Sive Morten
Special Consultant to the FPA
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Fundamentals
Last week we've placed our detailed fundamental view on two major subjects that will drive EUR/USD in long-term perspective. They are tariffs turmoil and Fed/ECB interest rate balance. This week, we mostly get a results, and they are mostly confirm our assessment of situation.
ECB indeed was not too brave to take more aggressive steps in interest rate policy. It just has confirmed what we've said - they will try to keep everything unchanged as long as possible. Thus, M. Draghi said that QE will finish according to the schedule, in December and interest rate will be unchanged till the mid 2019 - this was new input that push EUR lower. I would say that it is not totally unexpected, because we said that ECB definitely will keep rates at zero till the end of 2018, and then gradually will start preparation for more hawkish steps. So 6 month in the beginning of 2019 is precisely the period that should be enough for preparation to the first rate change.
In general, on the question that the ECB was abandoning asset purchases before inflation reached its target, Draghi responded that current levels are much higher than two years ago and the council is confident growth is strong enough to keep inflation on course to reach the target. Given the slowdown in the first quarter, ECB staff revised the forecast for GDP growth this year downward to 2.1 percent, from 2.4 percent, while leaving it unchanged at 1.9 percent for 2019 and 1.7 percent for 2020.
The staff projections for eurozone inflation are 1.7 percent for this year as well as for the following two years. However, since the ECB reacts to incoming data and inflation, this could be subject to change. Indeed, the current forecast for 2018 and 2019 has been revised upward due to higher oil prices.
Also Draghi has confirmed our view on Italian political crisis - Draghi said it was nothing like the earlier crisis of confidence that hit the entire southern rim of the eurozone. Italian yields are well below crisis levels and there has been no evidence of contagion in other countries, he noted.
This let's us to make update on our long-term analysis. It suggests action to at least ~ 1.10 area if we will get confirmation of ECB flat policy. Recent rate decision brings more confidence with this scenario
Speaking on Fed perspectives, I show you two tables with 2 week lag. They show probabilities of rate change by Fed, according to investors' expectations. This one is two weeks ago:
And this table is most recent, just after Fed meeting this week:
Take a look that investors mostly treat positive recent Fed statement as probabilities of rate change have increased. Next one should come in September, and chances on 4th rate hike this year have increased for 20%.
Now, if we combine this new data with ECB policy, as a bottom line we should get more bearish pressure on EUR/USD and continuation of bear trend in long term perspective.
Speaking on tariffs... we do not have something new here. In general we need to keep in mind simple thing - United States are working on rebalancing their global cash flows. This work goes on different directions. First is, Trump tries to offload US balance with non-core assets. Long time America pays for its allies and finance global authorities, blocs such as NATO, small limitrophe countries that supports US policy in region or that have valuable geopolitical position. This was rather expensive for US population and tax payers.
As soon as global world balance is going to change - America needs to accommodate to new reality. Now US makes an attempt to put some expenses on allies. That's why once Trump has become a president we start to hear demands to Europe for increasing NATO financing and US military bases in EU, to support Ukraine, Baltic and other countries of Eastern Europe. The same stands in other regions of the world. In two words - US is seeking chances to put financing burden of its circle of influence on his allies.
Second big cluster of work that Trump is trying to make is to re-balance of huge cash flows from financial sector into production. Its too much capital stands in different financial assets that do not produce any real wealth for US population. The same is about merchant sphere. Applying tariffs and unpopular steps in financial sphere he tries to make investors re-balance assets, diversify them in favor of real production. Why these measures unpopular? Because previously big banks, funds etc. made money easily on financial markets, robbing population and regularly initiating global crisis, using big crib named "National debt" but now this crib is closing. At least Trump wants it to be closed. He needs to optimize and reduce government expenses, redeem dept and rise real industrial production.
Currently it is very difficult to predict what steps will be taken on this way. Definitely 50 Bln tariffs with China is next to nothing, but here is psychological effect is important. So, we'll see. Now, my opinion is US tends to become a country of Germany type - with strong local area domination in North America, wealthy population and healthy economy, without global domination but keeping national geopolitical interests in the world.
