Sive Morten
Special Consultant to the FPA
- Messages
- 18,644
Fundamentals
Friday action from technical point of view was absolutely natural - drop to major daily OP and rebound after that. But, fundamental factors that stand beyond this action were changing through the day.
As Reuters reports, the U.S. dollar was modestly higher on Friday morning, steadying after it whipsawed following a report showing import price data weakened for the third straight month in January, the latest sign of weak inflation pressures.
The Labor Department said on Friday that import prices decreased 0.5 percent last month as petroleum product costs fell and a strong dollar curbed prices for motor vehicles and consumer goods, leading to the largest annual drop in nearly 2-1/2 years.
After rising 1.6 percent so far in February, the dollar fell broadly on Thursday when poor U.S. retail sales suggested a sharp slowdown in economic activity at the end of 2018.
“Calling the next move in the dollar is pretty tough right now. The start of the year saw investors move into undervalued risk assets, but right now the mood is shifting toward one of secular stagnation,” said Chris Turner, head of foreign exchange strategy at ING.
The results of a meeting on Friday between U.S. Treasury Secretary Steve Mnuchin and Chinese President Xi Jinping is also in focus for foreign exchange investors.
Earlier in the week, markets cheered U.S. President Donald Trump’s upbeat assessment of the talks, but a lack of progress since then has bred a risk-off mood causing declines in the Australian dollar, a proxy for China risk.
Any bad news out of the trade discussions on Friday could push the dollar back up, given investor demand for safe-haven assets during uncertain times, Turner said.
The euro extended its fall to a three-month low after Benoit Coeure, a member of the European Central Bank’s executive board, said a new round of cheap multiyear loans to banks was possible. Coeure added that the euro zone’s recent economic slowdown is more pronounced than earlier expected, suggesting the path of inflation will also be more shallow.
As soon as our OP target has been hit, dollar starts dropping later in the session, after San Francisco Federal Reserve Bank President Mary Daly suggested the central bank may hold off on raising interest rates in 2019, bolstering risk appetite in the currency market.
The Fed probably will not need to raise rates this year, given a slowdown in economic growth and muted inflation, Daly told the Wall Street Journal in an interview published on Friday.
“If the economy evolves as I just said I expect it to - 2 percent growth, 1.9 percent inflation, no sense that (price pressures are) going up, no sense that we have any acceleration - then I think the case for a rate increase isn’t there” this year, the paper quoted Daly as saying.
That was a big driving factor for stock market as well, guys, if you're interested with it.
“All of this looks like a positive risk tone in markets on dovish Fed comments from Daly which go further than what other Fed speakers have said,” said Richard Franulovich, senior currency strategist at Westpac Banking Corp. “That I think is what has undermined the dollar and pulled the euro up.”
“The dollar was bid this morning and Europe touched three-month lows,” said Franulovich. “But all that is in the past now.”
According CME Fed watch tool, low probability of rate increase has dropped even lower - from 5.75% to 3.23%.
Source: cmegroup.com
COT data provides no new information, as net position on EUR still stands short and almost at the same value on -40K contracts. CFTC on website provide curious reports, somehow they stand for 22 of January, so they update reports that they have missed due shutdown.
Recent fundamental information that we've got on EUR/USD mostly stands the same. The ratio depends on situation in US economy, because only there something could change and make impact on rate. Political component also takes not small role and it also mostly depends on US but not on EU.
European economy also stands poor, but stable and hardly it could become worse in nearest future.
The fact that we see some signs of slowdown in US economy, decreasing of inflation pressure, consumers activity suggests that it is difficult to count on big rally on dollar, at least not due economical component. Somehow I suggest that if any big rally on USD will happen, it will be due political factors.
By the way, silently, unnoticed but we're coming to end of March - Brexit day. And it seems that we will get hard scenario. Within 2-3 weeks investors' attention will turn to GBP, so we do either. Currently UK already meets drop in key economy figures.
Here is what Fathom tells in recent report:
According to the preliminary estimate of GDP, the UK economy slowed during the final quarter of last year, with output increasing by just 0.2%. Looking at the expenditure components, both household and government expenditure made positive contributions, while net trade and investment were a drag on growth. It is notable that business investment has now fallen for four consecutive quarters, for the first time since the financial crisis of 2008/09. This demonstrates how uncertainty about the macroeconomic outlook can have real effects. Our own calculations suggest that uncertainty following the EU referendum has increased the required return to UK investment projects by more than 200 basis points.
So, it seems that we should start slow preparation to long GBP trading journey, which could start somewhere in the middle of the March, where situation around Brexit will become really hot.
Technicals
Monthly
So, let's take a look what coming week prepares to us...
This week EUR ticked down a bit, but no major impact has happened because price was able to hold above 1.12 lows and inside flag consolidation.
In general our analysis here still stands the same. 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.
As we said this many times previously - 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.
Just by using of common sense, guys, in nowadays it is difficult to expect something positive as in global economy as in politics. Hence, any bad new triggers demand for safe haven assets and US dollar. Just by this simple logic odds stand in favor of downside trend rather than sharp upside reversal.
