Sive Morten
Special Consultant to the FPA
- Messages
- 18,555
Fundamentals
Fundamental background stands very tricky for EUR right now. Two weeks ago on GDP and mostly PCE weak data, EUR and other currencies have got support and started rally across the board. Not because of their strength but mostly because of review investors' expectations on Fed policy. As we mentioned in previous report - odds on Dec rate change has dropped for 20% to ~62%, according to CME Fed watch tool.
But yesterday we've got opposite situation. NFP data was good, but what is more important - wedge growth shows 3.1% inflation which make investors come back to idea of rate change. As a result - odds jumps for 10% and now stands around 73% that Fed will increase rate in December:
Source: cmegroup.com
Why I'm talking about this? Because in short-term perspective, EUR/USD rate is a function of Fed decision and at 100% will depend on strength of weakness of the dollar. From that standpoint,Nov 8th Fed meeting will be extremely important for the markets. Not because Fed will change rate, but because of the comments. And this will be the moment where short-term trend will be estimated. This will happen on coming week.
Speaking Friday data and recent rumors around China tariffs agreement, here is what Reuters tells -
White House economic adviser Larry Kudlow told CNBC that President Donald Trump has not asked U.S. officials to draw up a proposed trade plan for China, shooting down an earlier report from Bloomberg that Trump had asked officials to draft a possible deal.
Kudlow also said he was not as optimistic as he once was about the two nations reaching a deal and said that Trump “could pull the trigger” on additional tariffs on Chinese imports, depending on how talks go.
Separately, Trump told reporters that a lot of progress had been made with China on trade, and he predicted the world’s two largest economies would reach a very good deal.
Risk sentiment deteriorated after the Kudlow remarks and that later drove more safe-haven demand for the dollar, Juan Perez, senior currency trader with Tempus, Inc in Washington, said.
“Just looking at the movements over the past two days for the U.S. dollar, the headlines surrounding U.S.-China talks -progress or lack thereof - is contributing to swings in broader risk sentiment, which is contributing to swings in the U.S. dollar,” said Eric Viloria, FX strategist at Credit Agricole in New York.
Investors’ view that the United States to be in better shape than its rivals to weather a trade war has helped drive demand for the dollar.
On Friday, the dollar was also supported by data that showed U.S. job growth rebounded sharply in October and wages recorded their largest annual gain in 9-1/2 years, which could keep the Federal Reserve on track to raise interest rates in December.
But the boost to the dollar from the jobs data was relatively muted.
“I think we might be seeing some signs that dollar gains are starting to become somewhat limited at these levels,” said Sireen Harajli, foreign exchange strategist at Mizuho in New York.
This week rally was good, especially on GBP, Gold and dollar index and short-term investors have opened long positions. Till the Fed meeting, EUR and other currencies will drive by their own, but I have some bad feeling on 8th of November, that this could be turning point. Not just because of Fed meeting, but also by taking a look at sentiment.
EUR net short position have increased on the background of rising open interest. This increase doesn't look extreme, mostly position stands the same, but numbers show that as speculators as hedgers have opened more bearish positions.
Source: CFTC.gov
Charting by Investing.com
Besides, although we do not see big appreciation of US dollar, take a look at US 10 year rate. It has shown solid growth this week, increasing from 3.06 to 3.22%, and this is solid range for it. Our target stands at 3.35% area:
Charting by Tradingview.com
It means that maybe on Friday effect was a bit muted and postponed, but Fed meeting could be last drop and change situation. What I would like to say is we probably could keep any longs until 8th of November, as markets will be driven by existence sentiment and upside bullish momentum, but, as Fed meeting will start, it would be better to meet its results sitting on the hands.
