Sive Morten
Special Consultant to the FPA
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Fundamentals
(Reuters) - The dollar was little changed against a basket of major currencies on Friday after conflicting U.S. economic data, leaving it on course for its largest weekly rise in 2017 amid a rise in expectations for inflation and U.S. interest rate hikes.
The one-week rise of just under 1 percent helped the greenback post its first monthly gain against its peers since February.
On Friday, the dollar fell to session lows after the release of a report showing U.S. consumer spending barely rose in August, but that was offset by an unexpected increase in the University of Chicago’s purchasing managers’ index and an in-line reading on consumer sentiment.
Federal Reserve Chair Janet Yellen said earlier this week that the central bank planned to stay on its current rate hike path, which suggested to investors that it would raise rates in December, with further increases to follow in 2018.
The Fed has raised rates twice in 2017.
Analysts said the week’s rally was sparked by the German election last weekend in which the far-right Alternative for Germany won seats in parliament for the first time, leading to worries that anti-European political movements on the continent, including those in Spain and Italy, could be more worrisome than initially thought.
“Economically, the situation in the U.S. merits the fact that the dollar has gained,” said Juan Perez, currency strategist at Tempus Inc in Washington.
“The political dissolution in Europe continues and now with the situation in Spain it symbolizes that there are separatist movements across the continent that cannot be ignored. On a geopolitical perspective, Europe in a little bit tougher situation than we are.”
Comments from Yellen and the release of a foundation for President Donald Trump’s proposed tax overhaul also pushed inflation expectations higher, with U.S. Treasury yields rising to months- and years-long highs on Wednesday.
The dollar index, the trade-weighted basket of the greenback against its rivals, was flat at 93.02. It rose 0.9 percent for the week, its best weekly performance since September, and was up 0.35 percent for the month.
The euro rose 0.35 percent to $1.1824, having earlier hit a three-day high against the dollar. The dollar was 0.1 percent higher against the Japanese yen at 112.43 yen.
Chart of the Week: FOMC: When No Surprise is a Surprise
by Fathom Consulting
Last Wednesday evening the FOMC announced that it would begin the process of unwinding its QE programme in October, and that it would do so very gradually by reducing the amount of maturing securities on its balance sheet that it reinvests every month. Meanwhile, the ‘summary of economic projections’ implied that committee members expected to lift the fed funds rate by another 25 basis points this year, and by a further 75 basis points next year – the same as it did in July. Even though the balance sheet shrinking plan was telegraphed by the committee several months ago, and the ‘dot plot’ was little changed, Treasury yields and the US dollar rose following Wednesday’s meeting. Nevertheless, we believe that investors continue to underestimate the extent to which the fed funds rate will rise over the next year or so; they were right to call the FOMC’s bluff after learning the lessons from the taper tantrum in 2013, but they are wrong to do so now. Although Janet Yellen confessed that she did not fully understand why inflation had been so soft in recent months, FOMC members appear keen to continue moving interest rates away from the zero lower bound, even though core PCE inflation is not expected to hit 2% until 2019. Core PCE inflation is currently 1.4% and we think that it is a lot more likely to rise than fall over the next couple of years, particularly if the economy gets a boost from fiscal policy.
COT Report
Today CFTC chart shows very interesting situation that points on hidden bulls' stubborn on EUR. We're mostly interested in last 4 weeks here. After net long position has reached its peak, next week it has reduced a bit, while open interest has moved in opposite direction and increased. It means that although investors mostly were kept their longs, new shorts were opened. This was a sign of preparation to German elections. Two weeks ago pressure on EUR has increased as Fed confirmed their hawkish ambitions and voting day in Germany has become closer. As a result - some longs were closed, probably by shorter-term investors, because as net long position as OI have dropped.
Last week, as election results have been announced we see that open interest almost stands the same while net long position have increased significantly and returned back to record levels. What does it mean? It means that short-term bears (speculators) stepped out and took profit probably while new bulls are stepped in. Concerning bulls - it is difficult to say right now whether they are long-term or short-term, may be they are those who out on week before elections and when Fed policy was announced. For short-term perspective this is more positive rather than negative sign for EUR. Status quo mostly has been re-established, except may be total value of positions. Right now it stands slightly lower compares to positions in July. It means that some investors since August still stand aside or in locking positions and wait for more clarity.
So, as a bottom line - major limitations for EUR have not disappeared as total position still stands at record levels and upside potential is limited, but for short-term perspective of 1-2 weeks recent position dynamic is positive, because bearish investors have closed their positions which suggests that they are do not believe in fast depreciation of EUR. This is also confirms our idea of larger H&S pattern on daily chart.