If you let me, here I briefly touch the topic with recent rush around 1987 Intermediate-Range Nuclear Forces (INF) treaty break. But what relation it has to FOREX? Direct relation. Breaking of INF agreement means that in a case of potential conflict Europe will be destroyed anyway, no matter who will win. Imagine that you're a EU president, what you should do in this situation. Personally, if I have no intention to start the war (which is obvious), I would make everything possible to avoid hazard of destruction, but I see only one solution to achieve this - close US military bases and send-off troops. And I suppose, this is what they (EU) will do in nearest future, or at least, they will try. How do you think, whether these EU efforts improve EU/US relations or not? Thus, it definitely impacts EUR/USD level, and hardly in favor of EUR...
This is just single example, but there are a lot of other political issues, which, at first glance, has no relation to FX market. But in reality they do.
So, although on technical picture we see just light and indirect signs of EUR weakness, political background stands negative. This is the major reason why I do not believe in resurrection of bull trend on EUR in this year.
Weekly
Previously we mentioned two setups that could be realized on EUR, although upside scenario by our view has less chances, just because market shows too choppy and heavy action, while upside action demands impulse, which we do not have.
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.
Last week we've got tail close and made forecast for further drop. Now this has happened.
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.
This week we also haven't got any grabber. Market has not reached MACDP line for few pips. Thus, lack of clear bullish signs doesn't let us to take bullish view here.
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.
Daily
Our daily target has been hit on Friday - OP@1.1235 area. In the beginning of the week, market will be quiet, because no major statistics will be released and Monday is President's day Holiday in US. First important news will be only on Wed - Fed minutes.
Thus, on Mon-Tue we could expect upside retracement as reaction on OP target. In fact, here we have a bit wide but "222" Buy pattern and its minimal target is 30% pullback, somewhere to 1.1340-1.1360.
In general, daily OB level stands around major 5/8 Fib level and we should not expect too big rally on EUR this week.
Intraday
Here we just need to wait for downside retracement. Here we could get either "222" Buy pattern on reverse H&S. As usual, just keep an eye on possible downside AB-CD's to estimate the Fib level, where retracement could finish.
On Monday, EUR could move slightly higher before retracement will start, just because of untouched OP target.
First upside target is 1.1350 area, and later we will see, should we expect higher price action.
Conclusion:
Long-term background mostly stands the same. In shorter-term, as EUR has hit our daily OP, the first half of coming week we spend in company of upside pullback. First upside target stands around 1.1350 area.
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.
Friday action from technical point of view was absolutely natural - drop to major daily OP and rebound after that. But, fundamental factors that stand beyond this action were changing through the day.
As Reuters reports, the U.S. dollar was modestly higher on Friday morning, steadying after it whipsawed following a report showing import price data weakened for the third straight month in January, the latest sign of weak inflation pressures.
The Labor Department said on Friday that import prices decreased 0.5 percent last month as petroleum product costs fell and a strong dollar curbed prices for motor vehicles and consumer goods, leading to the largest annual drop in nearly 2-1/2 years.
After rising 1.6 percent so far in February, the dollar fell broadly on Thursday when poor U.S. retail sales suggested a sharp slowdown in economic activity at the end of 2018.
“Calling the next move in the dollar is pretty tough right now. The start of the year saw investors move into undervalued risk assets, but right now the mood is shifting toward one of secular stagnation,” said Chris Turner, head of foreign exchange strategy at ING.
The results of a meeting on Friday between U.S. Treasury Secretary Steve Mnuchin and Chinese President Xi Jinping is also in focus for foreign exchange investors.
Earlier in the week, markets cheered U.S. President Donald Trump’s upbeat assessment of the talks, but a lack of progress since then has bred a risk-off mood causing declines in the Australian dollar, a proxy for China risk.
Any bad news out of the trade discussions on Friday could push the dollar back up, given investor demand for safe-haven assets during uncertain times, Turner said.
The euro extended its fall to a three-month low after Benoit Coeure, a member of the European Central Bank’s executive board, said a new round of cheap multiyear loans to banks was possible. Coeure added that the euro zone’s recent economic slowdown is more pronounced than earlier expected, suggesting the path of inflation will also be more shallow.
As soon as our OP target has been hit, dollar starts dropping later in the session, after San Francisco Federal Reserve Bank President Mary Daly suggested the central bank may hold off on raising interest rates in 2019, bolstering risk appetite in the currency market.
The Fed probably will not need to raise rates this year, given a slowdown in economic growth and muted inflation, Daly told the Wall Street Journal in an interview published on Friday.
“If the economy evolves as I just said I expect it to - 2 percent growth, 1.9 percent inflation, no sense that (price pressures are) going up, no sense that we have any acceleration - then I think the case for a rate increase isn’t there” this year, the paper quoted Daly as saying.
That was a big driving factor for stock market as well, guys, if you're interested with it.
