Sive Morten
Special Consultant to the FPA
- Messages
- 18,673
Fundamentals
This week we had two major fundamental events - ECB meeting and GDP data release. While ECB is self-sufficient event, GDP is a half way to coming FED meeting. Although GDP has not shaken market too strong, its numbers very important for market sentiment as it makes impact on FED view on US economy and mostly confirms our suggestions.
On Thursday the European Central Bank said interest rates would stay “at their present or lower levels” and opened the door for more quantitative easing.
Investors have interpreted the ECB’s message to mean a rate cut is coming in September, along with other stimulus measures, as the central bank seeks to lift low inflation and boost economic growth.
Investors had priced in more than a 50% chance of an interest rate cut prior to Thursday’s ECB meeting. After the ECB kept rates unchanged, the euro recovered from lows.
The bank’s statement said rates would stay “at their present or lower levels.” The common currency’s outlook remained downbeat due to the prospect of further monetary easing.
“I think the market had fairly dovish expectations going into the ECB meeting and some in the market had priced in a cut,” said Mazen Issa, senior FX strategist, at TD Securities in New York. The actual decision was a signal to cover shorts on the euro, he added.
“Now the question was: how dovish would Draghi be at his briefing? While he was pretty dovish, there were some positive elements as well,” Issa said.
Draghi, at his press briefing, said he saw low risk of recession in the euro zone, but noted that a rebound in the second half was less likely.
Rabobank in a research note said Draghi did not live up to expectation that he would be more specific about whether to institute a new asset purchase program. Draghi said there had been no discussion yet on policy tools.
“This suggests that while today’s actions may have been supported by a broad consensus, the discussion in September on the actual easing package to be implemented may reveal more division in the Council. Clearly, not everyone is on the same page here,” Rabobank said.
After the ECB session, President Mario Draghi indicated the bank was prepared to cut rates at its next meeting, in September, and consider other options for easing.
Speaking US data - New orders for key U.S.-made capital goods surged 1.9% in June, while weekly jobless claims declined to 206,000.
While U.S. gross domestic product slowed less than what economists polled by Reuters had forecast, it will likely not diminish the prevalent view among policymakers that a rate cut is needed to counter risk from trade conflicts and softening global demand, analysts said.
Data showed U.S. GDP grew at a 2.1% annualized rate in the second quarter, weaker than the 3.1% pace in the first quarter but stronger than the 1.8% projected by economists polled by Reuters.
“You continue to see this theme that the U.S. is growing well, better than most G7 economies, consistent with dollar strength that we’re seeing on the back of this,” said Erik Nelson, currency strategist at Wells Fargo Securities in New York.
“I don’t think it changes all that much for the Fed next week. We still expect a 25 basis-point cut at the meeting,” he added.
“It takes 50 basis-point (cut) off the table,” said Marvin Loh, State Street’s global macro strategist, in Boston. “There are enough good things going on in the economy.”
“The strong data suggested any rate cuts by the Fed would be the modest insurance variety and not the start of a full-blown easing cycle,” said Joe Manimbo, senior market analyst, at Western Union Business Solutions in Washington.
CFTC and market sentiment data
Hedge funds kept short positions on the euro at $4.39 billion in the week to July 16, around levels seen early this year, according to the Commodity Futures Trading Commission.
A Deutsche Bank index showed investors have been ramping up call options holdings in euro/dollar, pushing the amount of call options to the highest since early 2018, which serves as evidence that some market participants see the euro gaining.
Take a look that despite illusory disappointment of recent data, at least this is how it presents in media and by investors' talks, market price action tells the opposite. Net short position has increased slightly by the end of this week.
Source: cftc.gov
Charting by Investing.com
Interest rate futures suggested traders positioned for the Fed to lower key borrowing costs next week, with an 81% chance of a quarter-point cut, CME Group’s FedWatch program showed.
Here is probability distribution for next December Fed meeting. Take a look that odds of keeping rate at 2% was increasing week by week while odds of cutting rate to 1.75% were decreasing. Now it is approximately equal probability for both decisions. Our suggestion - it will change more in favor of 2% after July Fed meeting. No additional rate cut is expected till the end of 2019.
Source: cmegroup.com
So, what do we have at the bottom line?
ECB major decisions are postponed on September. I would suggest two things around this decision. First is, this will the hot time of Brexit talk as Europe and UK will stand on the cusp of Halloween deadline in September. And it should be more clear picture of how Brexit happens. This should give better environment to ECB make definite measures. Second is, by the same reason, ECB September decision will be dovish. Knowing of B. Johnson's political habits, hardly Brexit will passed quiet.
