Forex FOREX PRO WEEKLY, April 11 - 15, 2022

Sive Morten

Special Consultant to the FPA

This week, investors' minds were mostly twisted around Fed minutes and different comments from Fed representatives, concerning further steps on inflation control. Still, as we've mentioned last week and actually through the whole previous month, some "not very popular" statistics, such as mortgage rates, real estate market, loans market start showing some problems. Since now we get March data, that already includes consequences of sanctions as in the US as in EU, we could say that economical situation is deteriorating fast, especially in EU. This makes us think that EU politicians pay low attention to economy situation, trying to distance from these problems, which, might lead to catastrophe. All in all, we could say that global economy will change drastically by the end of this year.

Market overview

The U.S. dollar index on Friday posted its largest weekly percentage gain in a month, supported by the prospect of a more aggressive pace of Federal Reserve tightening to curb soaring inflation. The greenback gained ground against a basket of six currencies over the past month, particularly versus the euro, which has been pressured by investor concerns about the economic costs of war in Ukraine and a potentially nail-biting presidential election in France.

A tightening election race in France between President Emmanuel Macron and far-right candidate Le Pen has added pressure on the euro, raising investor concerns about the future direction of the euro zone's second-biggest economy. Macron is still ahead in polls. French presidential election risk was also evident in bond markets as French borrowing costs rose while yields of other core European government bonds fell.

Jonas Goltermann, senior markets economist at Capital Economics, said that "the Fed's hawkish message on quantitative tightening, renewed sanction risks in Europe and the polling shift in favor of far-right candidate Marine Le Pen ahead of France's presidential election has put pressure on risk sentiment, especially in Europe."

This week's release of the minutes of the Fed's March meeting showed "many" participants were prepared to raise rates in 50-basis-point increments in coming months. On the other side of the dollar's rally, the euro dropped to a one-month low of $1.0837. The euro has fallen in seven straight sessions. Meeting minutes from the European Central Bank published on Thursday suggested its policymakers are keen to act to combat inflation, but the euro zone has so far taken a more cautious tack than other central banks, weakening the euro.

"ECB minutes presented little in contrast to recent comments by policymakers, though the sense is that the bank is merely awaiting data over the coming months showing the impact of higher energy prices and the war in Ukraine to decide when to hike first - whether it's in Q3 or Q4," wrote Shaun Osborne, chief FX strategist, at Scotiabank in Toronto, in a research note. "In either scenario, we don't anticipate more than 50 basis points in tightening from the ECB this year, which is only as much as the Fed is set to roll out in one meeting, next month."

In Treasuries, the 10-year yield hit 2.73%, its highest since March 2019, and the yield on 10-year inflation-protected securities went within 15 basis points of turning positive for the first time in over two years. With a half-point interest rate rise mostly baked in for May, the debate has moved on to whether the Fed could kick off balance sheet reduction next month as well.

On Tuesday two normally dovish Fed officials, governor Lael Brainard and San Francisco Fed chief Mary Daly, precipitated a fresh Treasury selloff with suggestions the run-off might commence next month -- alongside a rate hike. Ten-year Treasury yields have jumped to the highest in three years, up some 20 basis points since Friday. And with the Fed apparently poised to become even more aggressive on inflation, the 2-year/10-year Treasury curve has normalised, having been inverted for around a week.

Federal Reserve officials in March "generally agreed" to cut up to $95 billion a month from the central bank's asset holdings as another tool in the fight against surging inflation, even as the war in Ukraine tempered the first U.S. interest rate increase.

Minutes of the Fed's March 15-16 meeting showed deepening concern among policymakers that inflation had broadened through the economy, which convinced them to not only raise the target policy rate by a quarter of a percentage point from its near-zero level but also to "expeditiously" push it to a "neutral posture," estimated to be around 2.4%.

But they also moved forward with plans to pull out of key financial markets that have been benefiting from massive Fed support since March of 2020, when the coronavirus pandemic prompted the central bank to buy trillions of dollars in Treasury bonds and mortgage-backed securities (MBS). After months of debate, policymakers rallied around a plan to as soon as next month reduce the Fed's holdings of Treasury bonds by up to $60 billion per month and its MBS holdings by up to $35 billion per month, with the amounts phased in over three months or slightly longer, the minutes said.

