Sive Morten
Special Consultant to the FPA
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Fundamentals
There were two major events in focus this week - Fed statement and Brexit rustle. Fed has shocked markets by clear signal of refusing interest rate increasing this year. This information has triggered chain of events and most important one for financial markets is drop of US interest rates. Recent Brexit events also make impact on market sentiment and GBP perspective.
As Reuters reports - The dollar fell against the safe-haven Japanese yen on Friday as dismal U.S. manufacturing data fuelled worries about the wider economy, and Treasury bond yields signalled growing fears of a recession.
The dollar, however, rose against the euro as a much weaker-than-expected German manufacturing survey raised concerns that Europe’s powerhouse economy may be slowing.
While EU policymakers had cut growth forecasts for the euro zone economy earlier this month and launched a new round of cheap loans to its banks, the below than expected data raised concerns that the German economy, Europe’s powerhouse, may be slowing quickly.
IHS Markit’s flash composite Purchasing Managers’ Index measuring activity in German services and manufacturing, which together account for more than two-thirds of the economy, fell to 51.5, it lowest reading since June 2013.
“The data was bad and the falling bond yields is also weighing on the euro,” said Manuel Oliveri, a currency strategist at Credit Agricole in London.
Germany’s 10-year government bond yield was poised to turn negative for the first time since October 2016 and was last trading at 0 percent after falling three basis points overnight.
On Friday, the spread between 3-month Treasury bills and 10-year note yields inverted for the first time since 2007 after U.S. PMI manufacturing data missed estimates. This inversion of the yield curve is widely seen as a leading indicator of recession.
“You have to take it seriously that it is a signal for slowing growth or a potential recession in the next 12 to 18 months. This is what the Fed looks at closely,” said Sean Simko, head of global fixed income management at SEI Investments Co in Oaks, Pennsylvania.
“The recovery (in the yen) is not on the strength of the Japanese economy, it’s more about safe-haven flows,” said Alfonso Esparza, senior currency analyst at OANDA in Toronto.
Japan is the world’s biggest creditor nation, and its currency benefits when Japanese investors repatriate funds in times of financial or geopolitical stress.
The dollar, which came under pressure after the Federal Reserve surprised investors on Wednesday by abandoning all plans to raise interest rates this year, found some relief from a weaker euro.
“March’s flash PMIs add to evidence that GDP growth was subdued in the three largest advanced economies in Q1, with Germany continuing to take the brunt of the global manufacturing slowdown,” Simon MacAdam, global economist as Capital Economics, wrote in a note.
“It helps to reinforce the idea that we are looking at a more meaningful and more widespread slowdown than markets had anticipated a few months ago,” said Karl Schamotta, director of foreign exchange strategy and structured products at Cambridge Global Payments.
“What we are seeing is sort of a recognition that the Fed is reacting to deeper risks in the global economy,” he said.
The British pound, weighed down by fears Britain could exit the European Union on March 29 without a deal in place, recovered overnight when EU leaders gave Prime Minister Theresa May a two-week reprieve to decide how Britain would leave.
Risk reversals, a gauge of puts to calls, and an indicator of how bearish or bullish are on the outlook of the currency, indicate that short term negative bets on the pound are piling up rapidly despite the broader calm in the spot markets.
One-month risk reversals on the pound versus the euro plunged to its lowest levels since mid-2017. Against the dollar, bearish bets grew to their highest levels since September 2017, according to Refinitiv data.
European Union leaders on Thursday gave May two weeks’ reprieve, until April 12, before Britain could crash out of the bloc if lawmakers next week reject her Brexit plan for a third time.
“That means the FX market clearly now sees a higher likelihood of sterling collapsing, even if the spot rate is not yet reflecting an increased no-deal risk,” Commerzbank strategists said in a note.
Fathom consulting also reports on worrying signs in US economy:
Although the government shutdown ended nearly two months ago, it is still complicating assessment of the US economy. Some data releases were delayed and the data themselves (payrolls, unemployment, retail sales and sentiment indicators) exhibited volatility. The failure of Fathom’s US Economic Sentiment Indicator (ESI) to rebound in February suggests that the shutdown may have had more than a transitory effect and/or GDP growth was slowing anyway — both are probably true.
