Sive Morten
Special Consultant to the FPA
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IT will be about GBP today...
Fundamentals
Reuters reports dollar rebounded from a three-week low on Friday, a day after the Federal Reserve kept U.S. interest rates on hold, in a late technical rally after a steep sell-off the previous session.
The Fed decision largely disappointed investors who wanted to get the process of normalizing rates going even at a gradual pace. It was largely expected though.
However, it was the Fed's dovish message, specifically the uncertain global growth outlook that could weigh on the world's largest economy, that took the market by surprise.
Market participants had anticipated two scenarios: a Fed hike with dovish undertones, or no move, but with upbeat comments about the U.S. economy.
Investors continued to sell the dollar earlier in the session before taking profits on their long positions in other currencies such as the euro and yen.
"This is nothing more than a technical correction in the dollar," said Omer Esiner, chief market analyst at Commonwealth Foreign Exchange. "The Fed's decision has introduced heightened volatility in the market."
Markets have reduced expectations for a rate increase this year, which could dim the short-term outlook for the dollar.
Rates futures placed an 11 percent chance on Friday that the Fed would raise rates in October, down from 41 percent early on Thursday, according to CME Group's FedWatch program.
A December move by the Fed had a 42 percent chance, with traders putting a 52 percent probability for a rate increase at the Fed's late-January meeting.
Some analysts expect the dollar to bounce back in the near term as soon as it becomes clear that the Fed is ready to end its zero-rate policy.
"With the Fed still projected to hike later this year, we expect the dollar to perform relative to currencies such as the euro, yen and sterling in coming months," said Allan von Mehren, chief analyst at Danske Bank in Copenhagen.
The prospect of loose monetary conditions for longer reignited investors' appetite for riskier currencies such as the Australian and New Zealand dollars, which gained.
ON FED DECISION
Stocks on major markets slipped on Friday and bond prices rose, pushing yields sharply lower, after the U.S. Federal Reserve on Thursday clung to its near-zero interest rate policy with global economic growth slowing.
Stocks and currencies in emerging markets, which are more vulnerable to higher U.S. interest rates, briefly welcomed the Fed's decision to postpone an interest rate rise, but their bounce faded with the persistent sell-off in developed markets.
Short-term lending rates, used as proxies for market expectations for the Fed's next move, shifted dramatically. December's fed funds futures contract rose to drop its rate to 21.5 basis points, implying only about a 44 percent chance of a rate increase by the end of the year.
"Investors are wrestling with how concerned they should be regarding global growth," said Jeremy Zirin, chief equity strategist at UBS Wealth Management in New York.
"The Fed has introduced a quasi-third mandate on global growth, apart from the labor market and inflation."
U.S. debt yields remained under downward pressure, with the U.S. Treasury two-year note's yield at 0.678 percent, a day after it hit a four-and-a-half-year high of 0.819 percent.
On BoE rate Hike
The Bank of England's next move may be to cut interest rates rather than raise them, because of the risk of persistent low inflation and an emerging market crisis that could hurt world growth, its chief economist Andy Haldane said on Friday.
Recent data suggested Britain's economy would slow in the second half of the year and inflation might remain too low, while emerging market troubles could drag on growth, he said.
Haldane's speech comes less than a day after the U.S. Federal Reserve held off from raising interest rates, blaming weaknesses in the global economy that concern the BoE too.
"The balance of risks to UK growth, and to UK inflation at the two-year horizon, is skewed squarely and significantly to the downside," Haldane said in a speech to businesses in Northern Ireland.
The case for raising interest rates was "some way from being made", he added.
"Were the downside risks I have discussed to materialise, there could be a need to loosen rather than tighten the monetary reins as a next step to support UK growth and return inflation to target."
Haldane flagged the possibility of cutting rates below their record-low 0.5 percent in March, but has not persuaded other policymakers.
The Bank of England undertook additional policy loosening by buying 375 billion pounds of British government bonds between 2009 and 2012 and has since reinvested the proceeds of maturing bonds.
The BoE as a whole is edging closer to an interest rate hike, but voted 8-1 this month to keep them on hold. Fears of a hard landing in China and general weakness in emerging markets have prompted investors to defer bets on the timing of a British rate hike.
Sterling inched down after the speech but bond markets were broadly unchanged.
"Everyone knows that he is probably the most dovish member of the committee, probably by some margin," Andy Chaytor, strategist at Nomura said.
GLOBAL HEADWINDS
Britain's strong domestic economy would partly offset external risks but it too was showing signs of slowing, Haldane said, citing softer employment and surveys of manufacturing and construction output.