And the last one - Fathom provides update on GDP and ECB policy perspective. Following their conclusion, overall situation stands in a row with expectations and lets ECB close QE program in December as it was planned. EU GDP is slowed, but still it shows positive numbers, which keeps major scenario intact by far. First view on rate change will not happen until mid 2019:
Fathom’s euro area nowcast model uses numerous high-frequency data to construct a timely estimate of euro area GDP growth. According to the model, the euro area economy is likely to have expanded by 0.4% in the third quarter. The currency bloc’s growth rate has undoubtedly slowed in the face of an uncertain global trade environment (net trade has been a drag on growth this year). Nevertheless, the pace of expansion remains solid and this, coupled with rising core inflation, should give the ECB sufficient confidence to cease net asset purchases in December.
Technical analysis
Monthly
Doing technical analysis this week is real challenge guys. Strong upside impulse makes difficult to apply any assumptions of the problems that could appear in the middle of coming week.
Things that we've said last week on monthly chart are still valid. Monthly picture is the one about 1.13 lows. Despite solid upside action on daily chart last week - here, on monthly it looks puny, and price stands around 1.13. Downside breakout will open wide road to the south.
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
If I ask you was it really positive week for EUR, almost all trades would say - "sure, because good rally has been formed on the markets across the board". But take a look at weekly chart, do you see here something positive? Our bullish grabber has been erased last week. Rally was cancelled by Friday drop and, in dry result we have indecision week right at the eve of Fed meeting, with light bearish sentiment on the back?
Recall what we've said in the beginning of this report - "bad feeling" about bullish perspective...
Here I remind you what we've said last week on this chart
"...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."
And today it sounds reasonable as well.
Daily
And now guys, we're coming to most interesting stuff. First - take a look at daily EUR chart. OP target has not been hit yet, EUR has failed to break falling wedge on Friday and turned down precisely from its upper border - definitely it is not quite bullish behavior, at least for upside reversal as it was seemed in the beginning of the week. Also EUR has failed to pass through MPP:
Now let's dig a bit more and take a look at December Dollar Index Futures. On Tuesday we correctly have estimated reason for pullback, as particular Dollar index has completed OP and shown W&R, which has triggered good pullback. And here is what we have now -
B&B "Buy" Setup with bullish grabber on board that suggests taking out of previous tops, at least. Could it fail? Well, probably yes, any pattern could. But, you should understand how bullish context is weak right now. Overall sentiment and investors activity doesn't show big purchases of the EUR, technical picture shows really big risk for any long position on EUR. On weekly chart, after W&R is done (I mean dollar Index), market mostly is coiling around the top, but doesn't go deeper. Friday statistics was dollar supportive. In such circumstances I do not want to go long guys...
Intraday
We all wait for some upside continuation, and reverse H&S pattern seems as most suitable for this purpose. Indeed, retracement to 1.1360 will create the right arm of this pattern and at first glance it seems perfect for long entry.
But I also would like to show you alternative scenario. We can't ignore the grabber on dollar index, at least until it stands valid. Here is very important detail exists. Our daily OP stands around 1.1240 area. Here, on 4H chart, we have smaller AB-CD pattern, which, actually is a daily CD leg. This minor OP already has been reached, but its XOP stands at the same 1.1246 area!
Putting its all together - we could get (and I suppose we will), 1.618 3-Drive "Buy" pattern, as 3rd drive points on 1.12 target. It stands slightly below our OP and XOP, but we should not forget that stop orders below 1.13 lows could push EUR lower, so all targets could be hit. This scenario corresponds to idea of the grabber on dollar index.
Should we ignore reverse H&S pattern? It depends on your risk aversion. Conservative traders are better to avoid any long positions right now. In general we could try to go long around 1.1360, but if market will not return back to 1.1450 neckline within 12 hours (3 periods on 4H chart), chances on H&S failure will increase.
Conclusion:
Without Fundamental/Sentiment analysis and excluding cross market view - EUR setup looks nice and inspiring of taking long position on 1.1360 retracement. But, with adding other type of analysis, overall bullish setup looks weak, and I have bad feeling about it. At least, I do not like Dollar index and sentiment bearish company to this EUR bullish setup.
