Forex FOREX PRO WEEKLY #2, February 10 - 14, 2020

Sive Morten

Special Consultant to the FPA
Messages
12,991
Fundamentals

Today folks, I thought it would be better to take a look at GBP. On gold market we have some changes but they are not critical and daily updates should be enough to keep track on events. Major longer-term background for the gold market we've specified already and mostly it stands the same - long-term bull trend but deeper retracement in near term. If we will not get any more panic on virus situation, market should start driving by its own and start to show natural behavior.

On GBP technical picture is more interesting, especially on a background of returning back to reality after divorce celebration. And here UK meets problems that we've mentioned before. In two words speaking - when you break something that was working for decades you should be ready to negative consequences. EU and UK relation was set long time ago and was working for decades. Now this relations are in splitting mode with breaking long lasting links - economical, logistic, social and others. We keep fingers crossed to see UK enjoying air of freedom and future prosperity, but it seems it will be a bit worse first. Both countries have to overcome first bitter fruits of divorce process.

Yesterday we already discussed some fundamental factors that are common as to EUR as to GBP and to FX market in general. Today we take a look at some specific moments for GBP directly. Most of them directly and indirectly supports our view of "V" shape performance of UK economy i nearest 3 years. The precise GBP/USD and EUR/GBP "V" bottom level depends on many factors, and most of all on the content of final EU/UK Agreement. Most negative scenario is no Agreement and turning to direct WTO regulation. Any Agreement gives better and smoother divorce impact on EU and UK economies.

Tortuous Brexit negotiations helped send daily trading volumes in Britain’s pound to a record high last year, Bank of England data showed on Tuesday. Increased activity in sterling, as well as more FX swap turnover, also sent the UK’s overall foreign exchange trading volumes to a record $2.88 trillion per day across all currencies, the BoE said in a survey of London’s FX industry, the world’s biggest.

“The increased levels of trading in sterling pairs is hardly a surprise, given it has effectively been a proxy for one of the most significant political events in a generation. However, the decline in dollar/yuan is larger than most market observers probably expected,” said Dan Marcus, CEO of trading platform ParFX.

Sterling, the most volatile major currency, had been buoyed on Wednesday by a strong final reading of the UK services PMI for January. The currency remained close to the six-week low it hit this week after Britain took a hard line on trade talks with the European Union. Concerns that Britain’s fiscal expansion may not be as generous as previously expected also weighed on the pound, analysts said.

The purchasing managers’ index for the services industry - the biggest contributor to Britain’s GDP - was revised to 53.9 for January, up from 52.9, where economists had expected it to stay. It was the strongest reading since September 2018.

On Tuesday Prime Minister Boris Johnson said Britain would not adhere to EU rules and regulations. It then rebounded on the back of a better-than-expected construction survey.

The PMI data “reinforced the justification for the Bank of England holding off” from cutting interest rates last week, said Derek Halpenny, head of research at MUFG, adding that the central bank likely held off to get a better sense of Britain’s fiscal outlook.

Chancellor Sajid Javid is expected to present the new budget of the recently formed government on March 11, but tensions between Javid and Johnson’s allies are rising as Javid threatens imposing serious spending constraints. Dominic Cummings, chief special adviser to Johnson, is pushing through a number of big spending commitments in areas such as health and police, as well as to revive the North and Midlands, promises that helped the Conservative Party to win the December general election.

“The pound is going to remain fairly weak and we should not expect much gains from the currency,” Halpenny said. “Our forecast profile is pretty flat.”

Sterling extended losses on Thursday as concerns about negotiations between Britain and the European Union for a post-Brexit trade deal continued to rattle investors.

The pound continued to fall after taking a big drop on Wednesday, which some analysts said was exacerbated by a media report that indicated the EU would look to re-write a major set of European financial regulations known as Mifid II. More news emerged on the uncertainty of Britain’s relationship with the European Union when a transition period for its exit from the bloc wraps up at the end of the year. British financial services firms will get no access to European Union markets after Brexit unless they agree to respect EU rules, French Finance Minister Bruno Le Maire said on Thursday.

“It’s very hard to square the circle. We’ve gone from a place where the market expected common ground to be found to a place of brinkmanship again,” said Jordan Rochester, FX strategist at Nomura. He said Thursday’s moves were part of a broader trend downward. The pound is 2% lower against the dollar this week after Prime Minister Boris Johnson said Britain does not accept the EU’s rules to strike a comprehensive free trade deal with the bloc on Monday.

“In terms of what’s driving it right now this second, it’s just breaking of key levels,” Rochester said, citing the currency’s fall below $1.2950, which he said had been a key level of support.


