Forex FOREX PRO WEEKLY #2, March 29 - 02, 2021

Sive Morten

Special Consultant to the FPA

This week it makes sense to consider the GBP long-term view instead of gold. Because first is gold stands under impact of absolutely the same factors as EUR and everything that we've said recently relates to gold market as well. While GBP has its own drivers, such as inflation, coming Scotland elections and tensions with EU on multiple subjects. Second - technically gold provides nothing new in recent 2-3 weeks, fluctuating in very tight range, while on GBP we have more alive picture.

Inflation driving factor

Despite that recent CPI data shows contraction - in recent few months inflation in UK shows good tempo. And, as expected, it could make impact on BoE policy in short-term perspective.

British consumer price inflation unexpectedly fell to 0.4% in February from 0.7% in January, reflecting the biggest annual drop in clothing prices since 2009. A Reuters poll forecast it would edge up to 0.8%. After the release of the inflation numbers, British two-year government bond yields hit a one-month low, while sterling fell to an almost seven-week low versus the dollar and to its lowest since March 5 against the euro.

The weaker-than-expected inflation data “should serve as a reminder that reflation is still in the early stages in the UK,” said, Jane Foley, head of FX strategy at Rabobank. “The optimism may be a little too much, too soon”.

But keeping a portion of that optimism alive, another set of data showed a rush of new orders by businesses anticipating an easing of Britain’s lockdown prompted a much stronger rebound for UK companies than expected in March. The flash IHS Markit/CIPS UK Composite Purchasing Managers’ Index rose to a seven-month high as Britain’s vaccine rollout bolstered confidence among businesses.

British retail sales partly recovered in February, in line with a Reuters poll of economists.

“The economic wheel of fortune seems to be turning back in the UK’s favour. A successful vaccine rollout, aggressive policy support and a solid global backdrop set the stage for at least two years of rapid economic rebound from the massive pandemic shock of 2020,” Kallum Pickering, senior economist at Berenberg, wrote in a note to clients. We expect a strong consumer-led recovery from spring onwards as savings normalise, face-to-face services re-open and manufacturers step up production to meet rising demand,” he added.

The Bank of England says the degree to which households spend the savings they have accumulated while they have been stuck at home will determine the speed of Britain’s recovery from its worst economic shock in more than three centuries.

BoE policymaker Michael Saunders is due to give a speech later in the session, on the topic of supply and demand before and after the pandemic.

But, in general - British inflation is on course to rise rapidly this year, to well above its 2% target, throwing into sharper relief splits at the Bank of England about how vulnerable Britain is to a more lasting rebound in prices after the COVID-19 pandemic.

Consumer price inflation, the measure targeted by the BoE, was just 0.7% in January but economists at Bank of America and Pantheon Macroeconomics see it reaching 2.5% by late this year. The BoE’s forecast last month was just below 2%.

Most of the increase is likely to come in the next few months, due to the raising of a price cap for many domestic energy bills from April and a 50% surge in oil prices since effective COVID-19 vaccines were announced last year. The impact of higher prices will be magnified as they are compared to levels a year ago, when demand slumped at the start of the pandemic, briefly pushing oil prices below zero and sending British inflation to its lowest since 2015.

The same pattern is visible in the United States and the euro zone.

“All central banks are in a similar position that their headline inflation rates are going to be above their targets by the end of the year because of the rebound in oil prices,” said Samuel Tombs, chief UK economist at Pantheon Macroeconomics.

British inflation is likely to get an extra push in August, when restaurant prices will be compared against discounts a year before under a government scheme to attract diners during a lull in the pandemic, and again in October, when a temporary sales tax cut for hospitality begins to be phased out.

Brexit and COVID-19-related disruption is also pushing up the cost of some imports from the European Union and elsewhere, though it is too early to see a clear impact on overall prices.

