Forex FOREX PRO WEEKLY #2, June 01 - 05, 2020

Sive Morten

Special Consultant to the FPA
Messages
13,627
Fundamentals

This week we do not have any new information for gold market. It mostly shows reaction on geopolitical tensions and US-China piking, while positive "back to life" mood keeps it in tight range. Thus I think we could take a look at GBP as there are few important moments that we need to talk about.

Currently there two hot topics for GBP - pandemic impact and hazard of negative interest rates, that everybody denies but Gilt yields show that they are possible. Second - coming new round of Brexit negotiations.

This research I would like to start with G. Soros words on virus that sounds not good:

Soros, 89, said the damage to the euro zone economy from the new coronavirus would last “longer than most people think”, adding that the rapid evolution of the virus meant that a reliable vaccine would be hard to develop.

The hedge-fund veteran and chairman of Soros Fund Management LLC said perpetual bonds, used by the British to finance wars against Napoleon, would allow the European Union - itself created out of the ashes of World War Two - to survive.

“If the EU is unable to consider it now, it may not be able to survive the challenges it currently confronts,” Soros said in a transcript of a question-and-answer session emailed to reporters. “This is not a theoretical possibility; it may be the tragic reality.

Without relation to EU, I'm interested in words on virus - should we treat them as a caution that it is too early to celebrate? He also sees the positive changes in the world and economy but he makes the statements of this kind - what could this mean?

Investors’ focus shifted back to the possibility of negative interest rates in Britain. Bank of England Chief Economist Andy Haldane on Tuesday played down the prospect of imminently taking rates into negative territory, saying that “reviewing and doing are different things”. But analysts believe that once the talk of negative rates has taken hold in the markets, it would be hard to shift the focus away from it.

“The door has been opened to the prospect of negative rates given the BoE clearly before has explicitly ruled out negative rates,” said Derek Halpenny, head of research at MUFG. “We do not see Haldane’s comments yesterday as a signal of a reversal of the negative rate speculation,” he said.

Britain told the European Union on Wednesday it needed to break a fundamental impasse to clinch a Brexit trade deal by the end of the year and said an agreement on fisheries might not be ready by July. Britain’s negotiator with the EU, David Frost, also reiterated that the UK would not extend the Brexit transition period beyond December. The United Kingdom left the EU on Jan. 31 but the main terms of its membership remain in place during a transition period until the end of this year, allowing it time to negotiate a new free trade deal with the bloc. Failure to reach a deal would convulse global trade just as the world aims to exit the coronavirus lockdown. But so far the talks have not gone well - and that was the only thing on which both sides agreed at the end of the last round.

“Whilst a classic last-minute EU fudge is still broadly anticipated by the market, the language from David Frost was not optimistic,” said Neil Wilson, chief market analyst at markets.com. “Undoubtedly, sterling becomes increasingly exposed to headline risks around Brexit as we move out of the worst of the COVID-19 pandemic and back into the cut-and-thrust of negotiations,” Wilson said.

Taking wider view on financial and political situation in UK - there is really something to worry about. The currency is struggling near its lowest levels in more than three decades, and a Brexit trade deal looks distant. Meanwhile it is grappling with the prospect of negative interest rates in Britain, a deep recession and a growing pile of debt.

“Unless Boris Johnson’s government can come up with a coherent post-Brexit plan, the pound may be vulnerable from these already low levels,” said Stephen Jen, co-founder at hedge fund Eurizon SLJ.

While the Bank of England’s chief economist Andy Haldane said the central bank was not even remotely close to implementing negative rates, money market futures from March 2021 are already pricing in such an outcome.
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Though the pound remains one of the most undervalued currency on a trade-weighted basis adjusted for inflation, along with its Scandinavian counterparts, it is still among the most shorted currencies in the $6.6 trillion a day FX markets.

