Sive Morten
Special Consultant to the FPA
- Messages
- 18,655
Fundamentals
This week price action was really difficult to trade, not only on EUR and FX market but on commodities as well. This happens every time, when market is driven by external political factors and news, when investors scare and do not know in what direction to run and emotionally reacts on any new word of politicians.
Beyond this volatility, which is short-term, we could miss some important factors that will make shape of the market in long-term perspective. There are two of them - EU election results and rising economical tensions between EU and US.
Last year (or even more) we talked that EU will change as politically as economically, it should change the direction of its development, all allies and unions will break or change. This process stands under way right now. Relationship between EU and US is chilling. UK, as all-time US ally leaves EU as well. Now US is too busy with China and neighbors - Mexico and Canada, but soon US turns to EU. Even now, when US puts sanctions on Iran, Russia, Venezuela, Cuba - it intentionally but indirectly hurts interest of other countries.
EU also starts to feel this burden, not heavy by far, but something tells me that pressure will increase. Recent Cuba story - The European Union said on Thursday it would take "measures" in response to a decision by Washington to allow lawsuits in US courts against companies using premises confiscated by the communist government of Cuba . New set of anti North Stream 2 sanctions, ban of any cooperation in space sphere, and famous Huawei scandal - this is just few to mention here. And this process is getting stronger momentum and it is naive to suggest that EU is able to stay aside from it.
So, we expect that breaking of old order and decreasing of old power center unavoidable leads EU to reorganization, when core countries suddenly recall that they have own economical and political interests and own citizens, and they do not want to work, feed and utilize resources of nation in favor of others, on orders from Brussels.
And here we come to second important event of this week - elections result. Here we see the confirmation of thoughts, that we just have said. Brussels determines everything and overrule any decision of domestic governments - it decides which country should accept refugees and how much, ignoring population opinion, it decides where Germany, France or Italy money will be distributed and invested etc. Thus, the EU-leaving sentiment becomes stronger in EU and this sentiment shows its way in election results.
Centre-right wins EU vote, but eurosceptics make gains - The centre-right European People's Party (EPP) has won the most seats in the European Parliament, but eurosceptic parties have made strong gains, officials have said.
The EPP won 178 seats, just ahead of the 152 won by traditional centre-left rival the Socialists and Democrats, but various populist, eurosceptic and right-wing parties won more than 100 seats, parliament spokesman Jaume Duch told reporters.
Along with a surge for the Greens, that meant four groups occupying the pro-EU middle ground lost under 20 seats, securing 505 seats out of 751, according to a projection by the European Parliament.
That may complicate some policymaking, as a two-party "grand coalition" of the conservative European People's Party (EPP) and the Socialists (S&D) no longer has a majority.
The Parliament's projection put the EPP on 178 seats, ahead of the S&D on 152, with the liberals on 108, up 39 seats, and Greens on 67, up 15. On the far-right, two groups in the current parliament had a combined 108 seats, a 40% gain from 2014.
The European Parliament election will usher in weeks and possibly months of hard bargaining over who will run EU institutions. Party spokespeople for the four pro-EU centre parties were quick to talk of plans for a broad coalition.
Thus, maybe effect is not as strong as it was expected, but changing of power balance definitely will find the way in EU policy, especially, in EU major countries. Any political restructuring and reforms always make impact on economy and this will be bearish factor for EUR in a long term.
In shorter term, the most important news was on Mexico tariffs as a new spiral of US global trade war. As Reuters reports - the dollar held up against its key rivals on Thursday after fears of an escalation in the Sino-U.S. trade standoff forced investors to take shelter in safe-haven assets, including government bonds.
As the dispute between the world’s two biggest economies showed no signs of abating, worries that global growth will be hurt have rippled through financial markets in recent sessions, with riskier assets in particular taking the brunt of selling.
“The outlook for global growth, and any drag from the festering trade dispute, remain key issues for markets,” said Michael McCarthy, Sydney-based chief market strategist at CMC Markets.
“The data over the next twenty-four hours has potential to either confirm or dispel the gloom,” he wrote in a note.
Offering the latest sign the standoff between Washington and Beijing is far from ending, Chinese Vice Foreign Minister Zhang Hanhui said on Thursday that provoking trade disputes is “naked economic terrorism”, ramping up the rhetoric against the United States.