BoE Governor Andrew Bailey has stated that Britain’s central bank -- which is in the middle of rolling out 150 billion pounds ($207 billion) of quantitative easing bond purchases agreed last year -- will not tighten policy at the first sign of inflation.

The BoE last week affirmed it would wait for “clear evidence” that inflation would stick at 2%
and that spare capacity in the economy such as joblessness was reducing before considering tighter policy.

But last week’s meeting set the stage for a dispute later in the year -- when inflation is likely to be above target and headline growth rebounding sharply -- about whether the economy is at risk of overheating. The minutes noted “a range of views” on how much spare capacity exists now, how fast it is likely to be used up, and how the post-pandemic recovery will differ from others.

BoE Chief Economist Andy Haldane has likened the economy to a “coiled spring” and described inflation as a “tiger” that is beginning to stir.

Inflation is more likely to overshoot than undershoot BoE forecasts, he said, as richer households spend savings built up during lockdown and due to mismatches between supply and demand. He also sees a risk of a long-term reversal of past globalising trends that brought cheap goods and migrant workers to Britain. But to many economists, the inflation pressures Britain is facing look more like the temporary factors the BoE has looked through in the past than the start of a longer-term change.

Few see rates rising before the tail-end of 2022 at the earliest.

How Britain’s job market responds after the government furlough programme ends in September will be key for the BoE’s Monetary Policy Committee
, said Philip Shaw, chief UK economist at Investec.

“It would be surprising if the MPC as a whole began to make some very hawkish noises on monetary policy before anyone gets clarity on the labour market,” he said.

If British wages do rise significantly after the pandemic, putting upward pressure on inflation, it will mark a sea-change from the previous decade, when wage pressures were very muted despite unemployment falling to its lowest since 1975. The fact that British inflation averaged close to its 2% target between 2008 and 2019 largely reflected the inflationary impact of two big falls in sterling in 2008 and 2016.

Pantheon’s Tombs also saw little sign of wage pressures over the next two to three years -- the time horizon the BoE normally focuses on -- and added that a rise in sterling since late last year was likely to reduce inflation in 2021.

But he said Haldane was right to point out longer-term dangers of greater inflation now that Brexit had made it harder to import workers from the European Union.

“In time I think wages could be a problem for businesses,” Tombs said. “But I see that as three to four years down the line, once the recovery is much more mature.”


European Union raised the prospect of blocking COVID-19 vaccine shipments to countries, such as Britain, with higher inoculation rates and to those not exporting doses. Bets that Britain’s rapid vaccination drive would lead to a faster reopening of its economy propelled the pound above $1.42 in February.

But a firmer dollar on rising bond yields and the risk of the EU banning COVID-19 vaccine exports to Britain, which relies heavily on imports for its inoculation campaign, knocked sterling from its perch as the best-performing G10 currency.

After a meeting of European leaders on Thursday, EU commission chief Ursula von der Leyen said that AstraZeneca cannot export any more COVID-19 vaccines from Europe until it fulfils its contracts with the EU.

But German Chancellor Angela Merkel said on Thursday that the EU aims to achieve a “win-win” situation with Britain over vaccine supplies, and a UK minister said on Friday that Britain had sufficient supplies to vaccinate all adults by the end of July. Brussels and London sought to cool tension on Wednesday, declaring they were working “to create a win-win situation and expand vaccine supply for all our citizens”.

The European Commission, which oversees trade policy for the 27 EU member states, set out a proposal to ensure planned exports by drugmakers do not threaten already reduced EU supply. The pound has lost over 1% against the dollar this week, as the EU, which is lagging Britain and the United States in rolling out vaccines, considers the measure. A rise in bond yields as well as some risk aversion in markets have also broadly benefited the dollar in recent weeks.

Bets that Britain’s rapid pace of vaccinations would lead to a faster economic rebound made sterling the best performing G10 currency against the dollar as recently as February, but it has since lost that perch. The pound climbed as high as $1.42 in February, and has lost 4% since.