The pace of the planned balance-sheet rundown, which should have the effect of increasing long-term interest rates, is nearly double that of the Fed's "quantitative tightening" from 2017 to 2019, and could also include outright sales of MBS down the road, said the minutes.

By Bloomberg calculation and MXFond report, rising of the Fed rate could cost $5200 per year to every household in the US. As its amount stands around 110 mln, the total expenses could rise for $57.2 Bln, that never intends to compensate with closing CV19 supportive programs. Whether Fed intends to cut households' consumption power and their wealth in electing year we should treat as rhetoric question.

Last week we already mentioned that with recent mortgage rate jump, the debt service burden reaches as much as 20% of households' expenses, on average. As a result, you could see clear downside trend in mortgage applications for the few months in a row:


With the strong increasing of mortgage rate:


As a result, more and more households starts feeling lack of short-term liquidity and turning to consumer loans, which shows big growth in recent month:

Consumer credit m/m change

By our view, Fed were waiting for too long with starting tightening policy. Now, we the piking inflation, with rate increase they contract ability of households to refinance existed loans, make them expensive and hurt consumption power of population. As a result, last week we've mentioned student loans, that could start meeting problems with payouts.
The Biden administration is expected to announce on Wednesday an extension of the student loan repayment pause through Aug. 31, an administration official familiar with White House's decision making said on Tuesday. The repayment moratorium has been extended multiple times since it was first put in place in March 2020 due to the COVID-19 pandemic. The current pause was set to expire on May 1. Nearly 41 million borrowers have benefited from a freeze on interest accruals and about 27 million borrowers have not had to pay their monthly bills since the forbearance began.

Rising interest rates on home mortgages, bonds and other longer-term debt are already accounting for the Fed getting rid of perhaps $80 billion to $100 billion of assets per month, economists say, so the immediate market response may be muted. But the plan will send a powerful signal of officials' intent to make credit steadily more expensive and, by doing so, help lower inflation currently running at more than triple the Fed's 2% target.

The Fed "will continue tightening monetary policy methodically through a series of interest rate increases and by starting to reduce the balance sheet at a rapid pace as soon as our May meeting," Fed Governor and Vice-Chair nominee Lael Brainard said on Tuesday. Referring to the 2017-2019 period when the Fed took a year to reach a pace of $50 billion in monthly reductions of its holdings, Brainard said "I expect the balance sheet to shrink considerably more rapidly" this time

As the Fed begins its withdrawal, economists expect it may end up targeting a balance sheet level equivalent to perhaps 20% of GDP, or around $6 trillion depending on how fast the economy grows and, perhaps more importantly, what level of reserves commercial banks require.

"They want this to operate in the background so they will be very careful about the language they use," said Andrew Patterson, senior international economist for Vanguard. Patterson said he thought the Fed would aim to reduce the balance sheet to around "20ish" percent of GDP, but may take four or five years to get there, a slightly slower pace than Powell flagged to Congress.

Not only FPA sees structural problems in economy of the US and EU. The Bank of America tells that the macro-economic picture is deteriorating fast and could push the U.S. economy into recession as the Federal Reserve tightens its monetary policy to tame surging inflation, BofA strategists warned in a weekly research note. "'Inflation shock' worsening, 'rates shock' just beginning, 'recession shock' coming", BofA chief investment strategist Michael Hartnett wrote in a note to clients, adding that in this context, cash, volatility, commodities and crypto currencies could outperform bonds and stocks.

Thus, Fathom consulting tells:
The decline in the G7 economies’ share of world GDP and trade is unlikely to reverse anytime soon. The group faces structural headwinds that are likely to keep growth rates lower than the global average. All have high levels of debt, which Fathom Consulting has previously found works to reduce structural growth rates. An injection of credit can be used to buy additional growth in the short term, but it is not sustainable; and the more an economy relies on credit, the smaller the bang it gets for its buck. High debt levels are made worse by deteriorating demographics, which reduce structural growth rates due to the lower availability of labour.