Latest positioning data in the week up to last Tuesday showed speculators are holding a sizeable $1.5 billion net short position against the pound.
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The collapse in UK economic activity is not out of line with its peers. Nonetheless, Britain’s economy shrank by a record 5.8% in March. Apart from negative rates, a high rate of COVID-19 related deaths and an astonishing amount of government debt were also weighing on sterling. Britain is likely to run a budget deficit equal to 5% of gross domestic product in 2024, when Britain’s next national election is due, the Financial Times reported.

The British economy is more vulnerable than some because it does not have the support of a large current account surplus like that of the European Union. Nor does it have the powerful reserve currency status of the U.S. dollar.
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Britain’s debt mountain exceeds $2.5 trillion and its public sector net borrowing is on course to reach 14% of gross domestic product this year, the biggest single-year deficit since World War Two. A measure of British public debt jumped to close to 100% of the country’s economic output in April, its highest in nearly 60 years.

As you understand - free trade agreement with EU will have direct impact on major UK economy indicators and that's why coming round of negotiations is important. Besides, the half of the year is passed and mostly was lost due virus epidemic. Everybody was focused on resolving their own, domestic problems.

The European Union and Britain will have to engage in accelerated Brexit talks over the summer if they are to reach a deal, an adviser to the EU’s chief trade negotiator Michel Barnier said. Separately, Irish Prime Minister Leo Varadkar said very little progress had been made in the Brexit negotiations.

Without progress next week a no-deal scenario could be priced in and weigh on sterling, Swissquote senior analyst Ipek Ozkardeskaya said in a note to clients.
The UK will start preparing for a no-deal divorce if we do not see material progress in talks next week,” Ozkardeskaya said.

“We are most concerned with the UK,” Deutsche Bank said in a note. Negative rates “would be very negative for GBP as a current account deficit country”, it added.


This month sterling has lost almost 4% against the euro, which has gained support from the European Commission stimulus plan announced this week. The country has the highest COVID-19 death toll in Europe, but Prime Minister Boris Johnson said on Thursday that Britain’s coronavirus lockdown would ease next week, but the announcement has not been enough to lift the mood after the Bank of England said Britain’s economy is unlikely to recover fully in the next two to three years.

British finance minister Rishi Sunak was to tell employers on Friday that they must pay between 20% and 30% of the costs of the government’s expensive wage subsidy programme from August, according to media reports.

That's being said - Britain heads into another round of Brexit talks ahead of the June 18-19 European Union summit by which time London needs to make up its mind about asking for an extension to the transition agreement. British officials have repeatedly said they won’t do so, but the clock is ticking and there’s not much time left until the end of December when Britain and the EU part ways - with or without a trade deal.

Negotiators have not made much progress. Britain says an agreement on fisheries might not be ready by July and it is down to Brussels to break a fundamental impasse. The EU urges Britain to make a bigger effort and be more realistic about what it can achieve in these talks.

All this toing and froing keeps the pound close to its lowest in nearly three decades. And as if a potentially messy Brexit was not enough, the British currency is also grappling with the prospect of negative interest rates, a deep recession and a growing pile of debt.

As you can see - negative rates, economy recovery depends on Brexit negotiations progress, because free trade agreement will be positive to UK and should have positive consequences to economy. Conversely, negative rates will forthcoming if no progress will be achieved. It is important to achieve some progress before EU summit. Although chances are not very high to see any achievement. Thus, guys - be prepared to solid volatility on the market and not rely too much on technical analysis as headline news will probably drive the GBP next week.


Technicals
Monthly


I'm a bit skeptic, guys, that any agreement will be achieved within two weeks. Now it looks like a miracle. Technical situation has not changed too much since our last discussion two weeks ago. GBP fortunately has shown better May close with pullback in the middle of range, while two weeks ago chart was looking really bad, with May potential bearish tail close.

Still, this makes minor impact on monthly picture, because as April as May are inside months to huge Brexit candle in late 2019, that is potentially bullish grabber. With a philosophy view on this candle - "it was showing bullish potential of agreement achieving with the EU". But this has not become a reality by far.