Technical
Monthly
As last week action was rather gradual, we do not have big chances in technical analysis of current situation on market, at least on monthly/weekly charts. Thus, major topic of our discussion as last week as this one and may even next week will be tactical downside retracement. Although it is "tactical" only for monthly chart. On daily one we have significant action.
As we have estimated earlier, EUR has formed short-term bearish pattern here - wash'n'rinse of previous top. August was indecision candle and in September price has tried to move higher but failed. This is sign of weakness and it increases chances on deeper retracement on lower time frames, mostly on daily. And this retracement right now stands under way.
Appearing of strong resistance on monthly chart, right at the moment of overloaded speculative bullish positions makes us to be careful with any bullish trades. We have two side-by-side Fib levels at 1.2160-1.2170 area on monthly chart and long-term support/resistance zone, where market stands right now. Monthly OB level stands higher and will not be a barrier. All yearly pivots have been broken up on EUR.
As you can see August month shows mostly indecision action. May be shadows of this candle are not as big to call it "high wave" pattern, but by it's nature, it's probably the same. Appearing of "indecision" sign at this moment mostly stands in favor of retracement rather than upside breakout.
It is a bit difficult to talk on depth of possible bounce, but monthly chart tells that it will be probably painless for bullish ambitions, if retracement will not be deeper than 1.14 area. Here we draw previous consolidation as rectangle, but in reality, if you draw upper border based on tops sharply, we will get sloped line and it stands around 1.14 area. That's why re-testing of this line is allowable and overall bullish sentiment will not be harmed:
The same situation we still have around US Dollar Index - it stands at strong monthly support and OS level, which gives monthly bullish "Stretch". Of course, hardly it will hold wide fluctuations of currencies on daily charts, but, action to new extremes hardly will be possible in nearest month or so. Besides, if you will drop time frame further, you'll see that some reversal patterns could be formed, such as DRPO "Buy", reverse H&S for higher upside bounce...
Weekly
Trend has turned bearish here, OS level stands rather far and doesn't prevent downside action. In fact, what we've said above to Dollar Index might be true for EUR as well.
Action since middle of the March, right after (or even before) the gap of French elections could be treated as "thrust". Currently price has not reached 1.16 area and we can't talk about B&B "Buy" here yet. Besides, DRPO "Sell" here is more logical to see, if we will take in consideration the scale of ongoing processes. I mean strong monthly dollar index support area and resistance on EUR. Also we should not forget about CFTC EUR positions they are also make mostly long-term effect.
If DRPO "Sell" will be formed here, we probably will have to focus on deeper K-support area around 1.14, trend line and OS level.
Here we could only talk on possible retracement levels that could be reached. I've drawn here sloped line that we've mentioned above and it stands in an area of K-support here.
For shorter daily time perspective we will watch for 1.16 Fib support, this is "hidden" gap-based Fib level.
Daily
So, taking all above talks together, it seems that our H&S pattern on daily has not bad chances to appear. As were tracking it day by day in our daily videos, it is not much to add right now.
Market has reached daily K-support that is accompanied by September PS1 and daily OS level. This combination makes it suitable for starting point point for right shoulder creation. Our intraday 1.1620 target is too extended for this pattern and stands below K-area. It means that neckline probably stands as we've drawn it here and upside action has started.
Taking in consideration of H&S harmony, it seems that destination point stands somewhere around 1.1880-1.19 area:
Intraday
So, last week target of 1.1825 area has been met, so as ride down after German elections as ride up after completion of intraday targets were pretty nice.
First, let's start from 4-hour chart. As butterfly 1.618 target has been met price has turned to upside retracement which we've traded in last 2 sessions. At the same time we have minor H&S pattern as well here and it's ultimate 1.618 target has not been completed yet.
At the same time, as you can see, neckline of this minor "H&S" stands at the same area where the top of left shoulder of daily larger H&S. It means that most probable scenario here is upside continuation and re-testing of neckline, some kind of "kiss goodbye" probably. Then downward action could continue. Final target of minor H&S probably will be met on a road to major target of daily H&S pattern.
Although market could reach 1.1620 first and start upside action (to form right shoulder on daily ) second, but this scenario we treat as significantly less probable:
Upside action on hourly chart has started from our "222" Buy pattern, but later we also have recognized reverse H&S pattern, which target has not been met yet. Market just has reached 1.1825 resistance. Thus, completion of this AB-CD will lead EUR right to the point - K-resistance and neckline. That's what we will be watching for on Monday:
Conclusion:
In very long term perspective EUR looks positive as monthly USD index could form huge H&S pattern.
In shorter-term perspective EUR has some factors that limit its upside potential - Germany election, technical resistance and overloaded speculative long positions by CFTC data It means that EUR mostly is ready for meaningful retracement down.
