Sive Morten
Special Consultant to the FPA
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Fundamentals
Despite that now we have a lot of different political events that make impact on global situation, such as new issues in Iran/US confrontation, failed elections of President of the European Commission, UK political chaos and some others, it seems that now the major thing that will form the shape of the markets is Fed policy. Personally for me, it is still the riddle, despite recent Fed statement, as it looks a bit irrational in current circumstances and we talk about it below, what things confuse me.
This week, as Reuters reports - The dollar fell on Friday to three-month lows against a basket of currencies on bets the Federal Reserve would start lowering interest rates, while the yen rose to a five-month high versus the dollar on growing tensions between Iran and the United States.
The greenback’s weakness propelled the euro to three-month highs. The single currency was also buoyed by stronger-than-forecast survey data on French and German business activity.
The dollar extended its losses for three straight sessions since the Federal Reserve on Wednesday signalled it was prepared to lower interest rates later this year.
The Fed and the European Central Bank this week hinted they were open to ease policies to counter a global economic slowdown, exacerbated by global trade tensions.
“Now it’s going to be a horse-race between the Fed and ECB on policy easing,” said Ed Al-Hussainy, senior rates and currency analyst at Columbia Threadneedle Investments in Minneapolis.
The focus now shifts to whether Washington and Beijing can resolve their trade dispute at a summit in Japan next week of leaders from the Group of 20 leading world economies.
U.S. President Donald Trump and Chinese President Xi Jinping are due to meet at the G20 next weekend, but analysts say chances of a decisive breakthrough are low.
The dollar enjoyed a brief respite on news of stronger-than-forecast sales in U.S. existing homes in May.
The encouraging news offset IHS Markit data that showed manufacturing growth weakened to its most sluggish level since September 2009 in June, while services sector activity slumped to its lowest level since February 2016.
Friday’s U.S. data did not change traders expectations the Fed would lower key lending rates, as early as July. They priced in the probability policy-makers will have reduced rates by at least 75 basis points by year-end, based on calculations by CME Group’s FedWatch tool on its interest rates futures.
Source: cmegroup.com
U.S.-IRAN TENSIONS
Meanwhile, Iran’s downing of an unmanned U.S. surveillance drone stoked fears about a military conflict between the two nations following a spate of attacks on oil tankers in the Gulf region.
An initial wave of safe-haven buying of the yen faded following news that Trump shelved a missile strike against Iran and preferred dialogue with Tehran, especially over its nuclear program.
“The Iranians for their part refused the overture for now, so tensions remain high, but the risk of conflict appears to have eased,” said Boris Schlossberg, managing director of FX strategy at BK Asset Management in New York.
On Iran/US tensions I would say that no hot conflict will follow and tensions will ease soon. Some political piking will hold but actually they always were. Situation with Iran should be treated not separately but in context of recent Middle East Campaign Iraq and Syria. With this point of view, US now have neither political nor military resources to start hot conflict with Iran.
CFTC data shows that it seems market believes Fed and takes at its face value as net short position has dropped 1.5 times:
Source: cftc.gov
Charting by Investing.com
Now few comments on recent Fed decision. It seems that situation here stands more complex than at first glance and involves not only some economical factors but political background and market sentiment. The latter one for long time already shows that it wants recession and prepares to recession.
Talks on markets about possible major reversal have started few months ago. Even last year there were a lot of talks that Fed makes mistake and wrongly starts hawkish rate cycle. D. Trump also was accusing Fed that it breaks US economy and they should have to cut the rate instead. Now every time when any US bearish factor seen on the market - result is the same. Everybody in media talks that this is early sign of worsening and recession. For example, we could recall recent reaction on NFP data. I've talked about it two weeks ago. Report was not bad - wage inflation stands above 3% since the beginning of the year, but markets wanted it to be and it has become. It is also amazing moment with wage inflation data - every time, despite whether data is 3% or 3.4% expectation consensus stands 0.1% higher - at every report this year, which let markets treat it as "bad" result. Would you think that this is artificial badness?
This is the sentiment. But you could ask - how it makes impact on Fed policy. Fed is a king and it dominates over the markets. Not quite. Sentiment could anticipate Fed decisions and markets takes action ahead of Fed decision. Fed becomes a hostage, because if it doesn't do what markets want - situation on markets could out of control with huge volatility and collapses, but Fed can't accept this, especially on bond and currency market. Below we show how it impacts on current Fed policy.
Second factor is political. Next year US President elections. As usual, election campaign starts in autumn. What usually happens before elections? Right, stock market is rising. If Fed starts rising rates, it could create negative economical background around elections and D. Trump personally and nobody wants to be part of this. But hardly this is major issue, as well as US/Sino tariffs war which makes more theoretical harm to US rather than real one.