In general, long-term bearish scenario is not broken yet as sequence of LH and LL holds. We have all-time AB-CD pattern and OP target at 0.95. GBP performance shows the importance of Brexit negotiation driving factor, as, mostly, the drop was driven by this factor. Since GBP has no valuable supports till the 1.14 bottom - price could easily fluctuate there without risk to break long-term balance. Decisive moment will be the breakout of 1.3 lows.

By my humble view, the picture gives more points to bears, because - take a look, in fact GBP has dropped for 10 points (from 1.29 to 1.21) within a single month. So we have direct downside acceleration to 1.27 butterfly target, that makes very probable action to 1.05 area. You could argue that price has shown solid bounce after that. Yes, but it was the reaction on target reaching. In a wider view - now we have reaction on the target and monthly OS level, this is a retracement. Anyway, GBP has to take a long journey to turn situation bullish.

gbp_m_01_06_20.png


Weekly

In the focus of weekly chart we have the same pattern - huge bullish engulfing, that also could be treated as DiNapoli "Railroad Tracks" because of the price rejection type of action. And this pattern is a big test for GBP. If we put all political background aside - technical potential of this pattern is huge as it could drastically the situation on GBP. Unfortunately this type of events never happens without valuable driving factor, especially on the long-term charts. So, our case is not an exception - engulfing could lead price back to 1.30 area only with support of fundamental events. Otherwise, it just doesn't work.

Nearest few weeks should answer the question - whether recent upside jump out from 1.14 lows is price rejection and emotional relief after Brexit or real recovery. Our task here is to see how price response to support areas. Erasing of this pattern will be hard impact on bullish ambitions and could trigger drop to 1.05 target. Fortunately, GBP has 1.17 monthly OS level support that should hold the pace of collapse, if it will start.

Thus, as under action to 1.32 as under drop to 1.14 definitely should be some important fundamental driving factors. So, here we mostly are hostages of future political events rather than technical factors and patterns.

gbp_w_01_06_20.png


Daily

So, based on the pattern that we have - market has to show either immediate upward continuation or deeper AB-CD type of action. And our task now is try to estimate what particular scenario happens. On daily chart we see that despite upward reversal has happened but now it doesn't show solid strength and bullish pressure. It is a bit slow and it seems that initial optimism starts to fade. That lets us to suggest possible retracement features of current action and, in turn, makes scenario of deeper retracement more probable.

In fact, initially we said that it should be deep retracement 50-60%, somewhere to 1.18-1.19 area. Besides, there we have uncompleted XOP target of another AB-CD pattern:
gbp_d_01_06_20.png


Intraday

On intraday chart there are some tricky moments exist, but they should be resolved on Monday. Thus, on 4H chart we see completion of OP target and Agreement resistance level, "222" Sell pattern, but on a pullback price has formed multiple bullish grabbers, that suggest some action above the OP. At the same time, CD leg shows slowdown that points on potential downside reversal.

Upside action to XOP doesn't change the core and AB-CD daily pattern, so it is mostly important for intraday traders.
gbp_4h_01_06_20.png


On 1H chart market is forming falling wedge pattern and small H&S inside. Pay attention to red circle. If price on Monday turns down immediately, right from the circle - H&S should be formed, and there are more chances on downside continuation exist. While moving higher, back to 1.24 area increases chances on upside continuation.

Plan your trading process with this detail in mind. Initially you could consider short entry with stops above 4H 5/8 Fib level. Alternatively you could wait when H&S starts to work and erase 4H grabbers, or combine both ways by splitting your position in two parts.
gbp_1h_01_06_20.png
 

Sive Morten

Special Consultant to the FPA
Messages
13,627
Greetings everybody,

Finally we could take a look at Gold market as well. Currently price stands at very interesting moment as clarity on next direction should come soon. On daily chart bearish divergence is obvious, but we also have minor hidden bullish divergence that makes overall situation tricky a bit. It means that gold doesn't bye upside direction totally yet.
gold_d_02_06_20.png