Price pressures are greatest in the US but are higher across the board, as economies adjust to very strong demand against a backdrop of pandemic-related distortions in supply and high commodities prices. There remains a large degree of uncertainty about how long this cyclical bout of inflation will last — this will depend to a large degree on how well central banks are able to maintain well-anchored inflation expectations. Nonetheless, there remains a risk that central banks —and in particular, the Federal Reserve — will increase their policy rates to levels over and above what is currently priced in by financial markets.


While the outlook for short-term interest rates remains highly uncertain, there is more reason to believe that long-term interest rates will remain historically low. These tend to reflect slower-moving factors such as potential growth rates and levels of debt within an economy. Since these only adjust gradually over time, it is likely that the low level of long-term interest rates that prevailed pre-pandemic has not been significantly shifted by what has been an unusual economic cycle. Investors are pricing such an outcome, with G7 yield curves pointing to long-term interest rates in the range 0.5% to 2.5%

Although this is Fathom opinion, we are not sure with this outcome as current situation is absolutely unique and the way how it will develop could be out of historical patterns. Not all big market participants see recession signs. For example, a U.S. recession is not imminent despite the inversion of a part of the U.S. Treasury yield curve which has been "artificially pressured" by some investors, BlackRock Inc, the world's largest asset manager, said in a note on Friday.

We do not see a recession occurring in the near-term,” said Gargi Chaudhuri, head of iShares Investment Strategy, Americas, at BlackRock. “While we are hesitant to say that this time is different, we note that many factors now differ from previous yield curve inversions,” she wrote. Longer-dated yields had been pushed artificially low by investors such as pension funds with improved funding status, contributing to the curve inversion, she said.

BlackRock's Chaudhuri said more hawkish signals by the central bank - increasingly determined to tighten financial conditions through rate hikes and balance-sheet reduction to fight inflation - have contributed to the curve steepening.

"We still see room for longer end interest rates to move modestly higher from here", she said.

In the Europe, that carry the whole burden of sanctions, economy is preparing to nosedive.

The same story about the food pricing:

The U.S. dollar will remain dominant for now so long as the Federal Reserve stays a hawkish course on interest rate hikes and its intentions to unload some of its pandemic-related bond purchases, according to a Reuters poll of forex strategists. More than two-thirds of analysts who answered a separate question, 37 of 53, said the strong dollar trade would last for at least another three months, including 17 who said more than six months.

Thirteen respondents said under three months and the remaining three said the trade is already over.

"We've got some aggressive tightening coming up this year from the Fed. We think the fed funds rate will probably hit 3% in the first quarter of next year, but (they could) even be cutting rates by the final quarter of 2023," said Chris Turner, global head of markets research at ING. "I think the dollar could hold onto its gains for a lot of 2022...(and) we shouldn't be starting to look for weakening in the dollar until perhaps, next spring-summer 2023."



Speculators' net long positioning on the U.S. dollar fell in the latest week, according to calculations by Reuters and U.S. Commodity Futures Trading Commission data released on Friday. The value of the net long dollar position slid to $14.13 billion for the week ended April 5, from $16.11 billion the previous week. U.S. dollar net long positioning declined for the first time in five weeks.
So far this year, the dollar index, a measure of the greenback's value against six major currencies, has gained 4.4%, after a 6.3% gain in 2021. The greenback has benefited all year from safe-haven flows during the war in Ukraine, as well as expectations of aggressive Federal Reserve tightening to control the surge in inflation.
U.S. rate futures have priced in an 85% chance of a 50 basis point hike at the May meeting, with roughly 220 basis points of cumulative hikes for 2022.

It was also an eight week of outflows for European equities at $1.6 billion while U.S. stocks enjoyed their second week of inflows, adding $1.5 billion in the week to Wednesday.There is no big shift in net position on EUR this week, as both bulls and bears were opening new positions, that just led to increasing of open interest for 14K contracts.

Sive Morten

Special Consultant to the FPA
Next Week to Watch

#1 French elections (1 tour)

Far-right French politician Marine Le Pen, who sowed panic in the run up to 2017 presidential elections, is enjoying a resurgence in the opinion polls and markets are running scared. With the first round of voting in presidential elections scheduled for Sunday, Le Pen is closing the gap on incumbent Emmanuel Macron.