“While sterling has struggled lately, we note that its short-term financial fair value has improved vs the euro over the past two weeks, by more than 1%,” said Petr Krpata, chief EMEA and IR strategist at ING. With euro-sterling no longer being meaningfully undervalued (in fact now close to its fair value of 86.40 pence), this opens the door for further eventual declines in the cross towards our target of 85 pence. Short-term valuation is no longer a sterling headwind,” he said.

Flash purchasing managers indexes for Britain came in better than expected on Wednesday, brightening the outlook for an economy that last year suffered its worst annual contraction in 300 years.

“The UK’s vaccination campaign faces a bump in the road owing to the EU’s plans to restrict vaccine exports,” said Shaun Osborne, Chief FX Strategist at Scotiabank.

Jeremy Stretch, head of G10 FX strategy at CIBC Capital Markets, said the UK-EU vaccine row was having limited impact on the pound because it had not escalated into a tit-for-tat trade spat, and sterling was being lifted by the “risk-on” sentiment in markets more broadly.

He said the euro-sterling pair could head towards 84 pence per euro, as April is typically a strong month for the pound.


Scottish secession from the United Kingdom has for many investors always been the second big risk to Britain from Brexit. The next few months may test that thesis.
The state of the union is likely to be back in focus after Scotland heads to the polls on May 6 for regional parliamentary elections.

Investment firms, including Credit Suisse on Thursday, cite another referendum on independence as akey tail risk” for the UK banks at least, if not the wider economy.

If the governing Scottish National Party is returned with a hefty majority as expected, it has pledged to seek another vote on secession to match the one it lost narrowly 55%-45% in September 2014 - and it cites Scotland’s popular opposition to Brexit as the premise for a re-run. It needs the assent of the UK parliament in Westminster to do so and ruling Conservatives there are opposed to another vote. But the Edinburgh parliament could refer the issue to the UK Supreme Court to get a final ruling.

With perhaps bigger fish to fry with the coronavirus, vaccine races and Treasury budgeting for eye-watering government support bills, markets don’t yet appear to have priced many risks.

Implied 3-month sterling volatility remains subdued at less than half the peaks of the past decade and a point below the mean of the past 20 years - even if roughly the level as at the time of the 2014 referendum. That’s partly due to a complex sequence of events needed to get from here to even the chance of another vote.


Will the SNP win in May? If it does, will its majority be big enough to claim a mandate for another referendum? How stiff will Westminster opposition be? How would the courts rule and how soon could a vote be called anyhow? Does Catalonia’s failed ‘go it alone’ independence push rule out a unilateral move?


Although the SNP’s lead in the polls ebbed this year over an inquiry into leader Nicola Sturgeon’s handling of a court case involving former party chief Alex Salmond, the SNP is still widely expected to secure an overall majority in May and Sturgeon won a confidence vote in parliament this week.

But that’s where the picture dims. Polling and bookies reckon the rest is too close to call. Opinion polls show only a 2-3 point lead for those wanting independence. Online betting firms show an evens chance of a successful vote to secede, although the favoured date for such referendum is as far away as 2025.

Two factors potentially insulating sterling are that - compared with Brexit and the pandemic at least - the disruption to trading in 2014 was relatively modest for a vote that ran so close right up until polling.

The location of key UK financial firms in Edinburgh makes the sector more vulnerable to a split - but even prices in that sector barely budged last time. And there is debate about whether the pound would actually rise or fall if Scotland left the union.

Much like the debate on the impact on the euro from a Greek exit back in 2010, heavy budget deficits in Edinburgh may well mean a rump UK would be in a better fiscal position than previously and there may be capital flight south of the border to boot.

Ownership of North Sea oil fields may be a factor, but wild swings in oil prices since 2014 show how difficult it is to budget long-term for that.

Tom Clarke, portfolio manager at William Blair Investment Company, told Reuters recently that while there may be headline-driven volatility surrounding any referendum, he saw no fundamental reason why sterling ex-Scotland should be weaker.

