Sive Morten
Special Consultant to the FPA
- Messages
- 18,630
Fundamentals
So, it was really tough week, guys, let's see what we have in a dry result and what inputs we have on the start of the next week. Let's first take a look at GDP data
As Reuters reports - The U.S. dollar followed Wall Street lower on Friday, falling from the two-month high hit earlier in the day after news of stronger-than-expected third-quarter gross domestic product.
U.S. stocks were off their lows late Friday, but remained down for the day, as concerns about a slew of disappointing earning forecasts persisted, showing how tariffs, rising wages and higher borrowing costs as well as jitters over geopolitical events are hurting companies.
“People are still worried about the U.S. earnings season,” said Thierry Wizman, global interest rates and currencies strategist at Macquarie Group.
Actually reaction on GDP data was weak, mostly due following reasons. Despite that US shows best consumption numbers for decade probably, GDP still can't reflect this improvement due drop in Export:
The U.S. economy slowed less than expected in the third quarter, the Commerce Department reported, as the strongest consumer spending in nearly four years and a surge in inventory investment offset a tariff-related drop in soybean exports. Net exports took 1.8 percent off of the GDP figure, said Greg Anderson, global head of FX strategy at BMO Capital Markets.
Second, as we've warned you - be careful of PCE numbers. Everybody waits for good GDP, but if PCE will miss expectations, it will be major factor and it will mute positive GDP effect. Precisely this issue has happened. The GDP report also showed the Fed’s preferred inflation gauge, the personal consumption expenditures (PCE) price index excluding food and energy, missed expectations after it increased 1.6 percent in the third quarter. The core PCE price index rose at a 2.1 percent pace in the April-June period.
This is very important, because if we take a look at forecast and investors expectations of rate increase in December, then we will see that odds drop from 82.67% month ago to just 67% that Fed will rise rate to 2.5% in December:
It means that 8th of November meeting will be vital. Since no hints were announced earlier that Fed could hold rate increasing, this will be the last chance to warn markets. This meeting will be even more important than in December. Although nobody expects rate change, but economy situation has changed and markets need new Fed comments. As PCE inflation as wage growth doesn't show too high inflation tempo, and some questions Fed could appear - may be it is not necessary to hold so hawkish policy and take some pause?
It's not much to talk about ECB. Mostly we were correct in our assumption that Draghi will tell nothing new and of course he will not give a hint on policy tightening terms. Precisely this result is given - euro, meanwhile, fell to a 10-week low of $1.133. It hit a two-month low of $1.135 the previous session, following European Central Bank President Mario Draghi’s failure to convince traders the ECB could pursue monetary tightening after next summer as political and economic uncertainties grow in the monetary union.
This GDP report brings very important thing. US export is started to change due tariffs impact. This first official statistics that confirms it. All investors see this now and definitely will keep a close eye on all US/China tariffs relations. Second - this makes impact on US economy perspective sooner that it was seemed before.
First bell we see in brief update of long-term US scenario from Fathom consulting:
Before Donald Trump’s election victory in 2016, we set out two economic scenarios for the global economy: Trump Lite and Donald Dark. With fiscal stimulus implemented, business confidence close to record highs, GDP growth strong and some radical proposals canned, we are in a Trump Lite world. But with Sino-US trade tensions moving beyond the threat phase and continuing to escalate, we have taken a step towards our Donald Dark scenario. We have previously likened the trade negotiations to a game of chicken, which we expected the US to win; our China Exposure Index (CEI) suggests that, until recently, investors held a similar view. But since the US first imposed tariffs on imports from China the CEI has tumbled, and is now below 100, lower than it was on the date Donald Trump was elected. For our Donald Dark scenario to become a reality, other countries would need to adopt restrictive trade measures themselves – this appears unlikely for now. We still expect strong US GDP growth in the short run, but we will be revising our medium-term view in the coming weeks in light of ongoing trade developments.
Speaking on EUR side of EUR/USD pair, picture here mostly stands the same. I mean with Italy debt problems on the back, lack of consensus among political elite inside the EU core and other problems - ECB decision looks absolutely reasonable.
Recent COT report shows that investors positions mostly have not changed. EUR stands net bearish, open interest has increased. Investors add as to longs as to the shorts almost equal amount, especially hedgers. Speculators have added a bit more to bearish positions:
As a result we have the same net short value on a background of rising open interest:
Source: CFTC.gov
Charting by Investing.com
So, dollar could get its own problems from tariffs piking in few months which could impact and already makes impact on Fed view, I suppose. But EUR doesn't feel better by this reason. It has its own problems. Sentiment data stands moderately bearish. Shorts are not rising, but no signs of reversal yet as well.