At the same Fathom tells that not everything as bad as it seems:
That said, the current level of the ESI is still consistent with a solid pace of economic expansion and more than two-thirds of the ESI’s constituents are currently higher than their long-run average.
And here is most important conclusion for us:
Although we expect economic growth to slow this year, we still think that the economy will grow above potential, prompting inflation to rise and another two 25 basis point increases in the fed funds rate between now and the end of Q1 next year.
Indeed here is one thing where it is difficult to object to Fathom. Recent NFP data shows 0.4% wage inflation and it keeps growing as in previous reports it was 0.2 and 0.3 was treated as increasing. It means that despite possible slowdown GDP and production - inflation could force Fed to rise rates. Fed rhetoric could change and despite recent statement more hawkish action still stands on the table. This makes us still keep our long-term view on EUR/USD and still think that USD has more advantage position compares to EUR.
The only mismatch that we have here is a drop of US yields and it is difficult to put it in context of positive US perspectives. Although recent drop could be just short-term reaction on Fed statement, we need to keep an eye on 10-year yields. Trend should have to change when more realistic hawkish perspectives appear on horizon. Conversely, if US is falling into recession, we should see more signs of this and mostly in statistics data. In this case Fathom will review its assessment of US situation in advance probably.
CFTC Net EUR position has not change this week and stands short around 78K contracts.
Technicals
Monthly
Despite solid volatility through the week, monthly chart is barely impacted as price still stands in the same range.
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. But after recent events chances on rally stand phantom.
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. By our view this could happen somewhere in the summer. Of course, recent news and market sentiment hardly agree with this now, but situation changes rapidly and this scenario is not erased totally yet.
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 last year 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. We already see rally on JPY particular by this reason. Following simple logic odds stand in favor of downside trend rather than sharp upside reversal.
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
Last week we said that it is most difficult chart for understanding, because here we could find as bullish as bearish signs. Fallen wedge and strong support works for bulls, while long-term standing on support line and fundamental background add points to the bears.
Last week we've mentioned, as I call it, "2-days grabber". It is surprisingly, but it has been completed as price moved above recent top of 1.1418. But, bulls' happy was very short-term as price dropped back, forming shooting star bearish reversal pattern and cares signs of W&R.
Here is difficult to talk on long-term perspective, guys, but in short-term, sentiment mostly looks bearish. EUR and GBP are strongly politicized right now. If we wouldn't have any new Brexit turnings any time soon, I would say EUR is looking south, but with strong external driving factor situation could change in a blink of an eye, ignoring any technical background. Actually we saw an example, how this could happen, just on Friday.
Daily
Despite strong sell-off on Friday, It is not everything lost for the bulls. Yes, drop back below trend line, MPP and intraday K-support looks bearish. But market has formed bullish reversal swing and deep retracement is normal action. MACD daily trend still stands bullish. If we would have not as strong collapse as we do - it would be much better. But...
So, to take control over market and confirm bullish trend - EUR has to show upside continuation and break up recent top and 5/8 Fib resistance. Opposite action, i.e. inability of market to do it, will lead to downside continuation. Our task is watch for pattern.
Intraday
And first pattern is already in place. EUR has dropped right to major 5/8 Fib support on 4H chart, completing AB=CD pattern down. So, we have "222" Buy pattern in place. As our forum member Venelin correctly tells - we have B&B "Buy" setup on daily chart, thrust up is good, market hits major support within 3 bars below 3x3 DMA... What's the problem? Right, only with the pace of downward action it is too strong. May be B&B will work, or at least 3/8 upside pullback will happen, but currently it is too brave to suggest upside continuation.
So, this is first setup - if you intend to trade it long - move stops to breakeven as soon as market will pass 25-30 pips up.
Another setup that we will keep an eye on - possible bearish continuation pattern. If, say, upside action will be slow and heavy, we could get "222" Sell pattern and downside continuation. This will happen, if EUR will fail to climb above 1.1420 top and continue upside action.
Hourly chart shows that upside action could start by small reverse H&S pattern. Since drop was very strong, more probable target is K-resistance and WPP around 1.1340 area. But this is only by technical sight, once external political factors intrude - everything could happen.
That's being said - it is not forbidden to trade bullish patterns guys, but reduce your appetite, or, move stops to breakeven, at least. Bears should wait for upside retracement, the way how it goes, it should not be fast and furious, and look for bearish patterns, such as "222" Sell.