On coming week we continue our work with daily H&S pattern and process of forming right shoulder in particular.
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 was little changed against a basket of major currencies on Friday after conflicting U.S. economic data, leaving it on course for its largest weekly rise in 2017 amid a rise in expectations for inflation and U.S. interest rate hikes.
The one-week rise of just under 1 percent helped the greenback post its first monthly gain against its peers since February.
On Friday, the dollar fell to session lows after the release of a report showing U.S. consumer spending barely rose in August, but that was offset by an unexpected increase in the University of Chicago’s purchasing managers’ index and an in-line reading on consumer sentiment.
Federal Reserve Chair Janet Yellen said earlier this week that the central bank planned to stay on its current rate hike path, which suggested to investors that it would raise rates in December, with further increases to follow in 2018.
The Fed has raised rates twice in 2017.
Analysts said the week’s rally was sparked by the German election last weekend in which the far-right Alternative for Germany won seats in parliament for the first time, leading to worries that anti-European political movements on the continent, including those in Spain and Italy, could be more worrisome than initially thought.
“Economically, the situation in the U.S. merits the fact that the dollar has gained,” said Juan Perez, currency strategist at Tempus Inc in Washington.
“The political dissolution in Europe continues and now with the situation in Spain it symbolizes that there are separatist movements across the continent that cannot be ignored. On a geopolitical perspective, Europe in a little bit tougher situation than we are.”
Comments from Yellen and the release of a foundation for President Donald Trump’s proposed tax overhaul also pushed inflation expectations higher, with U.S. Treasury yields rising to months- and years-long highs on Wednesday.
The dollar index, the trade-weighted basket of the greenback against its rivals, was flat at 93.02. It rose 0.9 percent for the week, its best weekly performance since September, and was up 0.35 percent for the month.
The euro rose 0.35 percent to $1.1824, having earlier hit a three-day high against the dollar. The dollar was 0.1 percent higher against the Japanese yen at 112.43 yen.
Chart of the Week: FOMC: When No Surprise is a Surprise
by Fathom Consulting
Last Wednesday evening the FOMC announced that it would begin the process of unwinding its QE programme in October, and that it would do so very gradually by reducing the amount of maturing securities on its balance sheet that it reinvests every month. Meanwhile, the ‘summary of economic projections’ implied that committee members expected to lift the fed funds rate by another 25 basis points this year, and by a further 75 basis points next year – the same as it did in July. Even though the balance sheet shrinking plan was telegraphed by the committee several months ago, and the ‘dot plot’ was little changed, Treasury yields and the US dollar rose following Wednesday’s meeting. Nevertheless, we believe that investors continue to underestimate the extent to which the fed funds rate will rise over the next year or so; they were right to call the FOMC’s bluff after learning the lessons from the taper tantrum in 2013, but they are wrong to do so now. Although Janet Yellen confessed that she did not fully understand why inflation had been so soft in recent months, FOMC members appear keen to continue moving interest rates away from the zero lower bound, even though core PCE inflation is not expected to hit 2% until 2019. Core PCE inflation is currently 1.4% and we think that it is a lot more likely to rise than fall over the next couple of years, particularly if the economy gets a boost from fiscal policy.
COT Report
Today CFTC chart shows very interesting situation that points on hidden bulls' stubborn on EUR. We're mostly interested in last 4 weeks here. After net long position has reached its peak, next week it has reduced a bit, while open interest has moved in opposite direction and increased. It means that although investors mostly were kept their longs, new shorts were opened. This was a sign of preparation to German elections. Two weeks ago pressure on EUR has increased as Fed confirmed their hawkish ambitions and voting day in Germany has become closer. As a result - some longs were closed, probably by shorter-term investors, because as net long position as OI have dropped.
Last week, as election results have been announced we see that open interest almost stands the same while net long position have increased significantly and returned back to record levels. What does it mean? It means that short-term bears (speculators) stepped out and took profit probably while new bulls are stepped in. Concerning bulls - it is difficult to say right now whether they are long-term or short-term, may be they are those who out on week before elections and when Fed policy was announced. For short-term perspective this is more positive rather than negative sign for EUR. Status quo mostly has been re-established, except may be total value of positions. Right now it stands slightly lower compares to positions in July. It means that some investors since August still stand aside or in locking positions and wait for more clarity.
So, as a bottom line - major limitations for EUR have not disappeared as total position still stands at record levels and upside potential is limited, but for short-term perspective of 1-2 weeks recent position dynamic is positive, because bearish investors have closed their positions which suggests that they are do not believe in fast depreciation of EUR. This is also confirms our idea of larger H&S pattern on daily chart.