But, to be honest guys, inflation in US should grow, I suppose. Massive sanctions, imposed on the half of the world reduce reliability of the dollar and change its role from safe haven to source of risk. Now we see the tendency of eliminating dollar from mutual merchant among emerging countries and turning to EUR for trading with developed countries. Dollar very slow but will start to loose its backing by mutual international trading. So, big part of currency will become underutilized and excessive, which should lead to drop of its value. But this very long-term process.
Technicals
Monthly
Today guys we discuss some new moments on monthly chart as well. Although our major picture mostly stands the same and nothing to change yet right at this moment, but there are few moments that we need to keep an eye on.
As we've mentioned last week, EUR - hangs upon 1.14-1.15 support area. After strong drop and spike down - no meaningful upside action has followed. This is not good sign for bulls. It's already 5 months of laying upon this area. As longer EUR will stand here as greater chances on downside breakout will be.
This is indirect sign of weakness, when market can't jump out from strong support area. It means that strong level could support price from collapse but its effort is not sufficient to start bullish action. Day by day buyers will be washed out around this level and EUR could break it, if nothing will change. So, let's keep this issue in mind. It is not vital by far, but still first warning signs already exist.
On monthly chart 1.14-1.15 area is strong and very important support, because it includes YPP. Since our fundamental background supports dollar strength within a year or so - downside breakout should happen sooner or later. The fact that EUR has turned down precisely from YPR1 area tells that recent 1.05-1.26 action was an upside retracement within long-term bear trend. And YPP break could become another vital confirmation of this scenario.
In general 1.14-1.15 is important not just because of YPP. Take a look - this is upper border of former 1.05-1.14 consolidation. If price will drop back inside it - it will open road to the bottom of 1.05 area. Also this is monthly 50% support area. Price has problems with breaking borders of any consolidation, but it has no barriers inside and could freely move from up to bottom.
Now - take a look what progress we have around it. 1.14 lows is the first test of rectangle and monthly support. After small bounce price returns back to it. So, this is the crucial border and now it seems that EUR has very good chances to break it. Once it will happen - free space to YPS1 around 1.08 will be opened. It will mean return back in rectangle. Next our target here will be 1.03 AB-CD COP extension right around major lows.
It seems that we will not bore till the end of the year. Don't forget also that trend is bearish on monthly chart...
Weekly
So, for the weekly chart next week will be vital as well. Technically EUR still keeps changes on upside reversal. Although we can't rely on reverse H&S here, Double Bottom is still possible, especially with bullish grabber that has been formed last week. So, technical picture is not hopeless.
But, for fairness' sake, we have to say that fundamental story is a bit different. We do not see any bullish enthusiasm among investors. But it is necessary to move weekly chart. Weekly time frame is too big to be driven buy technical fluctuations. It needs some real factors. It's not a joke to push EUR to 1.20 area, this will not happen occasionally by some "technical retracement" real driving factor is needed, mostly fundamental. But right now it is real challenge to find one. That' being said, although we have a grabber and other stuff, but it also could fail. Personally I gravitate more to bearish scenario, it seems more probable to me. Market looks heavy, especially on monthly chart.
Anyway Next 1-2 weeks (and 8th November Fed meeting) will bring clarity - close below 1.1260 will open road to the downside. Otherwise EUR should show explosive upside action above 1.18 area at least.
Daily
So trend is bearish on all time frames. Appearing of weekly grabber makes our task simpler, because its clearly specifies invalidation point - lows of previous week. On daily chart we also have bullish engulfing pattern. We do not have pivots here just because EUR has dropped below all pivot support levels already - as weekly as monthly, which is bearish of course...
Anyway, initially we could try to play grabber's card to its final point. It means that we could try to go long on retracement against recent lows. Wedge pattern let's market to move higher, at least to 1.1460-1.1470 area and this will be enough to move our stops to breakeven later. The only risk for us is immediate collapse below the lows. But since we stand rather close to invalidation point - this will not hurt too much.
Intraday
So, some our intraday have been hit recently. We've traded them on a way down. As AB=CD pattern, as butterfly suggest 3/8 retracement, at least, which is 1.1445 area. This should be enough for stop replacement to b/e and initial safe entry:
Here we will try to play reverse H&S scenario with entry around 50% support, where bottom of right shoulder should be against the lows. It keeps 40 pips risk against at least 100 pips reward, which is acceptable, I suppose:
Conclusion:
Despite the fact that EUR keeps bullish picture by far, we have to acknowledge appearing new risk factors that could turn equilibrium later to bears again. They are non supportive short-term sentiment, suspicious silence on monthly chart and fundamental EU problems. Bullish scenario could work only on US "new" problems but not due improvement of fundamental situation in EU. Fed meeting 8th of November will play key role in this scenario.