Now lets go back to the US data. Wage inflation since the beginning of the year stands above 3%, unemployment at record lows, NFP hits all records, Sales and consumption stands at maximum, stock markets as well. This combination suggests overheat of economy and Fed has to rise rate.
Finally, let's combine everything. Theoretically Fed has to hike rates gradually and continue tightening cycle. If it doesn't do it, Inflation soon will reach unprecedented levels and we could meet repeating of 2008 collapse. Investors are not simps and have started action on Fed's anticipation, starting move assets out from risky markets (stock market in particular), which we saw in the beginning of the year.
That was promising to become a collapse as well and Fed had to turn to dovish rhetoric, which now has led them as far as to hints on rate cut instead. Fed now is trapped as it also can't boost rate by few steps at once. In this case it will be no difference between either boost hike or stock market bubble blow few year later due natural process. Anyway it will be economical disaster.
Thus, Fed has to rise rates due economical situation but it can't due market sentiment, wary of too strong negative reaction. All these factors leads me to only one acceptable conclusion. Fed deceive markets trying to smooth negative effect. To promise rate cut and not to do it will give softer effect than keep rising it. I do not exclude the fact that Fed expects strong change in statistics within few months, maybe it knows it for sure already and it needs just to play for time to change rhetoric back to hawkish again. May be I miss something, but in current circumstances I do not see any other solutions. Rate cut now is a suicide and just anticipate unavoidable collapse.
Now we stand in difficult situation. Hypothesis that we've described above contradicts to long-term Dollar index analysis that we have. It seems that something should happen and either our fundamental suggestion on Fed policy will be wrong or technical situation will change. Still, reversal process on the chart could change the shape, lasting longer and forming different pattern, say, diamond which doesn't exclude higher USD level with simultaneous keeping intact long-term bearish sentiment. We suggest that clarity should appear in autumn.
Technicals
Monthly
Monthly chart creates no new range and stands inside one that was formed in the beginning of the month. So the intrigue still stands around major support where price stands right now.
Our nearest culmination point is Fed July meeting which should clarify whether we right or wrong in our hypothesis. Our plan (according to fundamental issues) tends to idea of downside breakout.
As we've said last week, changes are still look insignificant, trend stands bearish. Monthly chart is rather large and any upside action will have retracement feature, until 1.26 area breakout. The first meaningful resistance here stands around YPP of 1.1740 area, which approximately agrees with 3/8 Fib resistance.
Weekly
As investors hew to Fed policy, we keep scenario with potential bullish reversal pattern on weekly chart, first time we introduced couple weeks ago. This is reverse H&S pattern. As road to the head's bottom was choppy as upside road to neckline also could be choppy.
Weekly trend stands bullish and market hits our first Fib resistance level of 1.1376. Still, major upside target is neckline around 1.16 K-resistance area.
The specific of H&S pattern is its dual character. It keeps door open for both scenarios. Upside scenario is based on reverse H&S while downside scenario could be confirmed by its failure, which happens around Right arm bottom. But now we're on the way to the neckline.
Daily
On daily chart we follow the the same AB-CD pattern and idea of reverse H&S pattern which starts to work. On Friday market has exceeded COP target and broken the neckline. OP stands slightly above K-resistance. XOP is also important for us. It is not shown here but it creates an Agreement with weekly neckline and K-resistance area at 1.1556 level.
Now EUR stands at K-resistance area and Overbought condition. As market stands in extension stage, reaction on OB condition should not be too strong. Besides, the EUR unique habit is to show small retracements on direct thrusting action. Thus, we could suggest retracement somewhere to neckline.
Intraday
4H chart provides nothing but Fib levels. No signs of retracement yet. Nearest support coincides with WPP around 1.13. K-area of 1.1255-1.1277 could be treated as vital signal area that market should not break down.
On 1H chart we have no signs of retracement as well. Local OP coincides with daily one and it is possible that market will try to hit it on Monday first and start retracement second. Hourly chart shows that 1.13 area is K-support as well and nearest levels stands at 1.1336. We would suggest that if retracement will be the first and OP target is second - retracement should be small, either 1.1336 or 1.1300 area. Conversely, if OP will be hit first, retracement will be deeper, somewhere to 4H K-support area.
Anyway, current situation provides limited possibility for trading. It is not time to go long as market is overbought near major resistance, and it is too early to go short as we have no bearish patterns and major targets are still stands above the market.
Conclusion:
Today we put large fundamental background of big doubts on real Fed policy. This hypothesis will be tested in July Fed meeting.