Meanwhile, a 1 percent fall in emerging market growth could shave 0.5 percent off global and British growth over two years, with Britain's banking sector a channel for contagion.
"We may now be entering the early stages of ... the
'Emerging Market' crisis of 2015 onwards," he said. "It is simply too soon to tell how potent contagion from emerging market economies to the world economy will be."
Haldane said central banks needed to consider the risk that interest rates might remain persistently lower and they should
"think imaginatively" about possible solutions such as raising their inflation targets or making bond-buying programmes a permanent part of their policy tools.
A third "and perhaps most radical and durable option" would be to charge a negative interest rate via a state-issued digital currency, he said.
Now let's see whether recent rally was supported by real investors positions. Open interest has dropped dramatically last week. It means that investors' exposition significantly dropped on Sterling last week.
Speaking on speculative positions - longs mostly stands intact, while short were contracted for ~30K contracts. But this is not all yet. It is interesting the changes of hedgers positions as well. Thus, contraction of longs is not surprise - they usually move in the same direction as spec. shorts. It is interesting that hedgers have contracted shorts as well. Since both sides were diminished, it mostly reminds on closing some positions before Fed meeting, rather than some directional positioning. So, recent rally mostly has happened due contraction of short positions rather than opening of new longs. Although true reasons might be different - either coming Fed, or good inflation data, or may be something else...
Open Interest:
Longs:
Shorts:
Technicals
As usual, we continue to keep our long-term analysis that we’ve made in December 2013 in our Forex Military School Course, where we were learning Elliot Waves technique.
Long Term Forecast on GBP rate
Our long term analysis suggests first appearing of new high on 4th wave at ~1.76 level and then starting of last 5th wave down. First condition was accomplished and we’ve got new high, but it was a bit lower – not 1.76 but 1.72. This was and is all time support/resistance area. Now we stand in final part of our journey. According to our 2013 analysis market should reach lows at 1.35 area. Let’s see what additional information we have right now.
Trend is bearish here, but GBP is not at oversold. Couple of months ago market has reached strong support area – Yearly Pivot support 1 and 5/8 major monthly Fib level. Market gradually was struggling through YPS1 but it seems that first attempt to pass through it has failed. This was the point where we've stopped last time.
Our conclusion was - GBP will continue move down, but we didn't know from which level this should happen.
Right now it seems that downward action is re-establishing. Also we have huge AB-CD pattern that specifies target with more precision. It is not quite 1.35, actually it is 1.3088.
Second issue here is B&B "Sell" pattern that we've discussed and traded. Market has reached 50% Fib resistance within 2 closes above 3x3 DMA and turned down again. B&B here looks absolutely logical, since we expect downward continuation but not upside reversal (where DRPO will be more suitable).
Now we have another important confirmation that bears gradually take power. August month has become bearish grabber that suggests taking out of 1.45 lows. So we have pattern on monthly chart that gives us clear direction for considerable time period. September could form another one if it will close a little bit lower.
Weekly
Weekly trend has shifted bearish as well. Upside scenario has been erased on last week, since GBP has shown new low and erased "C" point of upside AB-CD pattern - totally has erased it. Thus, on upside action Cable was able to reach only minor 0.618 extension right at 50% resistance where B&B "Sell" has started.
Still, B&B is still valid, since market has not reached yet it's minimal target. It stands at 5/8 Fib support - 1.5086. Take a look that this will rather strong area and it includes YPS1 again, weekly oversold and Trend line support. This area probably will become our destination in medium-term perspective. At the same time we should not forget about grabber. 1.5086 could become a reason for pause - but it should be temporal on a way down.
Also guys, pay attention to recent rally. On daily chart it looks really impressive, but here it is not too significant. Despite this move up trend stands bearish. You could ask why we do not consider possible upside AB-CD with treating most recent low as "C" point? Well we mostly do not discuss it currently because we have bearish context - both trends are bearish and we have bearish pattern on monthly chart. Thus, we could speak on possible upside targets and positions only when our bearish context will fail. It could happen by two reasons. First - market will move above 1.59 top. In this case grabber will fail and trends will turn bullish.
Second - if we will get some bullish directional pattern here on weekly chart. But currently we have neither first nor second issues.
Finally, if market will fail to move higher - we could get big butterfly "buy" here. Most recent action could become a left wing...
That's being said our long-term context is still bearish with invalidation point @ 1.59.