Chinese newspapers had warned the day before that Beijing could use rare earth elements to strike back at the United States after U.S. President Donald Trump said he was “not yet ready” to make a deal with Beijing over trade.
The impact of escalating trade tensions between Washington and Beijing is starting to show up in economic data, with a key measure of Chinese manufacturing activity disappointing investors, and Trump’s latest salvo fuelled a rush on Friday to safe-haven assets such as government bonds and the yen.
“As the United States isn’t likely to fall into a recession anytime soon, there’s a likelihood that risk sentiment may improve based on the economy’s strength,” said Ayako Sera, market strategist at Sumitomo Mitsui Trust Bank.
The benchmark 10-year U.S. Treasury yields hit as low as 2.210% overnight, their lowest since the middle of September 2017.
The European Commission wrote on Wednesday to the Italian government asking it to explain a deterioration in the country’s public finances, a move that sets the stage for a possible legal clash with the eurosceptic coalition in Rome.
Taking aim at what D.Trump said was a surge of illegal immigrants across the southern border, Trump vowed on Thursday to impose a tariff on all goods coming from Mexico, starting at 5% and ratcheting higher until the flow of people ceases.
Trump’s surprise duties on Mexican imports “spurred sharp losses in the Mexican peso and a general risk-off move that strengthened the yen,” said Marc Chandler, chief market strategist at Bannockburn Global Forex LLC.
The dollar’s broad losses on Friday were compounded by comments from senior policymakers, with the U.S. Federal Reserve Vice Chair Richard Clarida on Thursday discussing the possibility of rate cuts should the world’s biggest economy take a turn for the worse, though he also said he thought the U.S. economy is in “a very good place”.
U.S. interest rates futures implied traders expect at least one rate cut from the Federal Reserve by year-end.
Goverment data on Friday showed a modest pickup in inflation in April, while a private report indicated a stronger-than-forecast improvement in U.S. Midwest manufacturing activity in May. Stronger-than-forecast data on U.S. consumer spending and income in April tempered some worries about a slowing U.S. economy.
As a result, we do not see any big shift in EUR/USD sentiment. CFTC data shows that investors still hold net bearish positions:
Source: cftc.gov
Charting by Investing.com
And the last one thing that could change the shape of the markets. As Fathom Consulting suggests, Fed could change approach to inflation targeting, which could affect the Fed policy measures:
In recent years the widespread practice of targeting low rates of inflation has been found wanting. Our chart shows a long moving average of inflation in six inflation-targeting economies: the US, the euro area, the UK, Japan, Canada and New Zealand. Central Banks in each of these economies are charged with targeting an inflation rate of 2% Some economists have blamed this recent tendency to undershoot on a fall in the neutral rate of interest. Some commentators believe that the Fed might soon switch to targeting average inflation over a period of time, rather than current inflation, in an attempt to correct this downward bias.
Technical analysis
Monthly
Last time we've made cross market analysis, involving Dollar Index to understand what could expect soon. The overall picture has not changed on long-term charts, but currently it is still unclear by what factors major reversal should happen. In EU we see critical but stable condition, so the only reason for sudden rally on EUR could be unexpected weakness in USD, although reasons are also unclear by far.
While we're waiting for clarity - overall situation on monthly chart stands the same. Mays stands as inside month to April and price lays upon major Fib support, without any attempt to jump out from it. Trend stands bearish. Flag pattern was broken down and EUR enters in wide rectangle consolidation of 1.05-1.15 range.
As it doesn't want to leave it, it seems that EUR more is bearish rather than bullish and next valuable support is YPS1 of 1.0940. At least currently we do not see any clear bullish sign on monthly chart.
Weekly
On weekly chart market more and more narrows the trading range and we have lasting sequence of grabbers in different directions. This week again - we've got bullish grabber, which suggests action above 1.1262 top. Long lasting bullish MACD divergence can't get started to work as well. When bullish patterns in place but something keep them on hold and doesn't let them to work - could it be another sign of bearish pressure strength? Too tight trading range is always subject to explosive exit. The only question is - in what direction it will be. On weekly dollar index we do not have grabbers.
