Sive Morten
Special Consultant to the FPA
- Messages
- 18,644
Fundamentals
This week we've got two major events - Fed statement and NFP report. Fed sentiment was known in advance and market has started preparation to it even on last week.
Indeed, as Reuters reports, dollar fell on Wednesday, after the Federal Reserve held interest rates steady, as expected, and struck a cautious tone on its outlook for the economy and future interest rate increases.
The Fed said it would be patient in lifting borrowing costs further this year as it pointed to rising uncertainty about the U.S. economic outlook.
It also said it would be prepared to use the full range of tools, including altering the size and composition of its balance sheet, if the economy needed more monetary accommodation, than could be achieved with rate cuts.
Couple weeks ago, guys, we've discussed this topic with Fed balance sheet. In general, contraction of Fed balance makes the same impact as rate increase, because they dry liquidity out of the market by selling mortgage bonds and treasuries off the balance.
And some hints on possible slow down of this process is really the new issue. Indeed, Fed has great tool. They could keep rates steady, but reduce balance offload pace. This will work the same as rate decrease. And this should let escape a lot of volatility, talks and nervousness around Fed policy changing. Visually policy will stand the same, but in reality it will turn 180 degrees. Besides, applying of balance sheet tool, makes process smoother and gradual, since impact of balance sheet inc/decr. works slower.
The same thoughts in the mind of other analysts:
“The press statement was reassuringly dovish, but it wasn’t hugely unexpected. The place where there was more surprise...is that we got a shift, it seems, around the balance sheet,” said James McCann, senior economist, at Aberdeen Standard Investments in Boston.
“The language was very, very vague, and probably deliberately so. But the preparedness for the Fed to be more accommodative around the balance sheet seems to be a little new,” he added.
Following the Fed statement, contracts tied to the policy rate continued to price about a one-in-four chance of a 2019 Fed rate hike, and contracts maturing in 2020 were signalling a small but rising chance of a rate cut then.
Brian Coulton, chief economist at Fitch Ratings in London, said the Fed comments read “more like a pause” than a strong signal that the U.S. central bank was approaching the end of its tightening cycle.
As you remember Fathom consulting also thinks that Fed still should rise rate twice this year. So, Fed policy and its impact on the market could be most undervalued driving factor for FX market in 2019. As nobody expects rate change - it could come unexpectedly and trigger strong action.
Situation in EU is not better. Softer-than-expected European data released in the last few weeks suggested that the European Central Bank is expected to hold off tightening until year end. As we've said - we do not expect that ECB policy will make any impact on the market in 2019. Rates already are zero and Draghi already said that no rate change stands on the table.
“Our three-month forecast for euro/dollar is between $1.14-$1.16 levels as we don’t expect changes from either of the two major central banks (Fed, ECB),” said Antje Praefcke, a currency strategist at Commerzbank based in Frankfurt.
The same thing follows from Fathom consulting notes on EU business sentiment. They point on growth pace, but still suggest that it should continue, but at lower pace:
Euro area growth slowed substantially in 2018 as the deteriorating external environment removed a substantial tailwind from the euro area’s sails – aside from net trade, the composition of GDP growth through the first three quarters of last year looked broadly similar to 2017. The deterioration in the outlook is evident in measures of sentiment – Fathom’s Economic Sentiment Indicator (ESI) for the euro area fell by 0.8 percentage points in 2018. However, in spite of this fall, the ESIs remain close to, or above, their long-run averages suggesting that the currency bloc’s expansion will continue this year, albeit at a slower pace.
On Friday, dollar rose after January data showing the biggest number of U.S. jobs created in 11 months and a rebound in U.S. manufacturing.
But tame wage inflation as shown in the U.S. nonfarm payrolls report kept the dollar’s gains in check, analysts said.
“The combination of a barnstorming headline number and the slight rise in unemployment suggests two things: America is creating jobs at a prodigious rate right now and there is some spare capacity to keep employers fed with more recruits in coming months,” said David Lamb, head of dealing at Fexco Corporate Payments in Edinburgh.
But he noted that the jobs report was far from perfect, citing December’s downward revision and the weak wage growth for such a tight U.S. labor market.
“All this means is that inflationary pressure is modest, and the Federal Reserve will feel in no hurry to push through its next interest rate hikes,” Lamb said.
Beyond the headline jobs gains, the dollar has become more sensitive to wage inflation over the last year.
The report showed the U.S. economy created 304,000 jobs, the highest in 11 months, easily superseding forecasts for 165,000 jobs. The unemployment rate, however, rose to a seven-month peak of 4 percent, while average hourly earnings rose just 0.1 percent in January, after rising 0.4 percent in December.