Daily
On daily chart trend is bullish. On a way up market has reached MPR1 and stopped. Upside reaction probably was triggered by AB-CD target completion. Following the idea of bearish market - Cable by this action has shown sufficient retracement and should not go up further. If it still will continue move up - chances on bearish setup failure will increase. Thus action through MPR1 will be signal to us to not take shorts.
That's why here there are more just one tactics exist on short entry. Most careful will be DiNapoli Minesweeper again. It suggests that daily trend should turn bearish first and then we could take short position on minor retracement. The major advantage of this approach is - no bearish trend - no entry.
Aggressive tactic suggests using additional tools on decision making and we will talk on it below.
4-hour
This one is a major picture for short-term analysis. Aggressive tactics suggests earlier entry. Take a look at picture. Market has formed perfect upside AB=CD pattern and finished it right at MPR1. MPR1 in turn, holds upside retracement and this lets us think that this is retracement indeed but not yet a trend shift.
Following the logic of bearish market, GBP should not move higher if it is really bearish, because all necessary upside reactions have been done.
As combination of last plunge and AB-CD gives us clear "222' Sell pattern.
On Monday market will close around strong support area - MPP, WPP, K-support, thus minor upside bounce is possible. Particularly this bounce we could use for short entry with aggressive tactic. And here is how we will do this:
Hourly
On the top of 4-hour AB-CD we have Butterfly "Sell" It's ultimate 1.618 target stands around WPP. So probably market should hit it before any upside retracement will happen. Our task is to take position on some Fib resistance during this upside bounce.
Which level to use it is difficult to say right now, because we do not know how upside action will develop. If, say, we will get hourly DRPO "Buy" at WPP - then probably we should use 50% of even 5/8. May be we will get some AB-CD etc... Just watch what market will form and estimate the target. Initial stop should be placed above the top. If market is really bearish it should not continue completed AB=CD. If it will do it, then, bearish setup has flaws or even could fail totally. Later, if market will continue down further - move stop to breakeven.
As you can see this tactics has greater risk but it also gives you better entry point. So, final decision is up to you.
Conclusion:
GBP long term setup still holds bearish and recent upside action currently has no features of reversal and should be treated yet as retracement.
Truly bearish market already has done all necessary retracements and should continue move down. If GBP will not do this, we will come to conclusion that current bearish setup is not strong enough or even could fail.
You could apply different tactics for short entry as they provide different scale of risk taking, depending on your view and personality.
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.
Fundamentals
Reuters reports dollar rebounded from a three-week low on Friday, a day after the Federal Reserve kept U.S. interest rates on hold, in a late technical rally after a steep sell-off the previous session.
The Fed decision largely disappointed investors who wanted to get the process of normalizing rates going even at a gradual pace. It was largely expected though.
However, it was the Fed's dovish message, specifically the uncertain global growth outlook that could weigh on the world's largest economy, that took the market by surprise.
Market participants had anticipated two scenarios: a Fed hike with dovish undertones, or no move, but with upbeat comments about the U.S. economy.
Investors continued to sell the dollar earlier in the session before taking profits on their long positions in other currencies such as the euro and yen.
"This is nothing more than a technical correction in the dollar," said Omer Esiner, chief market analyst at Commonwealth Foreign Exchange. "The Fed's decision has introduced heightened volatility in the market."
Markets have reduced expectations for a rate increase this year, which could dim the short-term outlook for the dollar.
Rates futures placed an 11 percent chance on Friday that the Fed would raise rates in October, down from 41 percent early on Thursday, according to CME Group's FedWatch program.
A December move by the Fed had a 42 percent chance, with traders putting a 52 percent probability for a rate increase at the Fed's late-January meeting.
Some analysts expect the dollar to bounce back in the near term as soon as it becomes clear that the Fed is ready to end its zero-rate policy.
"With the Fed still projected to hike later this year, we expect the dollar to perform relative to currencies such as the euro, yen and sterling in coming months," said Allan von Mehren, chief analyst at Danske Bank in Copenhagen.
The prospect of loose monetary conditions for longer reignited investors' appetite for riskier currencies such as the Australian and New Zealand dollars, which gained.
ON FED DECISION
Stocks on major markets slipped on Friday and bond prices rose, pushing yields sharply lower, after the U.S. Federal Reserve on Thursday clung to its near-zero interest rate policy with global economic growth slowing.
Stocks and currencies in emerging markets, which are more vulnerable to higher U.S. interest rates, briefly welcomed the Fed's decision to postpone an interest rate rise, but their bounce faded with the persistent sell-off in developed markets.