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.
Fundamental background stands very tricky for EUR right now. Two weeks ago on GDP and mostly PCE weak data, EUR and other currencies have got support and started rally across the board. Not because of their strength but mostly because of review investors' expectations on Fed policy. As we mentioned in previous report - odds on Dec rate change has dropped for 20% to ~62%, according to CME Fed watch tool.
But yesterday we've got opposite situation. NFP data was good, but what is more important - wedge growth shows 3.1% inflation which make investors come back to idea of rate change. As a result - odds jumps for 10% and now stands around 73% that Fed will increase rate in December:
Source: cmegroup.com
Why I'm talking about this? Because in short-term perspective, EUR/USD rate is a function of Fed decision and at 100% will depend on strength of weakness of the dollar. From that standpoint,Nov 8th Fed meeting will be extremely important for the markets. Not because Fed will change rate, but because of the comments. And this will be the moment where short-term trend will be estimated. This will happen on coming week.
Speaking Friday data and recent rumors around China tariffs agreement, here is what Reuters tells -
White House economic adviser Larry Kudlow told CNBC that President Donald Trump has not asked U.S. officials to draw up a proposed trade plan for China, shooting down an earlier report from Bloomberg that Trump had asked officials to draft a possible deal.
Kudlow also said he was not as optimistic as he once was about the two nations reaching a deal and said that Trump “could pull the trigger” on additional tariffs on Chinese imports, depending on how talks go.
Separately, Trump told reporters that a lot of progress had been made with China on trade, and he predicted the world’s two largest economies would reach a very good deal.
Risk sentiment deteriorated after the Kudlow remarks and that later drove more safe-haven demand for the dollar, Juan Perez, senior currency trader with Tempus, Inc in Washington, said.
“Just looking at the movements over the past two days for the U.S. dollar, the headlines surrounding U.S.-China talks -progress or lack thereof - is contributing to swings in broader risk sentiment, which is contributing to swings in the U.S. dollar,” said Eric Viloria, FX strategist at Credit Agricole in New York.
Investors’ view that the United States to be in better shape than its rivals to weather a trade war has helped drive demand for the dollar.
On Friday, the dollar was also supported by data that showed U.S. job growth rebounded sharply in October and wages recorded their largest annual gain in 9-1/2 years, which could keep the Federal Reserve on track to raise interest rates in December.
But the boost to the dollar from the jobs data was relatively muted.
“I think we might be seeing some signs that dollar gains are starting to become somewhat limited at these levels,” said Sireen Harajli, foreign exchange strategist at Mizuho in New York.
This week rally was good, especially on GBP, Gold and dollar index and short-term investors have opened long positions. Till the Fed meeting, EUR and other currencies will drive by their own, but I have some bad feeling on 8th of November, that this could be turning point. Not just because of Fed meeting, but also by taking a look at sentiment.
EUR net short position have increased on the background of rising open interest. This increase doesn't look extreme, mostly position stands the same, but numbers show that as speculators as hedgers have opened more bearish positions.
Source: CFTC.gov
Charting by Investing.com
Besides, although we do not see big appreciation of US dollar, take a look at US 10 year rate. It has shown solid growth this week, increasing from 3.06 to 3.22%, and this is solid range for it. Our target stands at 3.35% area:
Charting by Tradingview.com
It means that maybe on Friday effect was a bit muted and postponed, but Fed meeting could be last drop and change situation. What I would like to say is we probably could keep any longs until 8th of November, as markets will be driven by existence sentiment and upside bullish momentum, but, as Fed meeting will start, it would be better to meet its results sitting on the hands.