A report by Jefferies economist David Owen in January said that while Scotland’s economy did no worse than the rest of the UK during the pandemic, higher per-capita public spending meant its fiscal position was several percentage points poorer.

Owen estimated that up to 2017 at least Scotland was running a current account deficit of up to 7% of its national output and this would likely have deteriorated since.

That meant the only viable option would be a free-floating new currency in the 2-3 year period between independence and likely euro membership, but backed by substantially higher FX reserves than calculated back in 2014 - somewhere in the region of $60 billion.

And key those external accounts may be the fate of the financial sector. “The process would need to be managed to try and limit capital leakage south of the border,” he concluded.

Breakup of the world’s 5th largest economy may seem like a seismic event for already crisis-weary Britain. But how to trade around it seems far from obvious.

COT Report

In our previous GBP report we've said that optimism that has pushed GBP to 1.42 level mostly includes already all positive moments, even potential ones. As this level coincided with strong technical target - downside reaction mostly was unavoidable, which we could see right now. At the same time, on background of new problems - net long position is deteriorating gradually:

As you could see in the table below - recent changes are not in favor of the bulls that have lost ~ 7K contracts net. Hedgers also have contracted bearish protected positions. It means that in short-term market doesn't suggest new GBP rally.

So, in short-term perspective, it seems that GBP has no obvious factors that could reverse it back up again. From that standpoint, overall situation looks similar to EUR. Although problems are different but they cap the market. In long-term eventually our technical picture could coincide with major political event of the May in Scotland. But currently it is more the hypothesis rather than evidence, as nothing clear yet and no confirming facts stand on the market.

As in the US, Inflation here is becoming the major driver. If it accelerates further, closer to the summer as it is suggested, the GBP keep outperforming EUR and could rival the US Dollar. BoE meetings should be watched closely. Hardly MPC steps on the road of tightening earlier than Fed - chances for that are minimal right now. But if situation changes - GBP could start outperform USD as well, at least temporary.



Long-term chart provides more questions rather than answers right now. Upside potential is limited by strong resistance area of 1.47-1.50 Fib levels cluster, and to break it up GBP needs strong fundamental reasons (rising inflation, for instance). Still, even without the real breakout of this area, it is rather wide. Here we have bullish divergence, suggesting taking out of previous top around 1.4372. Whether it mean that major reversal will not start until it happens?

At the same time, what could stand behind strong drop as it is suggested by harmonic pattern here - Scotland political situation? The one thing is clear here - it is not time to take long-term investment position with GBP as market shows that better opportunity could appear within 12 months. At the same time, as market keeps bullish context - it doesn't exclude another spikes before major retracement starts.


Here within the month market accurately completes the first stage of our trading plan - downside reaction on 1.42 resistance cluster, that includes Agreement level and YPR1 @ 1.4077. Trend has turned bearish but reaction doesn't look strong overall. Since we have another, more important upside target around 1.47 - last time we've agreed to keep an eye on downside reaction that should hint on chances to reach it.

Now it seems that chances are not bad and they are still here, as GBP pullback was jus to the nearest support level. On coming week our task is to decide, whether we keep going lower and keep trade it short or reversal signs become stronger and we need to prepare for upside continuation. 1.47 target is based on AB-CD OP and 1.618 extension of the butterfly.



Trend stands bearish here. It seems that recent bounce is mostly due daily oversold and Fib support area, that together formed bullish "Stretch" pattern by Dinapoli. Still bearish performance looks strong recently. Last two days of downside action shows good pace and tail closing. It could mean that downside tendency is not over yet.