Next 1-2 weeks will be vital and long-term direction will be estimated.
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.
So, it was really tough week, guys, let's see what we have in a dry result and what inputs we have on the start of the next week. Let's first take a look at GDP data
As Reuters reports - The U.S. dollar followed Wall Street lower on Friday, falling from the two-month high hit earlier in the day after news of stronger-than-expected third-quarter gross domestic product.
U.S. stocks were off their lows late Friday, but remained down for the day, as concerns about a slew of disappointing earning forecasts persisted, showing how tariffs, rising wages and higher borrowing costs as well as jitters over geopolitical events are hurting companies.
“People are still worried about the U.S. earnings season,” said Thierry Wizman, global interest rates and currencies strategist at Macquarie Group.
Actually reaction on GDP data was weak, mostly due following reasons. Despite that US shows best consumption numbers for decade probably, GDP still can't reflect this improvement due drop in Export:
The U.S. economy slowed less than expected in the third quarter, the Commerce Department reported, as the strongest consumer spending in nearly four years and a surge in inventory investment offset a tariff-related drop in soybean exports. Net exports took 1.8 percent off of the GDP figure, said Greg Anderson, global head of FX strategy at BMO Capital Markets.
Second, as we've warned you - be careful of PCE numbers. Everybody waits for good GDP, but if PCE will miss expectations, it will be major factor and it will mute positive GDP effect. Precisely this issue has happened. The GDP report also showed the Fed’s preferred inflation gauge, the personal consumption expenditures (PCE) price index excluding food and energy, missed expectations after it increased 1.6 percent in the third quarter. The core PCE price index rose at a 2.1 percent pace in the April-June period.
This is very important, because if we take a look at forecast and investors expectations of rate increase in December, then we will see that odds drop from 82.67% month ago to just 67% that Fed will rise rate to 2.5% in December:
It means that 8th of November meeting will be vital. Since no hints were announced earlier that Fed could hold rate increasing, this will be the last chance to warn markets. This meeting will be even more important than in December. Although nobody expects rate change, but economy situation has changed and markets need new Fed comments. As PCE inflation as wage growth doesn't show too high inflation tempo, and some questions Fed could appear - may be it is not necessary to hold so hawkish policy and take some pause?
It's not much to talk about ECB. Mostly we were correct in our assumption that Draghi will tell nothing new and of course he will not give a hint on policy tightening terms. Precisely this result is given - euro, meanwhile, fell to a 10-week low of $1.133. It hit a two-month low of $1.135 the previous session, following European Central Bank President Mario Draghi’s failure to convince traders the ECB could pursue monetary tightening after next summer as political and economic uncertainties grow in the monetary union.
This GDP report brings very important thing. US export is started to change due tariffs impact. This first official statistics that confirms it. All investors see this now and definitely will keep a close eye on all US/China tariffs relations. Second - this makes impact on US economy perspective sooner that it was seemed before.
First bell we see in brief update of long-term US scenario from Fathom consulting:
Before Donald Trump’s election victory in 2016, we set out two economic scenarios for the global economy: Trump Lite and Donald Dark. With fiscal stimulus implemented, business confidence close to record highs, GDP growth strong and some radical proposals canned, we are in a Trump Lite world. But with Sino-US trade tensions moving beyond the threat phase and continuing to escalate, we have taken a step towards our Donald Dark scenario. We have previously likened the trade negotiations to a game of chicken, which we expected the US to win; our China Exposure Index (CEI) suggests that, until recently, investors held a similar view. But since the US first imposed tariffs on imports from China the CEI has tumbled, and is now below 100, lower than it was on the date Donald Trump was elected. For our Donald Dark scenario to become a reality, other countries would need to adopt restrictive trade measures themselves – this appears unlikely for now. We still expect strong US GDP growth in the short run, but we will be revising our medium-term view in the coming weeks in light of ongoing trade developments.
Speaking on EUR side of EUR/USD pair, picture here mostly stands the same. I mean with Italy debt problems on the back, lack of consensus among political elite inside the EU core and other problems - ECB decision looks absolutely reasonable.
Recent COT report shows that investors positions mostly have not changed. EUR stands net bearish, open interest has increased. Investors add as to longs as to the shorts almost equal amount, especially hedgers. Speculators have added a bit more to bearish positions:
As a result we have the same net short value on a background of rising open interest:
Source: CFTC.gov
Charting by Investing.com
So, dollar could get its own problems from tariffs piking in few months which could impact and already makes impact on Fed view, I suppose. But EUR doesn't feel better by this reason. It has its own problems. Sentiment data stands moderately bearish. Shorts are not rising, but no signs of reversal yet as well.