Macron is still expected to win the presidency, but the possibility of an upset has sunk in. A Le Pen win would hamper European cohesion, while her big-spending, tax-cutting agenda would blow out France's spending bill.

Unlike in 2017, Le Pen does not advocate ditching the euro. But a strong showing on Sunday will herald market turbulence before the April 24 decider -- and possibly after.

#2 ECB meeting
With euro area inflation running at 7.5%, the European Central Bank's meeting on Thursday will see the hawks out in force.

They have become increasingly vocal, while markets are now gunning for a July rate rise, having ramped up their bets since the March meeting.

ECB chief economist Philip Lane warns against reacting to short-term, energy-driven price surges. And the Ukraine war is taking a toll on the economy and consumer confidence.

The ECB knows well the price of making a policy mistake. It has raised rates in the past, only to make a speedy U-turn. Yet inflation shows no signs of peaking, let alone returning to the 2% target. The hawks' clamour may get louder.


#3 Bank of Canada and NZ meetings

Both banks meet on Wednesday. Swaps price a 90%-plus chance of a 50 basis-point hike from the Reserve Bank of New Zealand and a better-than-80% likelihood of the Bank of Canada does the same .

With Canadian inflation seen above target until 2024, another 50 bps move may come in June. New Zealand delivered a 25 bps hike in February -- its third -- and flagged the possibility of bigger rises ahead.


#4 US March CPI data

February's 7.9% print was the largest annual increase in 40 years. In March, consumer prices grew 8.3% year-on-year, economists polled by Reuters predict.

And as Americans dig deeper for rent, gasoline and food, wage gains are eroding -- inflation adjusted average hourly earnings fell 2.6% year-on-year in February. A chunky inflation print will bolster the case for more dramatic policy tightening.



We think that the major mistake of modern economists who try to push current situation into well-known historical cliche and situations. This is because of the logic that ECB should start rising rates and long-term inflation expectations as well as long-term interest rates are mostly stable.

We suggest that in current situation, ECB can't rise rates as it makes money more expensive, hurting the households' wealth that is already decreasing. And with the steep dive of EU economy it will be the suicide. Now it seems that political fog blur the economic vision and politicians either not control or intentionally ignore huge problems in the economy. The problem is also stands relatively to other countries. Thus, EU cares strong burden, US hurts less, but there are a lot of countries that not invovled in sanctions war and care no problems at all, such as India, China and many others. Now they are getting economical advantage.

That's being said, we mostly agree with investors' anticipation that the US dollar should dominate in nearest 3-6 months, but not because of US economy performance, but become of cross-border capital flows, that lets Fed to follow hawkish policy. Once this external support dries, the US economical problems should become more evident.

Speaking about EU, if it would be possible to cancel/ease sanctions immediately, EU probably would be able to stay on -0.7-0.8% GDP performance. But as it seems hopeless in near term, it seems that EU economy keeps ruined.


Here we see the process that is expected. Reaction on YPS1 and trend line support is over and price is returning back. Technically, the attempt of downside breakout should to follow. Market is not at oversold, and the breakout of YPS1 area might have solid sentiment effect, as it is supposed that breakout of YPS1 is an indicator of starting long-term trend.

Our major extension here and the shape of AB-CD pattern shows CD leg acceleration and trend remains bearish. With the fundamental background that we've discussed above - we keep valid the major target here around 1.04-1.0450 area.



Trend here stands bearish, the major pattern that we've discussed last week is still valid and is not reached yet the minimal target - previous lows. As price is not at oversold, we follow with this scenario. Still, our suggestion that EUR has low chances to stop around the lows, but more probably should proceed lower. As last week, here again we put CME Futures chart, instead of spot market:



On daily chart we do not have any big changes. Market is not on oversold, so EUR could keep going lower. We see some slowdown of action and that is the reason why we also watch for intraday pullback as it could give us setup for short-entry:



So, on 4H chart we see bullish divergence, multiple bullish grabbers on the bottom, that provides at least light hope that maybe EUR shows some bounce. This is the reason why on 1H chart we keep watching for possible H&S. Last swing down equals 1.618 extension which is typical H&S ratio. Existence of divergence here supports idea of H&S as well.
Still, as we have major bearish context we do not intend to take long position but to use potential pattern for short entry, which potentially could appear around 1.0970 K-area and Agreement. At the same time, it is not forbidden to go long with this pattern, just control the risk.