Speaking on Fed and US economy situation nothing is changed in our view. IQ GDP is above 3%, IIQ GDP is above 2% - greater than any other developed country shows. PCE inflation shows numbers around 2% on average - right at Fed target. Consumption and Sales stand at high levels, Employment at record highs as well as stock market, wage inflation around 3%, real estate market shows acceptable statistics. All these stuff makes us keep our view that US economy somewhere near starting of overheating stage. In current situation normally Fed should keep rates intact and start prepare market to next rate hike. Now we see opposite decision. We suggest that Fed has become a market's hostage and single cut rate makes less damage to economy compares to what will happen on the markets if Fed keeps it intact. It means that rate cut will be single event, compromise to markets to satisfy them and calm down. This rate decision Fed will use to change its policy in favor of more stable or even hawkish direction (later), to prevent markets' expectations of rate cut cycle.
As ECB, BoE policy, coming Brexit culmination point and Fed policy should support US dollar in medium-term perspective, at least till the end of 2019.
Technicals
Monthly
Although miracle has not happened on Friday, we think that foundation for downside acceleration is laid and triggering point will on Fed meeting. Despite all talks about US problems and USD weakness - price doesn't lie and we see July performance showing USD appreciation.
Our nearest culmination point is Fed July meeting which should clarify whether we right or wrong in our hypothesis mentioned above (yet again). Our plan (according to fundamental issues) tends to idea of downside breakout. Rising concern on more dovish ECB policy and upside surprise of GDP data keeps intrigue hot.
Speaking on indirect signs, now we have a kind of bearish engulfing pattern here. In longer-term view, take a look that EUR stands for a long time below upper border of rectangle, while normally, bullish market has to jump up after re-testing it. Dropping back inside rectangle and standing there, although near the border, is a sign of weakness.
Nearest downside target stands around 1.0950 - YPS1.
Weekly
So, our tactic "Evening pattern" setup mostly is done as we were intended to deal with it until Fed culmination point comes. It's target is also almost completed.
Now we could discuss more important questions. Finally some clarity exists around our second pattern - potential reverse H&S. Currently we definitely could say that it should be compounded head, in shape of double bottom, and now market stands at very tricky point. Either it has to turn up to keep pattern valid, or we get major downside continuation of long-term trend.
It is not occasionally happened, I suppose, that market appears at this point right before Fed meeting. In fact, EUR has to show W&R of recent 1.1107 lows. Thus, we could keep an eye what will happen. Despite that I'm more tending to idea of downside breakout - nobody cancels pure facts, and we can't predict Fed statement precisely as well. Thus, no matter what I think, the only matter what we will get in reality.
That's being said, possible W&R (or breakout) of recent lows is the thing that we will keep an eye on here as well. OS level here, by the way, is low enough to let market touch YPS1...
Daily
On daily time frame nothing has changed since Friday, which was an inside session. Major pattern here is still the "High Wave". As a rule market follows in the direction of HW range breakout. Combining it with weekly picture - EUR has to show something around, either upside breakout or fake downside breakout, W&R of recent lows to keep bullish setup. For example, fast spike down to complete OP with following upside reversal, based on Fed statement. The long and the short of it is that It will be nervous area from technical point of view.
The one thing that I would like to add here is DXY chart. Take a look that at daily DXY we do not have HW pattern and price tends higher, already breaking the Thursday's top (i.e. HW bottom on EUR chart). Does it mean something? Another interesting observation - while EUR is already has reached previous lows - DXY is not, as OP there stands around them:
Thus definitely some divergence here exists and it seems it supports downside continuation on EUR.
Intraday
Here we need to catch something that could help us to get early sign of either breakout or upside reversal. But unfortunately we do not have something definite yet. On 4H chart we could suggest DRPO "Buy" LAL, as we already have puny W&R of daily lows:
While on 1H chart it could be either "222" Buy or, even butterfly pattern, which could held finalize daily OP as well:
The one thing is clear - we have to keep an eye on recent lows. If EUR drops below it and holds there - this is bearish sign which increases chances on downside continuation. Any bullish patterns, such butterfly with fast spike and upside return mostly will look like W&R and keep chances on bullish action. For truth sake clarity probably will come only by Fed meeting results.
Conclusion:
Although technically EUR keeps door open for some bullish scenarios, technical factors now are taking backseat and our fundamental view makes us bet on downside continuation by results of Fed statement.