But, to be honest guys, inflation in US should grow, I suppose. Massive sanctions, imposed on the half of the world reduce reliability of the dollar and change its role from safe haven to source of risk. Now we see the tendency of eliminating dollar from mutual merchant among emerging countries and turning to EUR for trading with developed countries. Dollar very slow but will start to loose its backing by mutual international trading. So, big part of currency will become underutilized and excessive, which should lead to drop of its value. But this very long-term process.
Technicals
Monthly
Today guys we discuss some new moments on monthly chart as well. Although our major picture mostly stands the same and nothing to change yet right at this moment, but there are few moments that we need to keep an eye on.
As we've mentioned last week, EUR - hangs upon 1.14-1.15 support area. After strong drop and spike down - no meaningful upside action has followed. This is not good sign for bulls. It's already 5 months of laying upon this area. As longer EUR will stand here as greater chances on downside breakout will be.
This is indirect sign of weakness, when market can't jump out from strong support area. It means that strong level could support price from collapse but its effort is not sufficient to start bullish action. Day by day buyers will be washed out around this level and EUR could break it, if nothing will change. So, let's keep this issue in mind. It is not vital by far, but still first warning signs already exist.
On monthly chart 1.14-1.15 area is strong and very important support, because it includes YPP. Since our fundamental background supports dollar strength within a year or so - downside breakout should happen sooner or later. The fact that EUR has turned down precisely from YPR1 area tells that recent 1.05-1.26 action was an upside retracement within long-term bear trend. And YPP break could become another vital confirmation of this scenario.
In general 1.14-1.15 is important not just because of YPP. Take a look - this is upper border of former 1.05-1.14 consolidation. If price will drop back inside it - it will open road to the bottom of 1.05 area. Also this is monthly 50% support area. Price has problems with breaking borders of any consolidation, but it has no barriers inside and could freely move from up to bottom.
Now - take a look what progress we have around it. 1.14 lows is the first test of rectangle and monthly support. After small bounce price returns back to it. So, this is the crucial border and now it seems that EUR has very good chances to break it. Once it will happen - free space to YPS1 around 1.08 will be opened. It will mean return back in rectangle. Next our target here will be 1.03 AB-CD COP extension right around major lows.
It seems that we will not bore till the end of the year. Don't forget also that trend is bearish on monthly chart...
Weekly
So, for the weekly chart next week will be vital as well. Technically EUR still keeps changes on upside reversal. Although we can't rely on reverse H&S here, Double Bottom is still possible, especially with bullish grabber that has been formed last week. So, technical picture is not hopeless.
But, for fairness' sake, we have to say that fundamental story is a bit different. We do not see any bullish enthusiasm among investors. But it is necessary to move weekly chart. Weekly time frame is too big to be driven buy technical fluctuations. It needs some real factors. It's not a joke to push EUR to 1.20 area, this will not happen occasionally by some "technical retracement" real driving factor is needed, mostly fundamental. But right now it is real challenge to find one. That' being said, although we have a grabber and other stuff, but it also could fail. Personally I gravitate more to bearish scenario, it seems more probable to me. Market looks heavy, especially on monthly chart.
Anyway Next 1-2 weeks (and 8th November Fed meeting) will bring clarity - close below 1.1260 will open road to the downside. Otherwise EUR should show explosive upside action above 1.18 area at least.
Daily
So trend is bearish on all time frames. Appearing of weekly grabber makes our task simpler, because its clearly specifies invalidation point - lows of previous week. On daily chart we also have bullish engulfing pattern. We do not have pivots here just because EUR has dropped below all pivot support levels already - as weekly as monthly, which is bearish of course...
Anyway, initially we could try to play grabber's card to its final point. It means that we could try to go long on retracement against recent lows. Wedge pattern let's market to move higher, at least to 1.1460-1.1470 area and this will be enough to move our stops to breakeven later. The only risk for us is immediate collapse below the lows. But since we stand rather close to invalidation point - this will not hurt too much.
Intraday
So, some our intraday have been hit recently. We've traded them on a way down. As AB=CD pattern, as butterfly suggest 3/8 retracement, at least, which is 1.1445 area. This should be enough for stop replacement to b/e and initial safe entry:
Here we will try to play reverse H&S scenario with entry around 50% support, where bottom of right shoulder should be against the lows. It keeps 40 pips risk against at least 100 pips reward, which is acceptable, I suppose:
Conclusion:
Despite the fact that EUR keeps bullish picture by far, we have to acknowledge appearing new risk factors that could turn equilibrium later to bears again. They are non supportive short-term sentiment, suspicious silence on monthly chart and fundamental EU problems. Bullish scenario could work only on US "new" problems but not due improvement of fundamental situation in EU. Fed meeting 8th of November will play key role in this scenario.
Next 1-2 weeks will be vital and long-term direction will be estimated.
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.
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