Daily
On daily chart overall situation is not very difficult, at least in short-term. While price holds above the lows - upside action could happen. We have weekly grabber, and here, on daily - we've got morning star pattern, which makes possible some upside continuation. Thus, 1.1262 area target, that we've mentioned last week - mostly stands the same. Now it also will be MPR1 of June.
The same story on downside breakout. Breaking through the lows means that our next stop is 1.1050 area of daily Oversold and some extension targets.
Thus, if we have bearish view - we should ignore bullish setup and patterns, and wait for proper bearish one. The opposite is true for the bulls - while market is above 1.11 lows, it is possible to take tactical long position based on the patterns that we have. Still, for truth sake - it seems that market stands in a kind of indecision, that also might be silence before the storm.
Intraday
If somehow bullish target will be reached, the bearish setup of larger scale could be formed on 4H chart. OP target stands right around K-resistance and this will be rather strong area, including OP. Large "222" Sell pattern will be formed. Thus, if you have bearish view, you could consider this pattern:
On hourly chart there are a lot of things stand. First, is our suggestion on minor H&S pattern is done, xop (gray) is hit, B&B is done but it was a bit dramatic due PCE data release. The fact that B&B has not become a pattern that triggers downside continuation but has hit just minimal target suggests that upside potential still exists.
Now we turn to more extended AB-CD pattern. In "C" point we also have a grabber which suggests action above recent top. Price now stands around COP. As no new top was formed, we could focus only on Fib levels, shown on the chart. Keeping in mind morning star daily pattern - drop should not be too deep. Appearing of "222' Buy is advantage. If market is still bullish it should proceed to OP after retracement. May be butterfly "Sell" will be formed to finalize action to OP target. The major task for bulls is to take position as closer to "C" point as possible, with initial stops at least below "C" but preferably below A.
Conclusion:
Although we see chances for short-term, tactical upside action on daily/intraday basis, we do not see yet any changes in long-term as technical as fundamental background. Last week we talked on long term setup on dollar index which potentially points on Dollar weakness. But currently it is still a question for us, what particular patterns could trigger this weakness. More probable that any EUR appreciation (if it still will happen) will be based not on EUR strength, as we do not see conditions for that but on USD weakness.
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 price action was really difficult to trade, not only on EUR and FX market but on commodities as well. This happens every time, when market is driven by external political factors and news, when investors scare and do not know in what direction to run and emotionally reacts on any new word of politicians.
Beyond this volatility, which is short-term, we could miss some important factors that will make shape of the market in long-term perspective. There are two of them - EU election results and rising economical tensions between EU and US.
Last year (or even more) we talked that EU will change as politically as economically, it should change the direction of its development, all allies and unions will break or change. This process stands under way right now. Relationship between EU and US is chilling. UK, as all-time US ally leaves EU as well. Now US is too busy with China and neighbors - Mexico and Canada, but soon US turns to EU. Even now, when US puts sanctions on Iran, Russia, Venezuela, Cuba - it intentionally but indirectly hurts interest of other countries.
EU also starts to feel this burden, not heavy by far, but something tells me that pressure will increase. Recent Cuba story - The European Union said on Thursday it would take "measures" in response to a decision by Washington to allow lawsuits in US courts against companies using premises confiscated by the communist government of Cuba . New set of anti North Stream 2 sanctions, ban of any cooperation in space sphere, and famous Huawei scandal - this is just few to mention here. And this process is getting stronger momentum and it is naive to suggest that EU is able to stay aside from it.
So, we expect that breaking of old order and decreasing of old power center unavoidable leads EU to reorganization, when core countries suddenly recall that they have own economical and political interests and own citizens, and they do not want to work, feed and utilize resources of nation in favor of others, on orders from Brussels.
And here we come to second important event of this week - elections result. Here we see the confirmation of thoughts, that we just have said. Brussels determines everything and overrule any decision of domestic governments - it decides which country should accept refugees and how much, ignoring population opinion, it decides where Germany, France or Italy money will be distributed and invested etc. Thus, the EU-leaving sentiment becomes stronger in EU and this sentiment shows its way in election results.
Centre-right wins EU vote, but eurosceptics make gains - The centre-right European People's Party (EPP) has won the most seats in the European Parliament, but eurosceptic parties have made strong gains, officials have said.