Short-term lending rates, used as proxies for market expectations for the Fed's next move, shifted dramatically. December's fed funds futures contract rose to drop its rate to 21.5 basis points, implying only about a 44 percent chance of a rate increase by the end of the year.
"Investors are wrestling with how concerned they should be regarding global growth," said Jeremy Zirin, chief equity strategist at UBS Wealth Management in New York.
"The Fed has introduced a quasi-third mandate on global growth, apart from the labor market and inflation."
U.S. debt yields remained under downward pressure, with the U.S. Treasury two-year note's yield at 0.678 percent, a day after it hit a four-and-a-half-year high of 0.819 percent.
On BoE rate Hike
The Bank of England's next move may be to cut interest rates rather than raise them, because of the risk of persistent low inflation and an emerging market crisis that could hurt world growth, its chief economist Andy Haldane said on Friday.
Recent data suggested Britain's economy would slow in the second half of the year and inflation might remain too low, while emerging market troubles could drag on growth, he said.
Haldane's speech comes less than a day after the U.S. Federal Reserve held off from raising interest rates, blaming weaknesses in the global economy that concern the BoE too.
"The balance of risks to UK growth, and to UK inflation at the two-year horizon, is skewed squarely and significantly to the downside," Haldane said in a speech to businesses in Northern Ireland.
The case for raising interest rates was "some way from being made", he added.
"Were the downside risks I have discussed to materialise, there could be a need to loosen rather than tighten the monetary reins as a next step to support UK growth and return inflation to target."
Haldane flagged the possibility of cutting rates below their record-low 0.5 percent in March, but has not persuaded other policymakers.
The Bank of England undertook additional policy loosening by buying 375 billion pounds of British government bonds between 2009 and 2012 and has since reinvested the proceeds of maturing bonds.
The BoE as a whole is edging closer to an interest rate hike, but voted 8-1 this month to keep them on hold. Fears of a hard landing in China and general weakness in emerging markets have prompted investors to defer bets on the timing of a British rate hike.
Sterling inched down after the speech but bond markets were broadly unchanged.
"Everyone knows that he is probably the most dovish member of the committee, probably by some margin," Andy Chaytor, strategist at Nomura said.
GLOBAL HEADWINDS
Britain's strong domestic economy would partly offset external risks but it too was showing signs of slowing, Haldane said, citing softer employment and surveys of manufacturing and construction output.
Meanwhile, a 1 percent fall in emerging market growth could shave 0.5 percent off global and British growth over two years, with Britain's banking sector a channel for contagion.
"We may now be entering the early stages of ... the
'Emerging Market' crisis of 2015 onwards," he said. "It is simply too soon to tell how potent contagion from emerging market economies to the world economy will be."
Haldane said central banks needed to consider the risk that interest rates might remain persistently lower and they should
"think imaginatively" about possible solutions such as raising their inflation targets or making bond-buying programmes a permanent part of their policy tools.
A third "and perhaps most radical and durable option" would be to charge a negative interest rate via a state-issued digital currency, he said.
Now let's see whether recent rally was supported by real investors positions. Open interest has dropped dramatically last week. It means that investors' exposition significantly dropped on Sterling last week.
Speaking on speculative positions - longs mostly stands intact, while short were contracted for ~30K contracts. But this is not all yet. It is interesting the changes of hedgers positions as well. Thus, contraction of longs is not surprise - they usually move in the same direction as spec. shorts. It is interesting that hedgers have contracted shorts as well. Since both sides were diminished, it mostly reminds on closing some positions before Fed meeting, rather than some directional positioning. So, recent rally mostly has happened due contraction of short positions rather than opening of new longs. Although true reasons might be different - either coming Fed, or good inflation data, or may be something else...
Open Interest:
Longs:
Shorts:
Technicals
As usual, we continue to keep our long-term analysis that we’ve made in December 2013 in our Forex Military School Course, where we were learning Elliot Waves technique.
Long Term Forecast on GBP rate
Our long term analysis suggests first appearing of new high on 4th wave at ~1.76 level and then starting of last 5th wave down. First condition was accomplished and we’ve got new high, but it was a bit lower – not 1.76 but 1.72. This was and is all time support/resistance area. Now we stand in final part of our journey. According to our 2013 analysis market should reach lows at 1.35 area. Let’s see what additional information we have right now.
Trend is bearish here, but GBP is not at oversold. Couple of months ago market has reached strong support area – Yearly Pivot support 1 and 5/8 major monthly Fib level. Market gradually was struggling through YPS1 but it seems that first attempt to pass through it has failed. This was the point where we've stopped last time.
Our conclusion was - GBP will continue move down, but we didn't know from which level this should happen.