Investors are nervous that British Prime Minister Johnson is taking a hard line in the trade talks with the EU, which need to be concluded before the end of the year to avoid a potentially disruptive break in trading relations.

“While GBP benefited from the risk rally in the middle of the week, its gains vs EUR and USD have been limited as the overhang of upcoming UK-EU negotiations limits GBP upside potential,” ING analysts said in a note. “We continue to expect the periods of GBP rebounds to be shallow and short-lived.”

Britain has committed to applying EU rules during the transition period that ends in December, but has said that at the end of the transition period it will be able to review and implement its own regulations.

As a result - the pound was headed for its worst week since the British election as investors priced in the risk of Britain not being able to agree on a trade deal with the European Union in the 11 months left of the Brexit transition period. Prime Minister Boris Johnson has said Britain will not obey the bloc’s regulations, setting a hard stance on the upcoming negotiations. Some analysts say this gives Britain a weaker position against its biggest export market. Investors are nervous that Johnson is taking a hard line in the trade talks with the EU, which need to be concluded before the end of the year to avoid a potentially disruptive break in trading relations.

“I expect that the post-Brexit trade negotiations will continue to weigh on Britain, a country with one of the largest current account deficits in the world,” said Marshall Gittler, head of investment research for BDSwiss Group.

CFTC Data

Although result of this week is not as dramatic to GBP as to EUR - its net short position has increased twice, GBP has lost the half of bulls as well. Its net long position has dropped almost twice as well from ~25K to 13K contracts:

1581241674187.png



Despite this temporal difficulties, investors do not fall in pessimistic sentiment. Sterling will be nearly 4% stronger in a year than it is now, according to a Reuters poll of market strategists, based on expectations that Britain will secure a trade deal with the European Union this year despite its tough initial stance.

On Monday sterling took a pummelling after Prime Minister Boris Johnson set tough terms for the trade talks. Some of the forecasts in the Reuters poll were gathered before Johnson’s speech. Britain left the EU on Friday and Johnson’s comments on Monday have rekindled fears of a cliff-edge - whereby no trade deal is agreed - at the end of an 11-month transition period which Johnson has repeatedly said he won’t ask to extend.

Foreign exchange strategists in Reuters polls have repeatedly said that leaving without a deal, and so trading on World Trade Organisation rules only, would be rough for the economy and the worst outcome for the pound.

The currency ended January on a high note after the Bank of England surprised many by leaving borrowing costs on hold but fell as much as 1.7% to $1.2984 on Monday. It was trading around $1.30 on Tuesday after better-than-expected construction data.

Median forecasts in the Jan. 31-Feb. 4 poll of 65 strategists showed the pound would be up at $1.31 in a month, $1.32 in six months and then $1.35 in a year’s time.

That is still well below the $1.50 it was trading at before the June 2016 referendum, when Britons voted by 52% to 48% to leave the world’s largest trading bloc.
With time short to agree even a bare-bones deal, economists in a Reuters poll last month said there was a median 20% chance of a disorderly departure at the end of the transition period, during which existing agreements apply as if Britain were still an EU member.

“A bounce in UK economic growth helped by a good-sized fiscal stimulus in Q2 remains our base case,” said James McCormick, global head of desk strategy at NatWest Markets. “We still like buying sterling and the BOE’s decision to pass on a cut last week (which was a surprise to us) has given the sterling trend some renewed momentum.”

But the coronavirus outbreak spreading further beyond China’s borders has raised more global growth risks and is set to keep the U.S. dollar, which has dominated most others in foreign exchange markets for around two years, firmly on its throne well into 2020. With the outlook for euro zone growth already lukewarm before the virus outbreak and no more policy changes expected from the ECB, little movement is expected between the pound and the common currency.

Trading around 84.9 pence on Tuesday, in one-, six- and 12-months time one euro will be worth 85.0p, the poll found.

Speaking on UK events, the major one is the new budget on 11th of March. BoE meeting on 26th of March and in May do not promise any rate change by far, at least according to BoE watch tool.
Thus, let's take a look what we could get from the budget. Fathom consulting also treats this as major event and dedicates special report to this subject.

UK Chancellor Sajid Javid has announced that there will be a budget on 11 March — the new government is expected to get the chequebook out to finance public investment in infrastructure and other projects. After stripping out the effects of the economic cycle, the UK government’s current receipts exceed its current expenditure by an amount equal to 2.0% of GDP, with the impact of the post-2010 austerity programme clear.