The EPP won 178 seats, just ahead of the 152 won by traditional centre-left rival the Socialists and Democrats, but various populist, eurosceptic and right-wing parties won more than 100 seats, parliament spokesman Jaume Duch told reporters.
Along with a surge for the Greens, that meant four groups occupying the pro-EU middle ground lost under 20 seats, securing 505 seats out of 751, according to a projection by the European Parliament.
That may complicate some policymaking, as a two-party "grand coalition" of the conservative European People's Party (EPP) and the Socialists (S&D) no longer has a majority.
The Parliament's projection put the EPP on 178 seats, ahead of the S&D on 152, with the liberals on 108, up 39 seats, and Greens on 67, up 15. On the far-right, two groups in the current parliament had a combined 108 seats, a 40% gain from 2014.
The European Parliament election will usher in weeks and possibly months of hard bargaining over who will run EU institutions. Party spokespeople for the four pro-EU centre parties were quick to talk of plans for a broad coalition.
Thus, maybe effect is not as strong as it was expected, but changing of power balance definitely will find the way in EU policy, especially, in EU major countries. Any political restructuring and reforms always make impact on economy and this will be bearish factor for EUR in a long term.
In shorter term, the most important news was on Mexico tariffs as a new spiral of US global trade war. As Reuters reports - the dollar held up against its key rivals on Thursday after fears of an escalation in the Sino-U.S. trade standoff forced investors to take shelter in safe-haven assets, including government bonds.
As the dispute between the world’s two biggest economies showed no signs of abating, worries that global growth will be hurt have rippled through financial markets in recent sessions, with riskier assets in particular taking the brunt of selling.
“The outlook for global growth, and any drag from the festering trade dispute, remain key issues for markets,” said Michael McCarthy, Sydney-based chief market strategist at CMC Markets.
“The data over the next twenty-four hours has potential to either confirm or dispel the gloom,” he wrote in a note.
Offering the latest sign the standoff between Washington and Beijing is far from ending, Chinese Vice Foreign Minister Zhang Hanhui said on Thursday that provoking trade disputes is “naked economic terrorism”, ramping up the rhetoric against the United States.
Chinese newspapers had warned the day before that Beijing could use rare earth elements to strike back at the United States after U.S. President Donald Trump said he was “not yet ready” to make a deal with Beijing over trade.
The impact of escalating trade tensions between Washington and Beijing is starting to show up in economic data, with a key measure of Chinese manufacturing activity disappointing investors, and Trump’s latest salvo fuelled a rush on Friday to safe-haven assets such as government bonds and the yen.
“As the United States isn’t likely to fall into a recession anytime soon, there’s a likelihood that risk sentiment may improve based on the economy’s strength,” said Ayako Sera, market strategist at Sumitomo Mitsui Trust Bank.
The benchmark 10-year U.S. Treasury yields hit as low as 2.210% overnight, their lowest since the middle of September 2017.
The European Commission wrote on Wednesday to the Italian government asking it to explain a deterioration in the country’s public finances, a move that sets the stage for a possible legal clash with the eurosceptic coalition in Rome.
Taking aim at what D.Trump said was a surge of illegal immigrants across the southern border, Trump vowed on Thursday to impose a tariff on all goods coming from Mexico, starting at 5% and ratcheting higher until the flow of people ceases.
Trump’s surprise duties on Mexican imports “spurred sharp losses in the Mexican peso and a general risk-off move that strengthened the yen,” said Marc Chandler, chief market strategist at Bannockburn Global Forex LLC.
The dollar’s broad losses on Friday were compounded by comments from senior policymakers, with the U.S. Federal Reserve Vice Chair Richard Clarida on Thursday discussing the possibility of rate cuts should the world’s biggest economy take a turn for the worse, though he also said he thought the U.S. economy is in “a very good place”.
U.S. interest rates futures implied traders expect at least one rate cut from the Federal Reserve by year-end.
Goverment data on Friday showed a modest pickup in inflation in April, while a private report indicated a stronger-than-forecast improvement in U.S. Midwest manufacturing activity in May. Stronger-than-forecast data on U.S. consumer spending and income in April tempered some worries about a slowing U.S. economy.