The technical portion of Sive's analysis owes a great deal to Joe DiNapoli's methods, and uses a number of Joe's proprietary indicators. Please note that Sive's analysis is his own view of the market and is not endorsed by Joe DiNapoli or any related companies.
This week we had two major fundamental events - ECB meeting and GDP data release. While ECB is self-sufficient event, GDP is a half way to coming FED meeting. Although GDP has not shaken market too strong, its numbers very important for market sentiment as it makes impact on FED view on US economy and mostly confirms our suggestions.
On Thursday the European Central Bank said interest rates would stay “at their present or lower levels” and opened the door for more quantitative easing.
Investors have interpreted the ECB’s message to mean a rate cut is coming in September, along with other stimulus measures, as the central bank seeks to lift low inflation and boost economic growth.
Investors had priced in more than a 50% chance of an interest rate cut prior to Thursday’s ECB meeting. After the ECB kept rates unchanged, the euro recovered from lows.
The bank’s statement said rates would stay “at their present or lower levels.” The common currency’s outlook remained downbeat due to the prospect of further monetary easing.
“I think the market had fairly dovish expectations going into the ECB meeting and some in the market had priced in a cut,” said Mazen Issa, senior FX strategist, at TD Securities in New York. The actual decision was a signal to cover shorts on the euro, he added.
“Now the question was: how dovish would Draghi be at his briefing? While he was pretty dovish, there were some positive elements as well,” Issa said.
Draghi, at his press briefing, said he saw low risk of recession in the euro zone, but noted that a rebound in the second half was less likely.
Rabobank in a research note said Draghi did not live up to expectation that he would be more specific about whether to institute a new asset purchase program. Draghi said there had been no discussion yet on policy tools.
“This suggests that while today’s actions may have been supported by a broad consensus, the discussion in September on the actual easing package to be implemented may reveal more division in the Council. Clearly, not everyone is on the same page here,” Rabobank said.
After the ECB session, President Mario Draghi indicated the bank was prepared to cut rates at its next meeting, in September, and consider other options for easing.
Speaking US data - New orders for key U.S.-made capital goods surged 1.9% in June, while weekly jobless claims declined to 206,000.
While U.S. gross domestic product slowed less than what economists polled by Reuters had forecast, it will likely not diminish the prevalent view among policymakers that a rate cut is needed to counter risk from trade conflicts and softening global demand, analysts said.
Data showed U.S. GDP grew at a 2.1% annualized rate in the second quarter, weaker than the 3.1% pace in the first quarter but stronger than the 1.8% projected by economists polled by Reuters.
“You continue to see this theme that the U.S. is growing well, better than most G7 economies, consistent with dollar strength that we’re seeing on the back of this,” said Erik Nelson, currency strategist at Wells Fargo Securities in New York.
“I don’t think it changes all that much for the Fed next week. We still expect a 25 basis-point cut at the meeting,” he added.
“It takes 50 basis-point (cut) off the table,” said Marvin Loh, State Street’s global macro strategist, in Boston. “There are enough good things going on in the economy.”
“The strong data suggested any rate cuts by the Fed would be the modest insurance variety and not the start of a full-blown easing cycle,” said Joe Manimbo, senior market analyst, at Western Union Business Solutions in Washington.
CFTC and market sentiment data
Hedge funds kept short positions on the euro at $4.39 billion in the week to July 16, around levels seen early this year, according to the Commodity Futures Trading Commission.
A Deutsche Bank index showed investors have been ramping up call options holdings in euro/dollar, pushing the amount of call options to the highest since early 2018, which serves as evidence that some market participants see the euro gaining.
Take a look that despite illusory disappointment of recent data, at least this is how it presents in media and by investors' talks, market price action tells the opposite. Net short position has increased slightly by the end of this week.
Source: cftc.gov
Charting by Investing.com
Interest rate futures suggested traders positioned for the Fed to lower key borrowing costs next week, with an 81% chance of a quarter-point cut, CME Group’s FedWatch program showed.
Here is probability distribution for next December Fed meeting. Take a look that odds of keeping rate at 2% was increasing week by week while odds of cutting rate to 1.75% were decreasing. Now it is approximately equal probability for both decisions. Our suggestion - it will change more in favor of 2% after July Fed meeting. No additional rate cut is expected till the end of 2019.
Source: cmegroup.com
So, what do we have at the bottom line?
ECB major decisions are postponed on September. I would suggest two things around this decision. First is, this will the hot time of Brexit talk as Europe and UK will stand on the cusp of Halloween deadline in September. And it should be more clear picture of how Brexit happens. This should give better environment to ECB make definite measures. Second is, by the same reason, ECB September decision will be dovish. Knowing of B. Johnson's political habits, hardly Brexit will passed quiet.