In short term perspective, while everybody hew to Fed promises, upside action should continue.
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.
Despite that now we have a lot of different political events that make impact on global situation, such as new issues in Iran/US confrontation, failed elections of President of the European Commission, UK political chaos and some others, it seems that now the major thing that will form the shape of the markets is Fed policy. Personally for me, it is still the riddle, despite recent Fed statement, as it looks a bit irrational in current circumstances and we talk about it below, what things confuse me.
This week, as Reuters reports - The dollar fell on Friday to three-month lows against a basket of currencies on bets the Federal Reserve would start lowering interest rates, while the yen rose to a five-month high versus the dollar on growing tensions between Iran and the United States.
The greenback’s weakness propelled the euro to three-month highs. The single currency was also buoyed by stronger-than-forecast survey data on French and German business activity.
The dollar extended its losses for three straight sessions since the Federal Reserve on Wednesday signalled it was prepared to lower interest rates later this year.
The Fed and the European Central Bank this week hinted they were open to ease policies to counter a global economic slowdown, exacerbated by global trade tensions.
“Now it’s going to be a horse-race between the Fed and ECB on policy easing,” said Ed Al-Hussainy, senior rates and currency analyst at Columbia Threadneedle Investments in Minneapolis.
The focus now shifts to whether Washington and Beijing can resolve their trade dispute at a summit in Japan next week of leaders from the Group of 20 leading world economies.
U.S. President Donald Trump and Chinese President Xi Jinping are due to meet at the G20 next weekend, but analysts say chances of a decisive breakthrough are low.
The dollar enjoyed a brief respite on news of stronger-than-forecast sales in U.S. existing homes in May.
The encouraging news offset IHS Markit data that showed manufacturing growth weakened to its most sluggish level since September 2009 in June, while services sector activity slumped to its lowest level since February 2016.
Friday’s U.S. data did not change traders expectations the Fed would lower key lending rates, as early as July. They priced in the probability policy-makers will have reduced rates by at least 75 basis points by year-end, based on calculations by CME Group’s FedWatch tool on its interest rates futures.
Source: cmegroup.com
Meanwhile, Iran’s downing of an unmanned U.S. surveillance drone stoked fears about a military conflict between the two nations following a spate of attacks on oil tankers in the Gulf region.
An initial wave of safe-haven buying of the yen faded following news that Trump shelved a missile strike against Iran and preferred dialogue with Tehran, especially over its nuclear program.
“The Iranians for their part refused the overture for now, so tensions remain high, but the risk of conflict appears to have eased,” said Boris Schlossberg, managing director of FX strategy at BK Asset Management in New York.
On Iran/US tensions I would say that no hot conflict will follow and tensions will ease soon. Some political piking will hold but actually they always were. Situation with Iran should be treated not separately but in context of recent Middle East Campaign Iraq and Syria. With this point of view, US now have neither political nor military resources to start hot conflict with Iran.
CFTC data shows that it seems market believes Fed and takes at its face value as net short position has dropped 1.5 times:
Source: cftc.gov
Charting by Investing.com
Now few comments on recent Fed decision. It seems that situation here stands more complex than at first glance and involves not only some economical factors but political background and market sentiment. The latter one for long time already shows that it wants recession and prepares to recession.
Talks on markets about possible major reversal have started few months ago. Even last year there were a lot of talks that Fed makes mistake and wrongly starts hawkish rate cycle. D. Trump also was accusing Fed that it breaks US economy and they should have to cut the rate instead. Now every time when any US bearish factor seen on the market - result is the same. Everybody in media talks that this is early sign of worsening and recession. For example, we could recall recent reaction on NFP data. I've talked about it two weeks ago. Report was not bad - wage inflation stands above 3% since the beginning of the year, but markets wanted it to be and it has become. It is also amazing moment with wage inflation data - every time, despite whether data is 3% or 3.4% expectation consensus stands 0.1% higher - at every report this year, which let markets treat it as "bad" result. Would you think that this is artificial badness?
This is the sentiment. But you could ask - how it makes impact on Fed policy. Fed is a king and it dominates over the markets. Not quite. Sentiment could anticipate Fed decisions and markets takes action ahead of Fed decision. Fed becomes a hostage, because if it doesn't do what markets want - situation on markets could out of control with huge volatility and collapses, but Fed can't accept this, especially on bond and currency market. Below we show how it impacts on current Fed policy.
Second factor is political. Next year US President elections. As usual, election campaign starts in autumn. What usually happens before elections? Right, stock market is rising. If Fed starts rising rates, it could create negative economical background around elections and D. Trump personally and nobody wants to be part of this. But hardly this is major issue, as well as US/Sino tariffs war which makes more theoretical harm to US rather than real one.