As a result, we do not see any big shift in EUR/USD sentiment. CFTC data shows that investors still hold net bearish positions:
Source: cftc.gov
Charting by Investing.com
And the last one thing that could change the shape of the markets. As Fathom Consulting suggests, Fed could change approach to inflation targeting, which could affect the Fed policy measures:
In recent years the widespread practice of targeting low rates of inflation has been found wanting. Our chart shows a long moving average of inflation in six inflation-targeting economies: the US, the euro area, the UK, Japan, Canada and New Zealand. Central Banks in each of these economies are charged with targeting an inflation rate of 2% Some economists have blamed this recent tendency to undershoot on a fall in the neutral rate of interest. Some commentators believe that the Fed might soon switch to targeting average inflation over a period of time, rather than current inflation, in an attempt to correct this downward bias.
Technical analysis
Monthly
Last time we've made cross market analysis, involving Dollar Index to understand what could expect soon. The overall picture has not changed on long-term charts, but currently it is still unclear by what factors major reversal should happen. In EU we see critical but stable condition, so the only reason for sudden rally on EUR could be unexpected weakness in USD, although reasons are also unclear by far.
While we're waiting for clarity - overall situation on monthly chart stands the same. Mays stands as inside month to April and price lays upon major Fib support, without any attempt to jump out from it. Trend stands bearish. Flag pattern was broken down and EUR enters in wide rectangle consolidation of 1.05-1.15 range.
As it doesn't want to leave it, it seems that EUR more is bearish rather than bullish and next valuable support is YPS1 of 1.0940. At least currently we do not see any clear bullish sign on monthly chart.
Weekly
On weekly chart market more and more narrows the trading range and we have lasting sequence of grabbers in different directions. This week again - we've got bullish grabber, which suggests action above 1.1262 top. Long lasting bullish MACD divergence can't get started to work as well. When bullish patterns in place but something keep them on hold and doesn't let them to work - could it be another sign of bearish pressure strength? Too tight trading range is always subject to explosive exit. The only question is - in what direction it will be. On weekly dollar index we do not have grabbers.
Daily
On daily chart overall situation is not very difficult, at least in short-term. While price holds above the lows - upside action could happen. We have weekly grabber, and here, on daily - we've got morning star pattern, which makes possible some upside continuation. Thus, 1.1262 area target, that we've mentioned last week - mostly stands the same. Now it also will be MPR1 of June.
The same story on downside breakout. Breaking through the lows means that our next stop is 1.1050 area of daily Oversold and some extension targets.
Thus, if we have bearish view - we should ignore bullish setup and patterns, and wait for proper bearish one. The opposite is true for the bulls - while market is above 1.11 lows, it is possible to take tactical long position based on the patterns that we have. Still, for truth sake - it seems that market stands in a kind of indecision, that also might be silence before the storm.
Intraday
If somehow bullish target will be reached, the bearish setup of larger scale could be formed on 4H chart. OP target stands right around K-resistance and this will be rather strong area, including OP. Large "222" Sell pattern will be formed. Thus, if you have bearish view, you could consider this pattern:
On hourly chart there are a lot of things stand. First, is our suggestion on minor H&S pattern is done, xop (gray) is hit, B&B is done but it was a bit dramatic due PCE data release. The fact that B&B has not become a pattern that triggers downside continuation but has hit just minimal target suggests that upside potential still exists.
Now we turn to more extended AB-CD pattern. In "C" point we also have a grabber which suggests action above recent top. Price now stands around COP. As no new top was formed, we could focus only on Fib levels, shown on the chart. Keeping in mind morning star daily pattern - drop should not be too deep. Appearing of "222' Buy is advantage. If market is still bullish it should proceed to OP after retracement. May be butterfly "Sell" will be formed to finalize action to OP target. The major task for bulls is to take position as closer to "C" point as possible, with initial stops at least below "C" but preferably below A.
Conclusion:
Although we see chances for short-term, tactical upside action on daily/intraday basis, we do not see yet any changes in long-term as technical as fundamental background. Last week we talked on long term setup on dollar index which potentially points on Dollar weakness. But currently it is still a question for us, what particular patterns could trigger this weakness. More probable that any EUR appreciation (if it still will happen) will be based not on EUR strength, as we do not see conditions for that but on USD weakness.
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.