Technical
Monthly
As last week action was rather gradual, we do not have big chances in technical analysis of current situation on market, at least on monthly/weekly charts. Thus, major topic of our discussion as last week as this one and may even next week will be tactical downside retracement. Although it is "tactical" only for monthly chart. On daily one we have significant action.
As we have estimated earlier, EUR has formed short-term bearish pattern here - wash'n'rinse of previous top. August was indecision candle and in September price has tried to move higher but failed. This is sign of weakness and it increases chances on deeper retracement on lower time frames, mostly on daily. And this retracement right now stands under way.
Appearing of strong resistance on monthly chart, right at the moment of overloaded speculative bullish positions makes us to be careful with any bullish trades. We have two side-by-side Fib levels at 1.2160-1.2170 area on monthly chart and long-term support/resistance zone, where market stands right now. Monthly OB level stands higher and will not be a barrier. All yearly pivots have been broken up on EUR.
As you can see August month shows mostly indecision action. May be shadows of this candle are not as big to call it "high wave" pattern, but by it's nature, it's probably the same. Appearing of "indecision" sign at this moment mostly stands in favor of retracement rather than upside breakout.
It is a bit difficult to talk on depth of possible bounce, but monthly chart tells that it will be probably painless for bullish ambitions, if retracement will not be deeper than 1.14 area. Here we draw previous consolidation as rectangle, but in reality, if you draw upper border based on tops sharply, we will get sloped line and it stands around 1.14 area. That's why re-testing of this line is allowable and overall bullish sentiment will not be harmed:
The same situation we still have around US Dollar Index - it stands at strong monthly support and OS level, which gives monthly bullish "Stretch". Of course, hardly it will hold wide fluctuations of currencies on daily charts, but, action to new extremes hardly will be possible in nearest month or so. Besides, if you will drop time frame further, you'll see that some reversal patterns could be formed, such as DRPO "Buy", reverse H&S for higher upside bounce...
Weekly
Trend has turned bearish here, OS level stands rather far and doesn't prevent downside action. In fact, what we've said above to Dollar Index might be true for EUR as well.
Action since middle of the March, right after (or even before) the gap of French elections could be treated as "thrust". Currently price has not reached 1.16 area and we can't talk about B&B "Buy" here yet. Besides, DRPO "Sell" here is more logical to see, if we will take in consideration the scale of ongoing processes. I mean strong monthly dollar index support area and resistance on EUR. Also we should not forget about CFTC EUR positions they are also make mostly long-term effect.
If DRPO "Sell" will be formed here, we probably will have to focus on deeper K-support area around 1.14, trend line and OS level.
Here we could only talk on possible retracement levels that could be reached. I've drawn here sloped line that we've mentioned above and it stands in an area of K-support here.
For shorter daily time perspective we will watch for 1.16 Fib support, this is "hidden" gap-based Fib level.
Daily
So, taking all above talks together, it seems that our H&S pattern on daily has not bad chances to appear. As were tracking it day by day in our daily videos, it is not much to add right now.
Market has reached daily K-support that is accompanied by September PS1 and daily OS level. This combination makes it suitable for starting point point for right shoulder creation. Our intraday 1.1620 target is too extended for this pattern and stands below K-area. It means that neckline probably stands as we've drawn it here and upside action has started.
Taking in consideration of H&S harmony, it seems that destination point stands somewhere around 1.1880-1.19 area:
Intraday
So, last week target of 1.1825 area has been met, so as ride down after German elections as ride up after completion of intraday targets were pretty nice.
First, let's start from 4-hour chart. As butterfly 1.618 target has been met price has turned to upside retracement which we've traded in last 2 sessions. At the same time we have minor H&S pattern as well here and it's ultimate 1.618 target has not been completed yet.
At the same time, as you can see, neckline of this minor "H&S" stands at the same area where the top of left shoulder of daily larger H&S. It means that most probable scenario here is upside continuation and re-testing of neckline, some kind of "kiss goodbye" probably. Then downward action could continue. Final target of minor H&S probably will be met on a road to major target of daily H&S pattern.
Although market could reach 1.1620 first and start upside action (to form right shoulder on daily ) second, but this scenario we treat as significantly less probable:
Upside action on hourly chart has started from our "222" Buy pattern, but later we also have recognized reverse H&S pattern, which target has not been met yet. Market just has reached 1.1825 resistance. Thus, completion of this AB-CD will lead EUR right to the point - K-resistance and neckline. That's what we will be watching for on Monday:
Conclusion:
In very long term perspective EUR looks positive as monthly USD index could form huge H&S pattern.
In shorter-term perspective EUR has some factors that limit its upside potential - Germany election, technical resistance and overloaded speculative long positions by CFTC data It means that EUR mostly is ready for meaningful retracement down.
On coming week we continue our work with daily H&S pattern and process of forming right shoulder in particular.
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.