Forex FOREX PRO WEEKLY, April 12 - 16, 2021

Sive Morten

Special Consultant to the FPA
Messages
14,742
Fundamentals

As we've discussed in depth fundamental background within few weeks and specified major driving factors, central scenario for EUR/USD, now is the time coming when we have to monitor the components of the fundamental model to be sure that it is correct and working. Within 3-4 months we expect sharp upside dollar reversal due higher inflation pressure, changing of the Fed rhetoric and trend on stock market. NFP recent data shows that employment in general corresponds to our fundamental model. Now it is time to check inflation and stock market.

Market overview

Minutes of the Federal Reserve’s March meeting showed the central bank committed to extending monetary policy support until an economic rebound in the United States was more secure. Even as the U.S. economy gathered steam this year, Federal Reserve officials remained cautious about the continuing risks of the pandemic and committed to pouring on monetary policy support until a rebound was more secure, the minutes showed.

“The minutes again indicated that the Fed thought it would be “some time” before officials see the necessary condition of “substantial further progress” on the dual goals on employment and inflation,” Ronald Simpson, managing director, global currency analysis at Action Economics, said in a note.

The dollar has appreciated this year along with Treasury yields as investors bet the United States would recover more quickly from the COVID-19 pandemic than other developed nations aided by massive fiscal and monetary stimulus. But the dollar index’s 2.5% gain in March, the biggest monthly increase since the end of 2016, prompted some traders to book profits, analysts said. The weakness in Treasury yields after their rapid rally this year also added pressure on the dollar.

Chair Jerome Powell said policy wouldn’t shift until there was at least a months long string of such data, while board member James Bullard said the Fed should not even discuss changes until it is clear the pandemic is over.

All of this has left investors wondering if the dollar weakness, which sent the currency to a near 3-year low earlier this year, may be set to resume.



“I don’t think it is necessarily time to say the USD is in a downward trend, but rather some of the support it had been seeing has faded to a degree,” said Stuart Cole, chief macro strategist at Equiti Capital in London.

Upbeat European data on Wednesday showing euro zone business activity bounced back to growth last month, also supported the common currency against the greenback.

The dollar was headed for its worst week of the year on Friday as unexpectedly strong economic data in Europe, downbeat U.S. jobs figures and a determinedly accommodative Federal Reserve have prompted investors to unwind some bets on the greenback.

“In short, the energy has gone out of the dollar’s first-quarter rebound, just as it has gone out of the bond sell-off,” said Kit Juckes, head of FX strategy at Societe Generale.

The vaccine - developed with Oxford University and considered a frontrunner in the global inoculation race - has been plagued by safety concerns and supply problems. Australia and the Philippines limited use of the shot on Thursday, while the African Union dropped plans to buy it.

On the data front, overnight figures showed U.S. unemployment claims unexpectedly rose - a bit of a dampener after a bumper payrolls report last week. European factory gate price rises, meanwhile, accelerated on the heels of surprisingly strong business activity growth.



That further robbed the dollar of some of its recent allure, while a broadly upbeat mood in equity markets also lent some support to the risk-sensitive Australian and New Zealand currencies which headed to the top of recent ranges.

“Markets (are) re-thinking the U.S. dollar exceptionalism view,” ANZ Bank analysts said in a note on Friday. Stronger U.S. growth should benefit all global cyclical assets, including the New Zealand dollar and Asian currencies, and this appears to be the theme now at play.”

“We’re seeing a consolidation in the broad U.S. dollar today after a week of losses as inflation data from China and the U.S. sparks the U.S. treasury curve back into life,” said Simon Harvey, currency analyst at broker Monex Europe.


Data on Friday, showed U.S. producer prices increased more than expected in March, resulting in the largest annual gain in 9-1/2 years, fitting in with expectations for higher inflation as the economy reopens amid an improved public health environment and massive government funding.

Inflation is expected to heat up this year, driven by pent-up demand and as the weak readings last spring drop out of the calculation. Prices tumbled early in the pandemic amid mandatory closures of non-essential businesses across many states to slow the first wave of COVID-19 infections. Most economists and Federal Reserve officials believe higher inflation will be transitory because of labor market slack.



Earlier on Friday, data showed China’s factory gate prices beat analyst expectations and rose at their fastest annual pace since July 2018 in March, the latest sign that a recovery in the world’s second-largest economy is gathering momentum.

The dollar was also helped by data showing a second straight monthly drop in industrial production in Germany, further boosting the likelihood of Europe’s biggest economy having contracted in the first quarter.

I guess this may only be a pause with the US dollar selling likely to resume so long as the Fed’s patient rhetoric remains unchanged, especially this early in the anticipated inflation cycle,” Stephen Innes, chief global market strategist at Axi, said in a note.

Great Britain now meets inner problems in Ireland due to the reasons that we've warned two years ago when Brexit is just were discussing. There was a deadway situation when GB has to make border either in Ireland sea or to split the Ireland. They have chosen the second way and now the border splits Ireland in two parts that resurrects old problems.