Contracts tied to the Fed’s policy rate had priced out any chance of a 2019 Fed rate hike after Fed Chairman Jerome Powell on Wednesday said the case for rate increases had weakened, and were pricing in about a one-in-three chance of a rate cut by the end of the year.
But after the jobs data, traders reduced rate-cut bets, though they continue to bet against a rate hike.
The dollar overall also benefited from a rise in the U.S. manufacturing index to 56.6 in January, from 54.3 the month before.
“The rebound in the ISM manufacturing index ... provides further reassurance that economic growth has remained solid at the beginning of 2019,” said Michael Pearce, senior U.S. economist at Capital Economics.
“We still expect a combination of weaker global demand and the strong dollar to weigh on the manufacturing sector this year, but it is clear that activity is not falling off a cliff,” he added.
CFTC resumes COT report publication after shutdown but missed the one for the 1st of February. So, we do not know still how overall sentiment has changed and what EUR position is:
"January 30, 2019: During the lapse in appropriations, the CFTC suspended publication of the weekly COT report, see the new schedule at https://www.cftc.gov/PressRoom/PressReleases/7864-19. "
Technicals
Monthly
This week action was in relatively tight range and has no impact on technical picture, at least on mohthly and weekly time frames. EUR still holds inside the monthly flag pattern, forming second doji in January.
Here we mostly wait for clarity - either downside breakout and start action to 1.08 and later to 1.03 or ability of the EUR to hold above 1.12 and turning up. Market stands at support area around major 5/8 Fib level. In case of upside action, YPP will be important target , because, as a rule, market tends to touch YPP through the year.
As Fathom consulting expects first rate change by Fed in June, but market is not ready for this step (as wee see from Fed watch tool by CME) - this is the first moment when EUR could show big action. Until June EUR could spend time in tight range without any meaningful breakout.
Indirect technical factors point on market's weakness, at least in long-term perspectives, as EUR can't jump out from strong support within more than 5-6 months and just lays upon it. Trend stands bearish here.
Monthly situation shortly could be described as indecision with light gravitation to the downside. In fact, long standing around Yearly Pivot confirms things that we've discussed above. MACD trend stands bearish here.
Thus we keep valid our downside COP target around 1.03 by far.
Weekly
In general we do not see any clear direction, weekly candles overlap on 70%, and most suitable description is fluctuation. Here actually we have two different setups.
First is our initial bearish setup, which, in fact, is continuation on the same logic that we have on monthly chart. Here we have downside channel.Since market shows very weak reaction on major 5/8 Fib support level - it brings some signs of bearish dynamic pressure, when MACD shows upside trend but price action stands flat.
Conversely, we have MACD divergence and possible reverse H&S shape. But market has to climb back to neckline at least, to resurrect this scenario, and break the channel up. Precisely this type of action we do not see yet. It means that we could get some different action, say, fallen wedge pattern instead. Anyway, currently weekly chart doesn't support any bullish inspiration and overall price action looks mostly indecision.
Speaking on sentiment, personally, when I'm looking at this chart, somehow I sense more bearish rather than bullish context. But this is something relates more to perception rather than strict technical analysis.
It means that again we mostly will be focused on daily/intraday tactical setups as we do not have any longer-term direction yet.
Daily
Here we have almost nothing to comment, guys. Reaction on NFP was mixed as it has provided good total numbers (even with downside revision of Dec) but shows drop in wage inflation. As a result we haven't got any strong direction and price holds in Wed range.
MACD trend stands bullish, market is neither at OB nor at OS. No strong resistance levels stands above as all Fib levels have been broken already. Price is coiling around MPP. From the picture that we have here it is difficult to extract future direction.
Usually, when we have situation of this kind, we watch on intraday short-term patterns and wait when something more definite on daily chart will appear. It seems that driving power of Fed statement and anemic ECB comments are exhausted. Market worked them out and now needs something new. Neither of the factors that we have now are sufficient to push market from dead point.
Intraday
Strictly speaking we have no reasons to doubt upside scenario by far. Yes, market stopped, but our AB-CD pattern is still valid, downside retracement out from COP target was small and K-support here holds market well.
Potentially in the beginning of the week we have two short-term setups. Either AB-CD retracement down, to major 5/8 Fib level here, or upside continuation. Here I put upside extensions, and you can see that this could be butterfly "Sell", which completes OP target.
Thus, all eyes should be on recent lows. Bullish scenario suggests that they have to be intact.
On 1H chart the only one valuable add-on - hidden bullish divergence. To keep valid butterfly setup, red circle lows should hold:
Conclusion:
Personally guys, I have feelings that bearish dynamic (not by DiNapoli term) is growing. As market doesn't take in consideration possible Fed rate hike, impact could come as bolt from the blue. Although everything stands quiet, and formally we do not have strong bearish signs...