Here we estimate two vital levels that point us the direction. Currently Gold has completed AB-CD upside retracement and stands around major 5/8 resistance. Bearish scenario suggests that gold has to drop right from here and no more upside action should happen. This, in turn, means that this is vital area for the bears.
But the problem - we have potential grabber that could push price higher. Besides, price is forming a kind of triangle right around the level, that also has bullish potential.
gold_4h_02_06_20.png


It means that upside action could start immediately with breakout of vital bearish border. Alternatively, gold could form reverse H&S pattern, which, in turn set bullish vital area. This is Agreement support around 1715 level:
gold_1h_02_06_20.png


If gold breaks it down - it means that no upside action will happen and gold goes lower. Depending on your view on the market, you could use these levels. Bulls could wait for different levels or split position and enter in parts on all levels, including possible grabber on 4H chart. Bears, in turn, could wait 1715 breakout, use Stop Sell order around 1710 for, example. Or, if grabber will not be formed - try to go short with stop above the OP top with fast move to breakeven. Everything depends on your risk management and personal trading moments.
 

Sive Morten

Special Consultant to the FPA
Messages
13,627
Greetings everybody,

Today guys, we have new inputs on gold market that make less probable any upside action on this week. I'm talking about yesterday session. It has become as bearish grabber as bearish reversal candle. This combination promises nothing good to bullish scenario and suggests drop below recent lows, i.e. somewhere back to 1687 level at least:
gold_d_03_06_20.png


As a result on bearish setup has worked perfect - market turns down precisely from vital area, bullish grabber that we've mentioned completed minimal target. Bears could hold positions, those who doesn't have them - now could consider using of Stop "sell" order below 1710 area:
gold_4h_03_06_20.png


Now the time has come to test bulls vital level. As you can see - it has not broken yet and gold still keeps chances to form H&S pattern, but with the daily bearish patterns - now it becomes not as attractive as yesterday. I would suggest either skip this bullish context, or, if you still want to try - wait at least, for appearing of clear bullish reversal pattern around 1713 support on 30min chart and lower. For example, wait when price finds the bottom and forms, say, minor reverse H&S, butterfly or something. This significantly will minimize your risk. Don't go long blindly just because we at vital point.
gold_1h_03_06_20.png
 

Sive Morten

Special Consultant to the FPA
Messages
13,627
Greetings everybody,

So, our worry was not in vain, indeed gold has dropped and renew recent lows. So, the grabber that we've talked about is completed. Now price stands at daily Fib support level and shows reasonable reaction:
gold_d_04_06_20.png


Still, overall AB-CD action is rather fast, CD leg shows acceleration, that makes very probable downside continuation to OP target @1675 as soon as retracement will be over:
gold_4h_04_06_20.png


It seems that 1710-1712 area is suitable for bearish purpose. We have K-area and potential Agreement with AB=CD retracement. It, in turn, could form "222" Sell as well:
gold_1h_04_06_20.png
 

Sive Morten

Special Consultant to the FPA
Messages
13,627
Greetings everybody,

In general, gold keeps our scenario well and now we're mostly interested in the shape of downside continuation as on 1H chart price action is a bit choppy. NFP on horizon brings no comfort for position taking by far.

Still, on daily we see logical reaction on 1687 support. Potentially gold could show deeper retracement here and we finally should get attractive level for longer-term position:
gold_d_05_06_20.png


On 4H chart we consider the same AB-CD pattern with 1273 target. 1.618 Extension of current pullback agrees with OP target and this makes us think that we could get butterfly "Buy" pattern:
gold_4h_05_06_20.png


On 1H chart gold mostly is completed our suggestion, OP target has been hit, reaction followed, but it was too choppy and market even has tried to hit XOP. Now downside action is slow, and XOP is still valid. As we do not have here any good bearish patterns, XOP, NFP are ahead, as well as weekend and new headlines, I suggest that it would be better to wait for clear bearish shape here. For instance, when we definitely see that butterfly is forming.
But if you still want to act today anyway - place initial stop above 5/8 Fib level and XOP.
gold_1h_05_06_20.png
 
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