Still, we're mostly interested in financial process and ECB/Fed disbalance are most important for us now. Geopolitical factors are long-term and too complicated for analysis.
COT Report
Recent CFTC data shows that net long speculative position stands around 77K and slightly has increased, while open interest has dropped for ~19K contracts. It means that investors probably supports an idea that downtrend could take a pause soon:
Technicals
Monthly
Technical picture barely has changed last week, as June month stands as inside May by far and makes no impact on long-term picture yet. Thus, mostly all that we've said last time is still valid. Major interest is a consequences of monthly bullish grabber, of course...
Theoretically it suggests action above 1.26 top, but taking in consideration recent fundamental background, it seems that it has more chances to fail. Anyway, EUR now stands at support, and although we expect downside continuation in long-term perspective, but in few months upside bounce still could happen - just as reaction on this support.
Reversal down has happened after completion of harmonic swing and around YPR1. The fact that EUR has failed to break through YPR1 tells that upside rally from 1.03 to 1.26 was just a retracement within larger bear trend. Now it is particularly interesting how EUR will behave around YPP. Drop below it will open road to YPS1 at ~1.09 which corresponds to our fundamental 1.10 target.
Conversely EUR ability to hold above YPP and keeping grabber valid could become a reversal point if corresponding fundamental factors will appear.
Weekly
So, on weekly chart our basic scenario suggests upside bounce back to 1.20-1.21 area, where market should form right arm of our H&S pattern. If, by that time, when arm will be completed, no major shifts in EU/US balance will happen - drop to 1.10 could become a reality. Whole action will take approximately 6 month. 1.09 - 1.10 area is major 5/8 Fib support and YPS1.
Alternative scenarios, such as immediate downside breakout and failure of H&S pattern in 1.20 area, if EUR
will not stop but continue upside action now look less probable.
As first upside reaction has happened, market needs to fade down existing bearish momentum before upside action will start. This bearish momentum finally has triggered another downside action, which takes the shape of bearish reversal week - new top has been formed but week has closed below the lows of previous one.
In fact, first upward action mostly was due OS area, but major Fib support levels were untouched. Now situation has changed and EUR is not at OS any more. It means that major support right now stands at 1.1450-1.1480 area. This is most probable destination for EUR on coming 1-2 weeks.
And, this area also will be the one where we need to keep an eye on bullish reversal patterns. Because EUR either will turn up there to 1.20 target or no upside action will happen at all.
Daily
Trend has turned bearish here, but EUR reached OS on Friday. It means that immediate downside continuation hardly will happen. This in turn tells us, that if any reversal pattern will be formed here - it probably will be a butterfly.
Upward bounce has good chances to happen in the beginning of the week due OS. Butterfly target mostly coincides with weekly support and MPS1. This situation provides potentially two different trading setups. First is for short-term traders who will be aimed to butterfly target around 1.1420 area. Second for daily traders - who could try to go long as soon as butterfly will be completed.
Intraday
As upward retracement just has started - we do not have a lot of tools here yet. Due daily OS, we probably should be ready for 50-61.8% upside bounce. Here I place 50% level as it is favorite one for EUR.
Probably we need to keep an eye on some upside AB=CD pattern and, as a result - "222" Sell, which trigger downside continuation. This should be especially interesting for scalp traders:
Conclusion:
Since gap between Fed and ECB policy has widened last week, chances on downside continuation to 1.10 area in long-term perspective have increased.
Within few weeks we should get the answer on question - will EUR show upside action to 1.20 area is it is followed by H&S shape on weekly chart. Mostly it will depend on reaction on major weekly 1.1450-1.1480 support.
Next week probably will be taken by upside retracement action. If downside reversal will start - this will happen closer to the end of the week.