In shorter-term we do not clear direction just yet and focus on intraday setups.
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.
This week we've got two major events - Fed statement and NFP report. Fed sentiment was known in advance and market has started preparation to it even on last week.
Indeed, as Reuters reports, dollar fell on Wednesday, after the Federal Reserve held interest rates steady, as expected, and struck a cautious tone on its outlook for the economy and future interest rate increases.
The Fed said it would be patient in lifting borrowing costs further this year as it pointed to rising uncertainty about the U.S. economic outlook.
It also said it would be prepared to use the full range of tools, including altering the size and composition of its balance sheet, if the economy needed more monetary accommodation, than could be achieved with rate cuts.
Couple weeks ago, guys, we've discussed this topic with Fed balance sheet. In general, contraction of Fed balance makes the same impact as rate increase, because they dry liquidity out of the market by selling mortgage bonds and treasuries off the balance.
And some hints on possible slow down of this process is really the new issue. Indeed, Fed has great tool. They could keep rates steady, but reduce balance offload pace. This will work the same as rate decrease. And this should let escape a lot of volatility, talks and nervousness around Fed policy changing. Visually policy will stand the same, but in reality it will turn 180 degrees. Besides, applying of balance sheet tool, makes process smoother and gradual, since impact of balance sheet inc/decr. works slower.
The same thoughts in the mind of other analysts:
“The press statement was reassuringly dovish, but it wasn’t hugely unexpected. The place where there was more surprise...is that we got a shift, it seems, around the balance sheet,” said James McCann, senior economist, at Aberdeen Standard Investments in Boston.
“The language was very, very vague, and probably deliberately so. But the preparedness for the Fed to be more accommodative around the balance sheet seems to be a little new,” he added.
Following the Fed statement, contracts tied to the policy rate continued to price about a one-in-four chance of a 2019 Fed rate hike, and contracts maturing in 2020 were signalling a small but rising chance of a rate cut then.
Brian Coulton, chief economist at Fitch Ratings in London, said the Fed comments read “more like a pause” than a strong signal that the U.S. central bank was approaching the end of its tightening cycle.
As you remember Fathom consulting also thinks that Fed still should rise rate twice this year. So, Fed policy and its impact on the market could be most undervalued driving factor for FX market in 2019. As nobody expects rate change - it could come unexpectedly and trigger strong action.
Situation in EU is not better. Softer-than-expected European data released in the last few weeks suggested that the European Central Bank is expected to hold off tightening until year end. As we've said - we do not expect that ECB policy will make any impact on the market in 2019. Rates already are zero and Draghi already said that no rate change stands on the table.
“Our three-month forecast for euro/dollar is between $1.14-$1.16 levels as we don’t expect changes from either of the two major central banks (Fed, ECB),” said Antje Praefcke, a currency strategist at Commerzbank based in Frankfurt.
The same thing follows from Fathom consulting notes on EU business sentiment. They point on growth pace, but still suggest that it should continue, but at lower pace:
Euro area growth slowed substantially in 2018 as the deteriorating external environment removed a substantial tailwind from the euro area’s sails – aside from net trade, the composition of GDP growth through the first three quarters of last year looked broadly similar to 2017. The deterioration in the outlook is evident in measures of sentiment – Fathom’s Economic Sentiment Indicator (ESI) for the euro area fell by 0.8 percentage points in 2018. However, in spite of this fall, the ESIs remain close to, or above, their long-run averages suggesting that the currency bloc’s expansion will continue this year, albeit at a slower pace.
On Friday, dollar rose after January data showing the biggest number of U.S. jobs created in 11 months and a rebound in U.S. manufacturing.
But tame wage inflation as shown in the U.S. nonfarm payrolls report kept the dollar’s gains in check, analysts said.
“The combination of a barnstorming headline number and the slight rise in unemployment suggests two things: America is creating jobs at a prodigious rate right now and there is some spare capacity to keep employers fed with more recruits in coming months,” said David Lamb, head of dealing at Fexco Corporate Payments in Edinburgh.
But he noted that the jobs report was far from perfect, citing December’s downward revision and the weak wage growth for such a tight U.S. labor market.
“All this means is that inflationary pressure is modest, and the Federal Reserve will feel in no hurry to push through its next interest rate hikes,” Lamb said.
Beyond the headline jobs gains, the dollar has become more sensitive to wage inflation over the last year.
The report showed the U.S. economy created 304,000 jobs, the highest in 11 months, easily superseding forecasts for 165,000 jobs. The unemployment rate, however, rose to a seven-month peak of 4 percent, while average hourly earnings rose just 0.1 percent in January, after rising 0.4 percent in December.
Contracts tied to the Fed’s policy rate had priced out any chance of a 2019 Fed rate hike after Fed Chairman Jerome Powell on Wednesday said the case for rate increases had weakened, and were pricing in about a one-in-three chance of a rate cut by the end of the year.