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Fathom’s Macroeconomic Policy Indicator suggests that fiscal policy was broadly neutral for growth last year; with ample fiscal space, we expect to see additional stimulus sufficient to boost UK economic growth by 0.7%-0.8% in each of the next two years.

Despite the additional stimulus, UK growth is likely to remain south of 2.0% for the foreseeable future, even if investment rebounds in response to greater clarity regarding the outcome of Brexit. Indeed, in the medium term, the UK’s trend rate of growth is likely drift below 1.0% as the full impact of an ageing population becomes evident.

Meanwhile, economic sentiment in the UK remains close to a ten-year low according to Fathom’s UK Economic Sentiment Indicator, which incorporates information from a range of consumer and business surveys. However, given the decisive result of the referendum, and the subsequent certainty that the UK would leave the European Union, the government would have been hoping for more of a rebound in December. The index remained below zero suggesting that business and consumer sentiment remain weak. The government will be under pressure to lift the gloom and it may well see the loosening of the chequebook on 11 March as a good place to start.


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Technicals
Monthly


The price shape slightly has changed since our last discussion in December, but not drastically. In December we had big spike right up to 1.3450 K-resistance area.
Now we have two more candles here and December final shape has changed a bit. Market now shows pullback out of strong resistance area and dropping below Yearly Pivot, which indicates bearish short-term sentiment on the market.

At the same time, major MACD trend stands bullish, and currently we still could fade this pullback, treating it as retracement in longer-term upside action. With spike up to 1.3450 area GBP has formed bullish reversal swing and now deep retracement is logical thing that should happen. MACD also shows good bullish divergence.

That totally agrees to our long-term view - some AB-CD downside pullback on weekly/daily time frames.
gbp_m_10_02_20.png


Weekly

On weekly chart our major pattern still stands the same and it is hard to not recognize it. This is reverse H&S pattern. As we said last time - the utility of this pattern is twofold. It is equally useful as in case of direct action as in case of failure. Besides, as it has really great scale it potentially generates multiple trading setups.

On first stage we could trade GBP down based on weekly/monthly huge bearish candlestick pattern. That is what we do now. Potential bottom of right arm is also accompanied by weekly oversold level, and this makes it more reliable. Trend here is bearish and weekly situation accurately suits to our weekly/monthly Setup - fading of weekly "Sell" against Monthly "Buy" around major 5/8 1.2550 Fib level.

Next stage suggests our long entry around 1.2550 area, if H&S will start to work. Or, conversely we intend to go short if this level will be roken. As you can see this is big and interesting journey for weeks and weeks ahead.
gbp_w_10_02_20.png


Daily

We've talked about daily setup in our Friday's update. Mostly it stands the same. Our suggestion that price should not drop too far due oversold level and Fib support was correct. Still, despite this temporal support area our setup here remains bearish. Major AB-CD shows that market has dropped below COP target, while OP stands in agreement with 1.27 area. This is also 1.618 extension of butterfly pattern.

Intermediate target of 1.28 stands due 1.27 butterfly extension. MACD trend stands bearish. Daily picture suggests that we should watch for technical pullback to some Fib resistance and consider short entry.

gbp_d_10_02_20.png


Intraday

Here guys, we will not gamble on the point where market potentially could stop short-term downside action. Oversold stands around 1.2860 next week, and market could stop at some minor AB-CD extension target that you could estimate on hourly chart. Ultimately, we do not exclude that GBP will follow right to OP target around 1.28, which is also butterfly destination point, but we treat chances of this event as not significant.

For us is more important to discuss potential pullback, because we're mostly watching for short entry. Since cable is near oversold, it is logical to suggest deeper pullback. Thus, K-resistance around 1.30 area suits perfect.

gbp_4h_10_02_20.png


Conclusion:

We are not smart enough to make forecasts on how Brexit will impact on UK economy statistics, Bank of England policy and EU relations. We just could suggest that situation probably should become worse, before it will start to improve. Because such events like Brexit never could pass quiet and unsigned. That's why we prefer to follow the market behavior, that, in turn, is driven by those who could predict, or at least forecast future changes in UK. Fundamental background that we've discussed today, mostly tells the same. As obviously some EU and UK tensions exist right now, they probably will exist through the "Agreement" year. But, longer-term perspective and forecasts on UK economy mostly stand positive.

In short-term perspective we follow our trading plan. Right now we consider downside action to 1.25 - 1.27 area and consider possible chances to take a short position. As market stands at daily oversold and support area - we could get this chance on coming week.
 