Speaking on Fed and US economy situation nothing is changed in our view. IQ GDP is above 3%, IIQ GDP is above 2% - greater than any other developed country shows. PCE inflation shows numbers around 2% on average - right at Fed target. Consumption and Sales stand at high levels, Employment at record highs as well as stock market, wage inflation around 3%, real estate market shows acceptable statistics. All these stuff makes us keep our view that US economy somewhere near starting of overheating stage. In current situation normally Fed should keep rates intact and start prepare market to next rate hike. Now we see opposite decision. We suggest that Fed has become a market's hostage and single cut rate makes less damage to economy compares to what will happen on the markets if Fed keeps it intact. It means that rate cut will be single event, compromise to markets to satisfy them and calm down. This rate decision Fed will use to change its policy in favor of more stable or even hawkish direction (later), to prevent markets' expectations of rate cut cycle.
As ECB, BoE policy, coming Brexit culmination point and Fed policy should support US dollar in medium-term perspective, at least till the end of 2019.
Technicals
Monthly
Although miracle has not happened on Friday, we think that foundation for downside acceleration is laid and triggering point will on Fed meeting. Despite all talks about US problems and USD weakness - price doesn't lie and we see July performance showing USD appreciation.
Our nearest culmination point is Fed July meeting which should clarify whether we right or wrong in our hypothesis mentioned above (yet again). Our plan (according to fundamental issues) tends to idea of downside breakout. Rising concern on more dovish ECB policy and upside surprise of GDP data keeps intrigue hot.
Speaking on indirect signs, now we have a kind of bearish engulfing pattern here. In longer-term view, take a look that EUR stands for a long time below upper border of rectangle, while normally, bullish market has to jump up after re-testing it. Dropping back inside rectangle and standing there, although near the border, is a sign of weakness.
Nearest downside target stands around 1.0950 - YPS1.
Weekly
So, our tactic "Evening pattern" setup mostly is done as we were intended to deal with it until Fed culmination point comes. It's target is also almost completed.
Now we could discuss more important questions. Finally some clarity exists around our second pattern - potential reverse H&S. Currently we definitely could say that it should be compounded head, in shape of double bottom, and now market stands at very tricky point. Either it has to turn up to keep pattern valid, or we get major downside continuation of long-term trend.
It is not occasionally happened, I suppose, that market appears at this point right before Fed meeting. In fact, EUR has to show W&R of recent 1.1107 lows. Thus, we could keep an eye what will happen. Despite that I'm more tending to idea of downside breakout - nobody cancels pure facts, and we can't predict Fed statement precisely as well. Thus, no matter what I think, the only matter what we will get in reality.
That's being said, possible W&R (or breakout) of recent lows is the thing that we will keep an eye on here as well. OS level here, by the way, is low enough to let market touch YPS1...
Daily
On daily time frame nothing has changed since Friday, which was an inside session. Major pattern here is still the "High Wave". As a rule market follows in the direction of HW range breakout. Combining it with weekly picture - EUR has to show something around, either upside breakout or fake downside breakout, W&R of recent lows to keep bullish setup. For example, fast spike down to complete OP with following upside reversal, based on Fed statement. The long and the short of it is that It will be nervous area from technical point of view.
The one thing that I would like to add here is DXY chart. Take a look that at daily DXY we do not have HW pattern and price tends higher, already breaking the Thursday's top (i.e. HW bottom on EUR chart). Does it mean something? Another interesting observation - while EUR is already has reached previous lows - DXY is not, as OP there stands around them:
Thus definitely some divergence here exists and it seems it supports downside continuation on EUR.
Intraday
Here we need to catch something that could help us to get early sign of either breakout or upside reversal. But unfortunately we do not have something definite yet. On 4H chart we could suggest DRPO "Buy" LAL, as we already have puny W&R of daily lows:
While on 1H chart it could be either "222" Buy or, even butterfly pattern, which could held finalize daily OP as well:
The one thing is clear - we have to keep an eye on recent lows. If EUR drops below it and holds there - this is bearish sign which increases chances on downside continuation. Any bullish patterns, such butterfly with fast spike and upside return mostly will look like W&R and keep chances on bullish action. For truth sake clarity probably will come only by Fed meeting results.
Conclusion:
Although technically EUR keeps door open for some bullish scenarios, technical factors now are taking backseat and our fundamental view makes us bet on downside continuation by results of Fed statement.
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.