From that standpoint, we would consider perfect area for long entry around OP target and K-support Agreement area of 1.3480-1.3515. Signs, pointing that we are wrong might be upside action above "C" top or appearing of reverse H&S pattern. In a case, if GBP indeed turns to 1.47 target - we do not need to hurry, trying to catch the bottom. It is long road to 1.47 and we should get multiple chances to join it. Right now as technical performance as fundamental background suggest that we still could get downside continuation:


To control retracement we intend to use Fib resistance levels. So, upside pullback has reached destination point that we've set on Friday - first Fib resistance, 1H XOP target and minimal butterfly target. Next one is K-area around 1.3865-1.3875. Normally, bearish market should not break it up and this area is important in short-term.

Despite that target is hit and overall price action is gradual - we do not have any bearish reversal patterns on 1H chart by far. Thus, it means that it is a bit early to take short position by far. We need more confirmation and maybe something will be formed in 1.38-1.3875 range on coming week. Upward breakout of K-area puts the shadow on bearish scenario and increases odds of upside reversal, with scenario on daily/weekly time frame.


Sive Morten

Special Consultant to the FPA
Greetings everybody,

So, this week we use this thread for gold analysis as well. It seems that our worry was not in vain as gold has collapsed as soon as interest rates start creeping higher again. Thus, as on EUR we're watching for 1.16, on 10 year yield 1.98-2.14% as on Gold - 1640$.
We previously mentioned uncompleted targets below the market and now gold is tending to fix this miss. Once they will be hit - major upward pullback could happen:

Meantime, while we're going lower - nearest target is 1688 XOP. Once it will be hit, minor pullback should get us chance to consider short entry around nearest levels - 1700 and 1706 K-area:

Sive Morten

Special Consultant to the FPA
Good morning,

So, as the euro, Gold has dropped more and now the reaching of our major targets around 1650-1670 is just a question of time. If NFP brings no surprises on Friday - they could be hit this week. As market is not at oversold or any support - we do not consider any long positions, even on the intraday charts. And have a plan to recall bullish positions only around 1650 area, once all major targets are hit:

The only short-term setup that we could consider - is possible short position around 1695 area if we get B&B "Sell" pattern. That's all that we have on gold market by this time...

Sive Morten

Special Consultant to the FPA
Greetings everybody,

Finally some activity appears on Gold market and we could consider few intraday setups. For daily traders - nothing has changed by far, as we still watch for 1650 area where all major targets have to be completed.

Still, appearing of bullish engulfing pattern recently on daily chart means that before downside continuation upside bounce should be more extended. Potentially, we're watching here for minor butterfly at the bottom:

The first, AB swing is coming to an end as price now hits resistance area on 4H chart - BC leg should start forming soon and this is the chance to step in, if you would like to buy gold:

Perfect shape of the price could look like this:

This is not precise levels, where market has to turn, but the shape mostly. So, as price now at resistance and hourly chart is forming something like H&S - downside pullback should start soon. The bottom of this drop is theoretical entry point. Hopefully it will be at some support level. Then is the final stage - upside CD extension. Once all these stuff is completed - we take a look at daily chart again to be sure that butterfly still valid. If it is - minor bearish trade also could be done there...

Sive Morten

Special Consultant to the FPA
Greetings everybody,

So, today is a bit tricky session due the holiday in EU and NFP release in the US. So, volatility probably will grow. Gold market shows strong performance on intraday chart and technical picture doesn't exclude scenario with bounce to 1800 K-resistance and re-testing of previous lows. Still, we keep "perfect" downside shape with minor butterfly as NFP data could reverse situation. Besides, upside pullback to 1800 doesn't cancel existed 1650 targets and anyway should be treated as pullback by far:

Our intraday setup has not been formed, as gold just was keeping higher, breaking all near stand fib levels. Next one stands around 1762, but major K-resistance area is around 1785-1800$. It might be reached, if, indeed we get Double Bottom here.

Despite that action looks strong, there are few things that we could do. First is - its tricky to buy right here with uncompleted daily targets and ahead of NFP release today. It is not good point for short entry as well - with no bearish signs and not at strong resistance area. Thus, it seems it would better to wait and see how NFP impacts on gold price and then make the decision on potential trades.