Now lets go back to the US data. Wage inflation since the beginning of the year stands above 3%, unemployment at record lows, NFP hits all records, Sales and consumption stands at maximum, stock markets as well. This combination suggests overheat of economy and Fed has to rise rate.
Finally, let's combine everything. Theoretically Fed has to hike rates gradually and continue tightening cycle. If it doesn't do it, Inflation soon will reach unprecedented levels and we could meet repeating of 2008 collapse. Investors are not simps and have started action on Fed's anticipation, starting move assets out from risky markets (stock market in particular), which we saw in the beginning of the year.
That was promising to become a collapse as well and Fed had to turn to dovish rhetoric, which now has led them as far as to hints on rate cut instead. Fed now is trapped as it also can't boost rate by few steps at once. In this case it will be no difference between either boost hike or stock market bubble blow few year later due natural process. Anyway it will be economical disaster.
Thus, Fed has to rise rates due economical situation but it can't due market sentiment, wary of too strong negative reaction. All these factors leads me to only one acceptable conclusion. Fed deceive markets trying to smooth negative effect. To promise rate cut and not to do it will give softer effect than keep rising it. I do not exclude the fact that Fed expects strong change in statistics within few months, maybe it knows it for sure already and it needs just to play for time to change rhetoric back to hawkish again. May be I miss something, but in current circumstances I do not see any other solutions. Rate cut now is a suicide and just anticipate unavoidable collapse.
Now we stand in difficult situation. Hypothesis that we've described above contradicts to long-term Dollar index analysis that we have. It seems that something should happen and either our fundamental suggestion on Fed policy will be wrong or technical situation will change. Still, reversal process on the chart could change the shape, lasting longer and forming different pattern, say, diamond which doesn't exclude higher USD level with simultaneous keeping intact long-term bearish sentiment. We suggest that clarity should appear in autumn.
Technicals
Monthly
Monthly chart creates no new range and stands inside one that was formed in the beginning of the month. So the intrigue still stands around major support where price stands right now.
Our nearest culmination point is Fed July meeting which should clarify whether we right or wrong in our hypothesis. Our plan (according to fundamental issues) tends to idea of downside breakout.
As we've said last week, changes are still look insignificant, trend stands bearish. Monthly chart is rather large and any upside action will have retracement feature, until 1.26 area breakout. The first meaningful resistance here stands around YPP of 1.1740 area, which approximately agrees with 3/8 Fib resistance.
Weekly
As investors hew to Fed policy, we keep scenario with potential bullish reversal pattern on weekly chart, first time we introduced couple weeks ago. This is reverse H&S pattern. As road to the head's bottom was choppy as upside road to neckline also could be choppy.
Weekly trend stands bullish and market hits our first Fib resistance level of 1.1376. Still, major upside target is neckline around 1.16 K-resistance area.
The specific of H&S pattern is its dual character. It keeps door open for both scenarios. Upside scenario is based on reverse H&S while downside scenario could be confirmed by its failure, which happens around Right arm bottom. But now we're on the way to the neckline.
Daily
On daily chart we follow the the same AB-CD pattern and idea of reverse H&S pattern which starts to work. On Friday market has exceeded COP target and broken the neckline. OP stands slightly above K-resistance. XOP is also important for us. It is not shown here but it creates an Agreement with weekly neckline and K-resistance area at 1.1556 level.
Now EUR stands at K-resistance area and Overbought condition. As market stands in extension stage, reaction on OB condition should not be too strong. Besides, the EUR unique habit is to show small retracements on direct thrusting action. Thus, we could suggest retracement somewhere to neckline.
Intraday
4H chart provides nothing but Fib levels. No signs of retracement yet. Nearest support coincides with WPP around 1.13. K-area of 1.1255-1.1277 could be treated as vital signal area that market should not break down.
On 1H chart we have no signs of retracement as well. Local OP coincides with daily one and it is possible that market will try to hit it on Monday first and start retracement second. Hourly chart shows that 1.13 area is K-support as well and nearest levels stands at 1.1336. We would suggest that if retracement will be the first and OP target is second - retracement should be small, either 1.1336 or 1.1300 area. Conversely, if OP will be hit first, retracement will be deeper, somewhere to 4H K-support area.
Anyway, current situation provides limited possibility for trading. It is not time to go long as market is overbought near major resistance, and it is too early to go short as we have no bearish patterns and major targets are still stands above the market.
Conclusion:
Today we put large fundamental background of big doubts on real Fed policy. This hypothesis will be tested in July Fed meeting.
In short term perspective, while everybody hew to Fed promises, upside action should continue.
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.