And the last one - Fathom provides update on GDP and ECB policy perspective. Following their conclusion, overall situation stands in a row with expectations and lets ECB close QE program in December as it was planned. EU GDP is slowed, but still it shows positive numbers, which keeps major scenario intact by far. First view on rate change will not happen until mid 2019:
Fathom’s euro area nowcast model uses numerous high-frequency data to construct a timely estimate of euro area GDP growth. According to the model, the euro area economy is likely to have expanded by 0.4% in the third quarter. The currency bloc’s growth rate has undoubtedly slowed in the face of an uncertain global trade environment (net trade has been a drag on growth this year). Nevertheless, the pace of expansion remains solid and this, coupled with rising core inflation, should give the ECB sufficient confidence to cease net asset purchases in December.
Technical analysis
Monthly
Doing technical analysis this week is real challenge guys. Strong upside impulse makes difficult to apply any assumptions of the problems that could appear in the middle of coming week.
Things that we've said last week on monthly chart are still valid. Monthly picture is the one about 1.13 lows. Despite solid upside action on daily chart last week - here, on monthly it looks puny, and price stands around 1.13. Downside breakout will open wide road to the south.
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
If I ask you was it really positive week for EUR, almost all trades would say - "sure, because good rally has been formed on the markets across the board". But take a look at weekly chart, do you see here something positive? Our bullish grabber has been erased last week. Rally was cancelled by Friday drop and, in dry result we have indecision week right at the eve of Fed meeting, with light bearish sentiment on the back?
Recall what we've said in the beginning of this report - "bad feeling" about bullish perspective...
Here I remind you what we've said last week on this chart
"...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."
And today it sounds reasonable as well.
Daily
And now guys, we're coming to most interesting stuff. First - take a look at daily EUR chart. OP target has not been hit yet, EUR has failed to break falling wedge on Friday and turned down precisely from its upper border - definitely it is not quite bullish behavior, at least for upside reversal as it was seemed in the beginning of the week. Also EUR has failed to pass through MPP:
Now let's dig a bit more and take a look at December Dollar Index Futures. On Tuesday we correctly have estimated reason for pullback, as particular Dollar index has completed OP and shown W&R, which has triggered good pullback. And here is what we have now -
B&B "Buy" Setup with bullish grabber on board that suggests taking out of previous tops, at least. Could it fail? Well, probably yes, any pattern could. But, you should understand how bullish context is weak right now. Overall sentiment and investors activity doesn't show big purchases of the EUR, technical picture shows really big risk for any long position on EUR. On weekly chart, after W&R is done (I mean dollar Index), market mostly is coiling around the top, but doesn't go deeper. Friday statistics was dollar supportive. In such circumstances I do not want to go long guys...
Intraday
We all wait for some upside continuation, and reverse H&S pattern seems as most suitable for this purpose. Indeed, retracement to 1.1360 will create the right arm of this pattern and at first glance it seems perfect for long entry.
But I also would like to show you alternative scenario. We can't ignore the grabber on dollar index, at least until it stands valid. Here is very important detail exists. Our daily OP stands around 1.1240 area. Here, on 4H chart, we have smaller AB-CD pattern, which, actually is a daily CD leg. This minor OP already has been reached, but its XOP stands at the same 1.1246 area!
Putting its all together - we could get (and I suppose we will), 1.618 3-Drive "Buy" pattern, as 3rd drive points on 1.12 target. It stands slightly below our OP and XOP, but we should not forget that stop orders below 1.13 lows could push EUR lower, so all targets could be hit. This scenario corresponds to idea of the grabber on dollar index.
Should we ignore reverse H&S pattern? It depends on your risk aversion. Conservative traders are better to avoid any long positions right now. In general we could try to go long around 1.1360, but if market will not return back to 1.1450 neckline within 12 hours (3 periods on 4H chart), chances on H&S failure will increase.
Conclusion:
Without Fundamental/Sentiment analysis and excluding cross market view - EUR setup looks nice and inspiring of taking long position on 1.1360 retracement. But, with adding other type of analysis, overall bullish setup looks weak, and I have bad feeling about it. At least, I do not like Dollar index and sentiment bearish company to this EUR bullish setup.
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.