Sive Morten

Special Consultant to the FPA
Morning everybody,

It seems that daily chart we do not need today, as nothing has changed there yet. It would be better, if I show you monthly chart of 10 year yields. Take a look - market shows strong performance in April with 2.86% yield has been hit already. All questions concerning yield curve inversion are gradually eliminating.
But, this yields performance forms strong headwind for the EUR, supporting US Dollar performance. This makes us think that our 1H H&S pattern could meet failure problems.

Currently, actually nothing wrong has happened by far - price at 5/8 support, vital H&S area, but positive scenario is still possible. At the same time, as overall environment is tricky, if you decide to buy EUR - try to minimize the risk. Now we see two ways how it could be done. First is - wait when upward action from support area starts, and 1H trend turns bullish, then try to enter on minor retracement. In this case it is possible to place stop right under the lows of the shoulder:

Second way - keep an eye on 4H chart for possible bullish grabber around support area. Once it will be formed, it also could be used for stop placing, that should safe a lot of money. Because now stop has to be placed below the head, which seems a bit too far...

Sive Morten

Special Consultant to the FPA
Morning folks,

So, it seems that our concern about H&S pattern was not in vain as EUR has failed to form it. Even core CPI number couldn't provide sufficient assistance. Since it is just two session until Good Friday & Easter holidays, we just focus on nearest target of weekly grabber - taking out of the lows:

On 1H chart the butterfly pattern that appears instead of H&S is quite welcome, as its 1.618 extension stands around 1.0775, which is enough to wash out the daily lows. Be prepared for a bit deeper fast spike as EUR probably triggers selling stops, which should push price lower

Sive Morten

Special Consultant to the FPA
Morning everybody,

So, it seems that EUR tries to play another "bullish" game. Yesterday, it has ignored the lows and now is trying to show the bounce. There are few reasons. First is relatively the same inflation in the US and the pullback of US interest rates and Dollar Index. Second is - coming ECB meeting and high expectations of hawkish position right now.

Among the technical signs we have divergence and nice bullish engulfing pattern on the bottom. But, let's not forget about weekly grabber and price flirting with the MACD here as well. Bearish grabber could appear here as well:

As EUR has failed previous H&S pattern, here it starts forming another one. It means that bulls could stay focus on the pullback from the neckline and the bottom of the right arm for potential entry. Just be sure that no bearish patterns appear on the daily chart.
For the bears - nothing to do today, because we need to wait either upside AB-CD completion or H&S failure, but hardly it happens today. Most probable on next week.

Sive Morten

Special Consultant to the FPA
Good morning,

So, as we've decided yesterday - let's keep EUR for weekend and take a look at something else. For instance, JPY, as many of you ask me about.

On monthly chart we have huge reverse H&S pattern, with potential OP target at 150. But this is the long way to go. As right arm takes the shape of butterfly, the nearest target to watch is 133:

Here, I do not have enough history, but on longer-term chart of other provider (SAXO), we see that 127 is important monthly resistance. Since market is overbought - the chance for pullback from there is not bad. This is answer to those who're interested with position taking and when it might be possible.

On weekly chart JPY is also overbought and here we have inner butterfly AB-CD target, which actually agrees with the same 133 area:

Currently it is difficult to say whether yen reacts separately on 127 and on 133, or it hits 133 and then starts reaction. Overall action looks outstanding, but the fact that market is overbought - provides chances on pullback from 127 area as well.

If we still get it, then, it seems that suitable area for entry is around 124-125 - daily Fib support, that is accompanied with Oversold. As market is still under way to major targets, the pullback should not turn to reversal, and yen should stay above supposed 124 area. If it becomes, say, B&B "Buy" - all the better.