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.
There were two major events in focus this week - Fed statement and Brexit rustle. Fed has shocked markets by clear signal of refusing interest rate increasing this year. This information has triggered chain of events and most important one for financial markets is drop of US interest rates. Recent Brexit events also make impact on market sentiment and GBP perspective.
As Reuters reports - The dollar fell against the safe-haven Japanese yen on Friday as dismal U.S. manufacturing data fuelled worries about the wider economy, and Treasury bond yields signalled growing fears of a recession.
The dollar, however, rose against the euro as a much weaker-than-expected German manufacturing survey raised concerns that Europe’s powerhouse economy may be slowing.
While EU policymakers had cut growth forecasts for the euro zone economy earlier this month and launched a new round of cheap loans to its banks, the below than expected data raised concerns that the German economy, Europe’s powerhouse, may be slowing quickly.
IHS Markit’s flash composite Purchasing Managers’ Index measuring activity in German services and manufacturing, which together account for more than two-thirds of the economy, fell to 51.5, it lowest reading since June 2013.
“The data was bad and the falling bond yields is also weighing on the euro,” said Manuel Oliveri, a currency strategist at Credit Agricole in London.
Germany’s 10-year government bond yield was poised to turn negative for the first time since October 2016 and was last trading at 0 percent after falling three basis points overnight.
On Friday, the spread between 3-month Treasury bills and 10-year note yields inverted for the first time since 2007 after U.S. PMI manufacturing data missed estimates. This inversion of the yield curve is widely seen as a leading indicator of recession.
“You have to take it seriously that it is a signal for slowing growth or a potential recession in the next 12 to 18 months. This is what the Fed looks at closely,” said Sean Simko, head of global fixed income management at SEI Investments Co in Oaks, Pennsylvania.
“The recovery (in the yen) is not on the strength of the Japanese economy, it’s more about safe-haven flows,” said Alfonso Esparza, senior currency analyst at OANDA in Toronto.
Japan is the world’s biggest creditor nation, and its currency benefits when Japanese investors repatriate funds in times of financial or geopolitical stress.
The dollar, which came under pressure after the Federal Reserve surprised investors on Wednesday by abandoning all plans to raise interest rates this year, found some relief from a weaker euro.
“March’s flash PMIs add to evidence that GDP growth was subdued in the three largest advanced economies in Q1, with Germany continuing to take the brunt of the global manufacturing slowdown,” Simon MacAdam, global economist as Capital Economics, wrote in a note.
“It helps to reinforce the idea that we are looking at a more meaningful and more widespread slowdown than markets had anticipated a few months ago,” said Karl Schamotta, director of foreign exchange strategy and structured products at Cambridge Global Payments.
“What we are seeing is sort of a recognition that the Fed is reacting to deeper risks in the global economy,” he said.
The British pound, weighed down by fears Britain could exit the European Union on March 29 without a deal in place, recovered overnight when EU leaders gave Prime Minister Theresa May a two-week reprieve to decide how Britain would leave.
Risk reversals, a gauge of puts to calls, and an indicator of how bearish or bullish are on the outlook of the currency, indicate that short term negative bets on the pound are piling up rapidly despite the broader calm in the spot markets.
One-month risk reversals on the pound versus the euro plunged to its lowest levels since mid-2017. Against the dollar, bearish bets grew to their highest levels since September 2017, according to Refinitiv data.
European Union leaders on Thursday gave May two weeks’ reprieve, until April 12, before Britain could crash out of the bloc if lawmakers next week reject her Brexit plan for a third time.
“That means the FX market clearly now sees a higher likelihood of sterling collapsing, even if the spot rate is not yet reflecting an increased no-deal risk,” Commerzbank strategists said in a note.
Fathom consulting also reports on worrying signs in US economy:
Although the government shutdown ended nearly two months ago, it is still complicating assessment of the US economy. Some data releases were delayed and the data themselves (payrolls, unemployment, retail sales and sentiment indicators) exhibited volatility. The failure of Fathom’s US Economic Sentiment Indicator (ESI) to rebound in February suggests that the shutdown may have had more than a transitory effect and/or GDP growth was slowing anyway — both are probably true.
At the same Fathom tells that not everything as bad as it seems:
That said, the current level of the ESI is still consistent with a solid pace of economic expansion and more than two-thirds of the ESI’s constituents are currently higher than their long-run average.