But after the jobs data, traders reduced rate-cut bets, though they continue to bet against a rate hike.
The dollar overall also benefited from a rise in the U.S. manufacturing index to 56.6 in January, from 54.3 the month before.
“The rebound in the ISM manufacturing index ... provides further reassurance that economic growth has remained solid at the beginning of 2019,” said Michael Pearce, senior U.S. economist at Capital Economics.
“We still expect a combination of weaker global demand and the strong dollar to weigh on the manufacturing sector this year, but it is clear that activity is not falling off a cliff,” he added.
CFTC resumes COT report publication after shutdown but missed the one for the 1st of February. So, we do not know still how overall sentiment has changed and what EUR position is:
"January 30, 2019: During the lapse in appropriations, the CFTC suspended publication of the weekly COT report, see the new schedule at https://www.cftc.gov/PressRoom/PressReleases/7864-19. "
Technicals
Monthly
This week action was in relatively tight range and has no impact on technical picture, at least on mohthly and weekly time frames. EUR still holds inside the monthly flag pattern, forming second doji in January.
Here we mostly wait for clarity - either downside breakout and start action to 1.08 and later to 1.03 or ability of the EUR to hold above 1.12 and turning up. Market stands at support area around major 5/8 Fib level. In case of upside action, YPP will be important target , because, as a rule, market tends to touch YPP through the year.
As Fathom consulting expects first rate change by Fed in June, but market is not ready for this step (as wee see from Fed watch tool by CME) - this is the first moment when EUR could show big action. Until June EUR could spend time in tight range without any meaningful breakout.
Indirect technical factors point on market's weakness, at least in long-term perspectives, as EUR can't jump out from strong support within more than 5-6 months and just lays upon it. Trend stands bearish here.
Monthly situation shortly could be described as indecision with light gravitation to the downside. In fact, long standing around Yearly Pivot confirms things that we've discussed above. MACD trend stands bearish here.
Thus we keep valid our downside COP target around 1.03 by far.
Weekly
In general we do not see any clear direction, weekly candles overlap on 70%, and most suitable description is fluctuation. Here actually we have two different setups.
First is our initial bearish setup, which, in fact, is continuation on the same logic that we have on monthly chart. Here we have downside channel.Since market shows very weak reaction on major 5/8 Fib support level - it brings some signs of bearish dynamic pressure, when MACD shows upside trend but price action stands flat.
Conversely, we have MACD divergence and possible reverse H&S shape. But market has to climb back to neckline at least, to resurrect this scenario, and break the channel up. Precisely this type of action we do not see yet. It means that we could get some different action, say, fallen wedge pattern instead. Anyway, currently weekly chart doesn't support any bullish inspiration and overall price action looks mostly indecision.
Speaking on sentiment, personally, when I'm looking at this chart, somehow I sense more bearish rather than bullish context. But this is something relates more to perception rather than strict technical analysis.
It means that again we mostly will be focused on daily/intraday tactical setups as we do not have any longer-term direction yet.
Daily
Here we have almost nothing to comment, guys. Reaction on NFP was mixed as it has provided good total numbers (even with downside revision of Dec) but shows drop in wage inflation. As a result we haven't got any strong direction and price holds in Wed range.
MACD trend stands bullish, market is neither at OB nor at OS. No strong resistance levels stands above as all Fib levels have been broken already. Price is coiling around MPP. From the picture that we have here it is difficult to extract future direction.
Usually, when we have situation of this kind, we watch on intraday short-term patterns and wait when something more definite on daily chart will appear. It seems that driving power of Fed statement and anemic ECB comments are exhausted. Market worked them out and now needs something new. Neither of the factors that we have now are sufficient to push market from dead point.
Intraday
Strictly speaking we have no reasons to doubt upside scenario by far. Yes, market stopped, but our AB-CD pattern is still valid, downside retracement out from COP target was small and K-support here holds market well.
Potentially in the beginning of the week we have two short-term setups. Either AB-CD retracement down, to major 5/8 Fib level here, or upside continuation. Here I put upside extensions, and you can see that this could be butterfly "Sell", which completes OP target.
Thus, all eyes should be on recent lows. Bullish scenario suggests that they have to be intact.
On 1H chart the only one valuable add-on - hidden bullish divergence. To keep valid butterfly setup, red circle lows should hold:
Conclusion:
Personally guys, I have feelings that bearish dynamic (not by DiNapoli term) is growing. As market doesn't take in consideration possible Fed rate hike, impact could come as bolt from the blue. Although everything stands quiet, and formally we do not have strong bearish signs...
In shorter-term we do not clear direction just yet and focus on intraday setups.
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.