The technical portion of Sive's analysis owes a great deal to Joe DiNapoli's methods, and uses a number of Joe's proprietary indicators. Please note that Sive's analysis is his own view of the market and is not endorsed by Joe DiNapoli or any related companies.
Last week we've placed our detailed fundamental view on two major subjects that will drive EUR/USD in long-term perspective. They are tariffs turmoil and Fed/ECB interest rate balance. This week, we mostly get a results, and they are mostly confirm our assessment of situation.
ECB indeed was not too brave to take more aggressive steps in interest rate policy. It just has confirmed what we've said - they will try to keep everything unchanged as long as possible. Thus, M. Draghi said that QE will finish according to the schedule, in December and interest rate will be unchanged till the mid 2019 - this was new input that push EUR lower. I would say that it is not totally unexpected, because we said that ECB definitely will keep rates at zero till the end of 2018, and then gradually will start preparation for more hawkish steps. So 6 month in the beginning of 2019 is precisely the period that should be enough for preparation to the first rate change.
In general, on the question that the ECB was abandoning asset purchases before inflation reached its target, Draghi responded that current levels are much higher than two years ago and the council is confident growth is strong enough to keep inflation on course to reach the target. Given the slowdown in the first quarter, ECB staff revised the forecast for GDP growth this year downward to 2.1 percent, from 2.4 percent, while leaving it unchanged at 1.9 percent for 2019 and 1.7 percent for 2020.
The staff projections for eurozone inflation are 1.7 percent for this year as well as for the following two years. However, since the ECB reacts to incoming data and inflation, this could be subject to change. Indeed, the current forecast for 2018 and 2019 has been revised upward due to higher oil prices.
Also Draghi has confirmed our view on Italian political crisis - Draghi said it was nothing like the earlier crisis of confidence that hit the entire southern rim of the eurozone. Italian yields are well below crisis levels and there has been no evidence of contagion in other countries, he noted.
This let's us to make update on our long-term analysis. It suggests action to at least ~ 1.10 area if we will get confirmation of ECB flat policy. Recent rate decision brings more confidence with this scenario
Speaking on Fed perspectives, I show you two tables with 2 week lag. They show probabilities of rate change by Fed, according to investors' expectations. This one is two weeks ago:
And this table is most recent, just after Fed meeting this week:
Take a look that investors mostly treat positive recent Fed statement as probabilities of rate change have increased. Next one should come in September, and chances on 4th rate hike this year have increased for 20%.
Now, if we combine this new data with ECB policy, as a bottom line we should get more bearish pressure on EUR/USD and continuation of bear trend in long term perspective.
Speaking on tariffs... we do not have something new here. In general we need to keep in mind simple thing - United States are working on rebalancing their global cash flows. This work goes on different directions. First is, Trump tries to offload US balance with non-core assets. Long time America pays for its allies and finance global authorities, blocs such as NATO, small limitrophe countries that supports US policy in region or that have valuable geopolitical position. This was rather expensive for US population and tax payers.
As soon as global world balance is going to change - America needs to accommodate to new reality. Now US makes an attempt to put some expenses on allies. That's why once Trump has become a president we start to hear demands to Europe for increasing NATO financing and US military bases in EU, to support Ukraine, Baltic and other countries of Eastern Europe. The same stands in other regions of the world. In two words - US is seeking chances to put financing burden of its circle of influence on his allies.
Second big cluster of work that Trump is trying to make is to re-balance of huge cash flows from financial sector into production. Its too much capital stands in different financial assets that do not produce any real wealth for US population. The same is about merchant sphere. Applying tariffs and unpopular steps in financial sphere he tries to make investors re-balance assets, diversify them in favor of real production. Why these measures unpopular? Because previously big banks, funds etc. made money easily on financial markets, robbing population and regularly initiating global crisis, using big crib named "National debt" but now this crib is closing. At least Trump wants it to be closed. He needs to optimize and reduce government expenses, redeem dept and rise real industrial production.