And here is most important conclusion for us:
Although we expect economic growth to slow this year, we still think that the economy will grow above potential, prompting inflation to rise and another two 25 basis point increases in the fed funds rate between now and the end of Q1 next year.
Indeed here is one thing where it is difficult to object to Fathom. Recent NFP data shows 0.4% wage inflation and it keeps growing as in previous reports it was 0.2 and 0.3 was treated as increasing. It means that despite possible slowdown GDP and production - inflation could force Fed to rise rates. Fed rhetoric could change and despite recent statement more hawkish action still stands on the table. This makes us still keep our long-term view on EUR/USD and still think that USD has more advantage position compares to EUR.
The only mismatch that we have here is a drop of US yields and it is difficult to put it in context of positive US perspectives. Although recent drop could be just short-term reaction on Fed statement, we need to keep an eye on 10-year yields. Trend should have to change when more realistic hawkish perspectives appear on horizon. Conversely, if US is falling into recession, we should see more signs of this and mostly in statistics data. In this case Fathom will review its assessment of US situation in advance probably.
CFTC Net EUR position has not change this week and stands short around 78K contracts.
Technicals
Monthly
Despite solid volatility through the week, monthly chart is barely impacted as price still stands in the same range.
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. But after recent events chances on rally stand phantom.
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. By our view this could happen somewhere in the summer. Of course, recent news and market sentiment hardly agree with this now, but situation changes rapidly and this scenario is not erased totally yet.
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 last year 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. We already see rally on JPY particular by this reason. Following simple logic odds stand in favor of downside trend rather than sharp upside reversal.
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
Last week we said that it is most difficult chart for understanding, because here we could find as bullish as bearish signs. Fallen wedge and strong support works for bulls, while long-term standing on support line and fundamental background add points to the bears.
Last week we've mentioned, as I call it, "2-days grabber". It is surprisingly, but it has been completed as price moved above recent top of 1.1418. But, bulls' happy was very short-term as price dropped back, forming shooting star bearish reversal pattern and cares signs of W&R.
Here is difficult to talk on long-term perspective, guys, but in short-term, sentiment mostly looks bearish. EUR and GBP are strongly politicized right now. If we wouldn't have any new Brexit turnings any time soon, I would say EUR is looking south, but with strong external driving factor situation could change in a blink of an eye, ignoring any technical background. Actually we saw an example, how this could happen, just on Friday.
Daily
Despite strong sell-off on Friday, It is not everything lost for the bulls. Yes, drop back below trend line, MPP and intraday K-support looks bearish. But market has formed bullish reversal swing and deep retracement is normal action. MACD daily trend still stands bullish. If we would have not as strong collapse as we do - it would be much better. But...
So, to take control over market and confirm bullish trend - EUR has to show upside continuation and break up recent top and 5/8 Fib resistance. Opposite action, i.e. inability of market to do it, will lead to downside continuation. Our task is watch for pattern.
Intraday
And first pattern is already in place. EUR has dropped right to major 5/8 Fib support on 4H chart, completing AB=CD pattern down. So, we have "222" Buy pattern in place. As our forum member Venelin correctly tells - we have B&B "Buy" setup on daily chart, thrust up is good, market hits major support within 3 bars below 3x3 DMA... What's the problem? Right, only with the pace of downward action it is too strong. May be B&B will work, or at least 3/8 upside pullback will happen, but currently it is too brave to suggest upside continuation.
So, this is first setup - if you intend to trade it long - move stops to breakeven as soon as market will pass 25-30 pips up.
Another setup that we will keep an eye on - possible bearish continuation pattern. If, say, upside action will be slow and heavy, we could get "222" Sell pattern and downside continuation. This will happen, if EUR will fail to climb above 1.1420 top and continue upside action.
Hourly chart shows that upside action could start by small reverse H&S pattern. Since drop was very strong, more probable target is K-resistance and WPP around 1.1340 area. But this is only by technical sight, once external political factors intrude - everything could happen.
That's being said - it is not forbidden to trade bullish patterns guys, but reduce your appetite, or, move stops to breakeven, at least. Bears should wait for upside retracement, the way how it goes, it should not be fast and furious, and look for bearish patterns, such as "222" Sell.
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.
