below. Meantime, on daily the most valuable issue for us is thrust, since it could become a background for DiNapoli directional pattern, although we haven't got yet any closes above 3x3 DMA.
4-hour
Here the major picture that we will track during next week. Market has formed butterfly pattern, but hardly meaningful upside retracement will happen here, because we have uncompleted AB=CD target on weekly chart @ 1.04 level. This leads us to conslusion that further drop is unavoidable soone rather than later. Recent low stands just 20 pips above major 1.05 lows. And major trick here means that EUR has to start upside action either right now or no upside action will be until 1.04 target will be hit.
Because if EUR will drop back to 1.0517 level - it definitely will challenge 1.05. Any stop triggering around this area will lead to further downward acceleration and most of all - reaching of 1.04 target. Only after this event chances on retracement will appear again.
Current upside action looks anemic. EUR has chance to form, say, small H&S pattern here to keep phantom chances on bounce, but, as we've said - if EUR will return back to recent lows here - be prepared for further drop and challenging of 1.05 lows.
Conclusion:
We still keep the same long-term view on EUR and it still looks bearish. Our next long-term target stands around parity.
On a way down we will have some intermediate targets as well, and next one stands around 1.04 area.
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.