Right now it seems that downward action is re-establishing. Also we have huge AB-CD pattern that specifies target with more precision. It is not quite 1.35, actually it is 1.3088.
Second issue here is B&B "Sell" pattern that we've discussed and traded. Market has reached 50% Fib resistance within 2 closes above 3x3 DMA and turned down again. B&B here looks absolutely logical, since we expect downward continuation but not upside reversal (where DRPO will be more suitable).
Now we have another important confirmation that bears gradually take power. August month has become bearish grabber that suggests taking out of 1.45 lows. So we have pattern on monthly chart that gives us clear direction for considerable time period. September could form another one if it will close a little bit lower.
Weekly
Weekly trend has shifted bearish as well. Upside scenario has been erased on last week, since GBP has shown new low and erased "C" point of upside AB-CD pattern - totally has erased it. Thus, on upside action Cable was able to reach only minor 0.618 extension right at 50% resistance where B&B "Sell" has started.
Still, B&B is still valid, since market has not reached yet it's minimal target. It stands at 5/8 Fib support - 1.5086. Take a look that this will rather strong area and it includes YPS1 again, weekly oversold and Trend line support. This area probably will become our destination in medium-term perspective. At the same time we should not forget about grabber. 1.5086 could become a reason for pause - but it should be temporal on a way down.
Also guys, pay attention to recent rally. On daily chart it looks really impressive, but here it is not too significant. Despite this move up trend stands bearish. You could ask why we do not consider possible upside AB-CD with treating most recent low as "C" point? Well we mostly do not discuss it currently because we have bearish context - both trends are bearish and we have bearish pattern on monthly chart. Thus, we could speak on possible upside targets and positions only when our bearish context will fail. It could happen by two reasons. First - market will move above 1.59 top. In this case grabber will fail and trends will turn bullish.
Second - if we will get some bullish directional pattern here on weekly chart. But currently we have neither first nor second issues.
Finally, if market will fail to move higher - we could get big butterfly "buy" here. Most recent action could become a left wing...
That's being said our long-term context is still bearish with invalidation point @ 1.59.
Daily
On daily chart trend is bullish. On a way up market has reached MPR1 and stopped. Upside reaction probably was triggered by AB-CD target completion. Following the idea of bearish market - Cable by this action has shown sufficient retracement and should not go up further. If it still will continue move up - chances on bearish setup failure will increase. Thus action through MPR1 will be signal to us to not take shorts.
That's why here there are more just one tactics exist on short entry. Most careful will be DiNapoli Minesweeper again. It suggests that daily trend should turn bearish first and then we could take short position on minor retracement. The major advantage of this approach is - no bearish trend - no entry.
Aggressive tactic suggests using additional tools on decision making and we will talk on it below.
4-hour
This one is a major picture for short-term analysis. Aggressive tactics suggests earlier entry. Take a look at picture. Market has formed perfect upside AB=CD pattern and finished it right at MPR1. MPR1 in turn, holds upside retracement and this lets us think that this is retracement indeed but not yet a trend shift.
Following the logic of bearish market, GBP should not move higher if it is really bearish, because all necessary upside reactions have been done.
As combination of last plunge and AB-CD gives us clear "222' Sell pattern.
On Monday market will close around strong support area - MPP, WPP, K-support, thus minor upside bounce is possible. Particularly this bounce we could use for short entry with aggressive tactic. And here is how we will do this:
Hourly
On the top of 4-hour AB-CD we have Butterfly "Sell" It's ultimate 1.618 target stands around WPP. So probably market should hit it before any upside retracement will happen. Our task is to take position on some Fib resistance during this upside bounce.
Which level to use it is difficult to say right now, because we do not know how upside action will develop. If, say, we will get hourly DRPO "Buy" at WPP - then probably we should use 50% of even 5/8. May be we will get some AB-CD etc... Just watch what market will form and estimate the target. Initial stop should be placed above the top. If market is really bearish it should not continue completed AB=CD. If it will do it, then, bearish setup has flaws or even could fail totally. Later, if market will continue down further - move stop to breakeven.
As you can see this tactics has greater risk but it also gives you better entry point. So, final decision is up to you.
Conclusion:
GBP long term setup still holds bearish and recent upside action currently has no features of reversal and should be treated yet as retracement.
Truly bearish market already has done all necessary retracements and should continue move down. If GBP will not do this, we will come to conclusion that current bearish setup is not strong enough or even could fail.
You could apply different tactics for short entry as they provide different scale of risk taking, depending on your view and personality.
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.