Currently it is very difficult to predict what steps will be taken on this way. Definitely 50 Bln tariffs with China is next to nothing, but here is psychological effect is important. So, we'll see. Now, my opinion is US tends to become a country of Germany type - with strong local area domination in North America, wealthy population and healthy economy, without global domination but keeping national geopolitical interests in the world.
Still, we're mostly interested in financial process and ECB/Fed disbalance are most important for us now. Geopolitical factors are long-term and too complicated for analysis.
COT Report
Recent CFTC data shows that net long speculative position stands around 77K and slightly has increased, while open interest has dropped for ~19K contracts. It means that investors probably supports an idea that downtrend could take a pause soon:
Technicals
Monthly
Technical picture barely has changed last week, as June month stands as inside May by far and makes no impact on long-term picture yet. Thus, mostly all that we've said last time is still valid. Major interest is a consequences of monthly bullish grabber, of course...
Theoretically it suggests action above 1.26 top, but taking in consideration recent fundamental background, it seems that it has more chances to fail. Anyway, EUR now stands at support, and although we expect downside continuation in long-term perspective, but in few months upside bounce still could happen - just as reaction on this support.
Reversal down has happened after completion of harmonic swing and around YPR1. The fact that EUR has failed to break through YPR1 tells that upside rally from 1.03 to 1.26 was just a retracement within larger bear trend. Now it is particularly interesting how EUR will behave around YPP. Drop below it will open road to YPS1 at ~1.09 which corresponds to our fundamental 1.10 target.
Conversely EUR ability to hold above YPP and keeping grabber valid could become a reversal point if corresponding fundamental factors will appear.
Weekly
So, on weekly chart our basic scenario suggests upside bounce back to 1.20-1.21 area, where market should form right arm of our H&S pattern. If, by that time, when arm will be completed, no major shifts in EU/US balance will happen - drop to 1.10 could become a reality. Whole action will take approximately 6 month. 1.09 - 1.10 area is major 5/8 Fib support and YPS1.
Alternative scenarios, such as immediate downside breakout and failure of H&S pattern in 1.20 area, if EUR
will not stop but continue upside action now look less probable.
As first upside reaction has happened, market needs to fade down existing bearish momentum before upside action will start. This bearish momentum finally has triggered another downside action, which takes the shape of bearish reversal week - new top has been formed but week has closed below the lows of previous one.
In fact, first upward action mostly was due OS area, but major Fib support levels were untouched. Now situation has changed and EUR is not at OS any more. It means that major support right now stands at 1.1450-1.1480 area. This is most probable destination for EUR on coming 1-2 weeks.
And, this area also will be the one where we need to keep an eye on bullish reversal patterns. Because EUR either will turn up there to 1.20 target or no upside action will happen at all.
Daily
Trend has turned bearish here, but EUR reached OS on Friday. It means that immediate downside continuation hardly will happen. This in turn tells us, that if any reversal pattern will be formed here - it probably will be a butterfly.
Upward bounce has good chances to happen in the beginning of the week due OS. Butterfly target mostly coincides with weekly support and MPS1. This situation provides potentially two different trading setups. First is for short-term traders who will be aimed to butterfly target around 1.1420 area. Second for daily traders - who could try to go long as soon as butterfly will be completed.
Intraday
As upward retracement just has started - we do not have a lot of tools here yet. Due daily OS, we probably should be ready for 50-61.8% upside bounce. Here I place 50% level as it is favorite one for EUR.
Probably we need to keep an eye on some upside AB=CD pattern and, as a result - "222" Sell, which trigger downside continuation. This should be especially interesting for scalp traders:
Conclusion:
Since gap between Fed and ECB policy has widened last week, chances on downside continuation to 1.10 area in long-term perspective have increased.
Within few weeks we should get the answer on question - will EUR show upside action to 1.20 area is it is followed by H&S shape on weekly chart. Mostly it will depend on reaction on major weekly 1.1450-1.1480 support.
Next week probably will be taken by upside retracement action. If downside reversal will start - this will happen closer to the end of the week.
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.