“All of this looks like a positive risk tone in markets on dovish Fed comments from Daly which go further than what other Fed speakers have said,” said Richard Franulovich, senior currency strategist at Westpac Banking Corp. “That I think is what has undermined the dollar and pulled the euro up.”
“The dollar was bid this morning and Europe touched three-month lows,” said Franulovich. “But all that is in the past now.”
According CME Fed watch tool, low probability of rate increase has dropped even lower - from 5.75% to 3.23%.
Source: cmegroup.com
COT data provides no new information, as net position on EUR still stands short and almost at the same value on -40K contracts. CFTC on website provide curious reports, somehow they stand for 22 of January, so they update reports that they have missed due shutdown.
Recent fundamental information that we've got on EUR/USD mostly stands the same. The ratio depends on situation in US economy, because only there something could change and make impact on rate. Political component also takes not small role and it also mostly depends on US but not on EU.
European economy also stands poor, but stable and hardly it could become worse in nearest future.
The fact that we see some signs of slowdown in US economy, decreasing of inflation pressure, consumers activity suggests that it is difficult to count on big rally on dollar, at least not due economical component. Somehow I suggest that if any big rally on USD will happen, it will be due political factors.
By the way, silently, unnoticed but we're coming to end of March - Brexit day. And it seems that we will get hard scenario. Within 2-3 weeks investors' attention will turn to GBP, so we do either. Currently UK already meets drop in key economy figures.
Here is what Fathom tells in recent report:
According to the preliminary estimate of GDP, the UK economy slowed during the final quarter of last year, with output increasing by just 0.2%. Looking at the expenditure components, both household and government expenditure made positive contributions, while net trade and investment were a drag on growth. It is notable that business investment has now fallen for four consecutive quarters, for the first time since the financial crisis of 2008/09. This demonstrates how uncertainty about the macroeconomic outlook can have real effects. Our own calculations suggest that uncertainty following the EU referendum has increased the required return to UK investment projects by more than 200 basis points.
So, it seems that we should start slow preparation to long GBP trading journey, which could start somewhere in the middle of the March, where situation around Brexit will become really hot.
Technicals
Monthly
So, let's take a look what coming week prepares to us...
This week EUR ticked down a bit, but no major impact has happened because price was able to hold above 1.12 lows and inside flag consolidation.
In general our analysis here still stands the same. 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.
As we said this many times previously - 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.
Just by using of common sense, guys, in nowadays it is difficult to expect something positive as in global economy as in politics. Hence, any bad new triggers demand for safe haven assets and US dollar. Just by this simple logic odds stand in favor of downside trend rather than sharp upside reversal.
If you let me, here I briefly touch the topic with recent rush around 1987 Intermediate-Range Nuclear Forces (INF) treaty break. But what relation it has to FOREX? Direct relation. Breaking of INF agreement means that in a case of potential conflict Europe will be destroyed anyway, no matter who will win. Imagine that you're a EU president, what you should do in this situation. Personally, if I have no intention to start the war (which is obvious), I would make everything possible to avoid hazard of destruction, but I see only one solution to achieve this - close US military bases and send-off troops. And I suppose, this is what they (EU) will do in nearest future, or at least, they will try. How do you think, whether these EU efforts improve EU/US relations or not? Thus, it definitely impacts EUR/USD level, and hardly in favor of EUR...
This is just single example, but there are a lot of other political issues, which, at first glance, has no relation to FX market. But in reality they do.
So, although on technical picture we see just light and indirect signs of EUR weakness, political background stands negative. This is the major reason why I do not believe in resurrection of bull trend on EUR in this year.
Weekly
Previously we mentioned two setups that could be realized on EUR, although upside scenario by our view has less chances, just because market shows too choppy and heavy action, while upside action demands impulse, which we do not have.
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.
Last week we've got tail close and made forecast for further drop. Now this has happened.
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.
This week we also haven't got any grabber. Market has not reached MACDP line for few pips. Thus, lack of clear bullish signs doesn't let us to take bullish view here.
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.
Daily
Our daily target has been hit on Friday - OP@1.1235 area. In the beginning of the week, market will be quiet, because no major statistics will be released and Monday is President's day Holiday in US. First important news will be only on Wed - Fed minutes.
Thus, on Mon-Tue we could expect upside retracement as reaction on OP target. In fact, here we have a bit wide but "222" Buy pattern and its minimal target is 30% pullback, somewhere to 1.1340-1.1360.
In general, daily OB level stands around major 5/8 Fib level and we should not expect too big rally on EUR this week.
Intraday
Here we just need to wait for downside retracement. Here we could get either "222" Buy pattern on reverse H&S. As usual, just keep an eye on possible downside AB-CD's to estimate the Fib level, where retracement could finish.
On Monday, EUR could move slightly higher before retracement will start, just because of untouched OP target.
First upside target is 1.1350 area, and later we will see, should we expect higher price action.
Conclusion:
Long-term background mostly stands the same. In shorter-term, as EUR has hit our daily OP, the first half of coming week we spend in company of upside pullback. First upside target stands around 1.1350 area.
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.
If trend line breaks probably 61.8% would not hold and dollar will go higher!