Sive Morten

Special Consultant to the FPA
Messages
12,991
Greetings everybody,

Gold provides today risky setup, but with great reward if it will be filled. In general, as you know, except virus panic, overall background stands bearish for the gold in short-term. Because investors are overextended long positions and they need some off load. It suggests a bit deeper retracement on gold.

Daily trend stands bearish and current upward action should be treated as retracement by far:
gold_d_11_02_20.png


In fact, we have triangle pattern, MACD shows hidden bullish divergence, but it contradicts a bit to fundamental background and now market shows downside turn, that might be early downside reversal. This is most tricky moment - "might be". Because inside the triangle opposite statement is correct also - you easily could draw here upward butterfly as well... So, why we think that this still could work?

gold_4h_11_02_20.png


On 1H chart, market shows struggle around 1575 Fib resistance. Some sellers stepped in and now gold pulls back a bit. Advantage of this trade is small risk, because our invalidation point is just recent top around 1575. If gold moves above it - that's all, setup has failed. Thus, we could place tight stop. Second is reward - it is great. Major risk is that we are not sure that this is definitely early downside reversal... That's the setup that we have on gold...You need just think and decide whether you want to trade it...
gold_1h_11_02_20.png
 

Sive Morten

Special Consultant to the FPA
Messages
12,991
Greetings everybody,

Yesterday we've discussed in details bearish trading setup and explained that in current situation we could try to follow bearish fundamental background of gold, ignoring some technical opposite signs, such as bullish divergence on 4H chart. The reason for this trade is twofold - huge potential reward and very small risk.

As we've suggested sudden stop on 4H chart could turn to early downside reversal inside the triangle. This, in turn, suggests downside breakout of the triangle. This was a reason to consider mentioned trading setup:
gold_4h_12_02_20.png


Our initial plan has worked nice as gold has shown good 5/8 pullback yesterday, keeping vital point untouched and dropped to OP target. Our bet on small potential risk of just 5$/contract was achieved. Now we keep an eye on further downside action. If you've sold gold around 1570 - you could move stops to breakeven. Those who have missed entry could watch for possible AB-CD upside action today on 1H chart, or is possible to consider using stop "Sell" order on a downside breakout of OP level, but it is more risky.

All in all - the major invalidation point stands the same - 1577 top. Any bearish setup will be good until market stands below it.
gold_1h_11_02_20.png
 

Sive Morten

Special Consultant to the FPA
Messages
12,991
Morning guys,

Today is on the gold again. I do not like price action after JP speech yesterday as it has become bullish and irrational to our short-term bearish setup. Despite that price still keeps valid setup - it is probably doomed. Anyway, you could keep it right to the end, if your entry was around 1570$, loss will not exceed 5$ per contract. My entry was worse a bit, so I booked loss today in the morning. Here is the reasons...

It seems that we should wait for something more reliable on gold. For instance, on daily chart it might be "222" Sell pattern:
gold_d_13_02_20.png


On 4H chart - take a look that our "early reversal" has shown slower pace that initial drop. It means that probably it is not the continuation of previous downside swing, but something difference - retracement of upside swing. It puts under question the idea of early reversal by far, as real "early reversal" after circle should shows the same strength as previous drop, which we do not see...
gold_4h_13_02_20.png


Indeed on 1H chart - market drops to OP nicely, but then downside action fizzled, showing W&R and forming upside reversal swing, erasing "C" point. Overall upside action also shows signs of thrust. All these moments breaks nature of bearish setup, despite that vital point is still untouched. Everything could happen, of course, but I prefer to leave the trade if price moves differently compares to my expectations:
gold_1h_13_02_20.png
 

Sive Morten

Special Consultant to the FPA
Messages
12,991
Morning guys,

Situation on Gold market has not changed significantly by far. As market denied our idea of early downside reversal, we look at opposite pattern, something like AB-CD on daily. Currently gold has no significant driving factors and there are a lot of chaotic component of fluctuations, which makes difficult to identify reasonable trading setup:
gold_d_14_02_20.png


On 4H chart, as market returns back to the previous top inside the triangle - it could proceed right to the upper border of the pattern. As MACDP line stands close, we could keep an eye on 1572 level, and monitor whether price will form bullish grabber there:
gold_4h_14_02_20.png


On 1H chart, market has grabbed stops above the recent top, but stands relatively close to it, showing signs of bullish dynamic pressure. Also it has untouched XOP above. So, taking all this stuff together, we suggest that gold could hit XOP first, then show some retracement. First 3/8 Fib level stands at 1572, which coincides with 4H MACDP line. If bullish grabber will be formed there - that will be at least something that we could try to use. Although I'm not sure that we will get all these things today.
gold_1h_14_02_20.png
 
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