The Loyalist Communities Council (LCC), which says it speaks for the Ulster Volunteer Force, Red Hand Commando and Ulster Defence Association militant groups, said it was not involved in the riots and it called for calm. However it warned in a statement that border arrangements with EU-member Ireland must be negotiated.

The loyalist paramilitaries, as they are known, laid down their weapons in the years that followed the Good Friday Agreement. But the LCC said Unionist anger had been misunderstood.

“To date there has been a spectacular collective failure to understand properly the scale and nature of Unionist and Loyalist anger,” it said.

The council cited concerns over post-Brexit trade barriers as well as policing following a decision last week not to prosecute Irish nationalist rivals Sinn Fein for an alleged breach of COVID-19 regulations at the funeral last June of a former IRA leader.

After the United Kingdom left the European Union at the start of this year, checks and tariffs were introduced on some goods moving from mainland Britain to Northern Ireland as the province now borders the bloc via EU member Ireland. But critics of the departure deal’s Northern Ireland Protocol say a border is now in effect in the Irish Sea, leaving unionists, who want to stay in the United Kingdom, feeling betrayed.

U.S. President Joe Biden asked Congress to sharply hike spending on climate change, cancer and underperforming schools, but his first budget wishlist on Friday drew howls of bipartisan concern over military spending. The $1.5 trillion budget, reflecting an 8% increase in base funding from this year, marks a sharp contrast with the goals of Biden’s predecessor, Donald Trump.

It would spread billions of dollars more across areas ranging from public transit, poor schools, toxic site clean-ups, foreign aid and background checks on gun sales, but spend nothing on border walls.

The budget “makes things fairer,” said Treasury Secretary Janet Yellen.

Yet the proposal was greeted by bipartisan scorn over its suggested funding for the Department of Defense, roughly even on an inflation-adjusted basis at $715 billion. The administration also cut an “Overseas Contingency Operations” account that even government bureaucrats said had come to serve as a slush fund for extra military spending.

Biden’s request displeased both liberals hoping to impose cuts and hawks who want military spending to increase to deal with threats from China, Russia, Iran and North Korea - a reminder of the uphill battle Biden faces in delivering the policies he promised as a candidate beyond the COVID-19 emergency.

Strong US data confirm rapid economic recovery

Countries that are relatively far advanced in their vaccine rollout plans, including Israel, the UK and the US, may give us clues about the strength of the recovery that lies ahead in other major economies. Data released last week showed that the US added close to one million jobs in March. Were that pace to be maintained, nonfarm payrolls would return to pre-pandemic levels by the end of this year. On Monday of this week, we learned that the ‘business activity’ component of the non-manufacturing ISM reached 63.7 in March, the strongest reading since the survey began in the late 1990s. And the ‘prices paid’ component pointed to a more rapid increase in prices than at any time since the Global Financial Crisis. This was no ordinary recession, and it will not be an ordinary recovery either, particularly in those economies that have put in place generous fiscal support packages. As we have been telling our clients during an ongoing series of forecast presentations, the risks around official forecasts for growth and inflation, most of which assume households unwind the savings they have built up during the pandemic smoothly over the remainder of their lifetimes, lie clearly to the upside.

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Households in the major economies have built up substantial excess savings pots during the past twelve months, supported by a variety of government programmes set up to limit the economic harm caused by the pandemic. By the end of March, these probably amounted to some 6%-8% of annual GDP in the US and the UK, and some 3%-4% of annual GDP in the euro area.

What will happen to these savings as economies reopen? In answering this question, policymakers have taken what seems to us to be an overly cautious approach. Using textbook models of consumer behaviour, the Bank of England’s Monetary Policy Committee assumes that just 5% of these excess savings pots are spent over the next three years. But as we have argued in a recent blog post, these textbook models were not designed to cope with behaviour during a pandemic. The dramatic increase in household savings through last year and into this was a rational, endogenous response to an extremely difficult set of circumstances. Rather than spend the money on things that they were allowed to enjoy, like more goods consumption, households chose to save – presumably in order to spend at least some of the money on the temporarily prohibited activities once that prohibition was lifted.

In our own central scenario (Fathom consulting), to which we attach a 50% weight, we assume that households in the major economies spend around 10% of their pandemic savings in the next two years, with most of it spent this year. In our upside risk scenario, to which we attach a 30% weight, this proportion rises to 50%. It goes without saying that had the Bank of England assumed anything other than a very gradual unwinding of these excess savings pots, their latest inflation fan chart might have looked very different, with a significant chance of inflation lying above target for most of the forecast horizon.

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COT Report

This week we do not see any big shifts in net position. Mostly week is marked by investors' run out of the EUR - open interest has dropped, but speculators were closing as longs as shorts with the same degree:

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Net position has dropped a bit, but not significant:
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Source: cftc.gov
Charting by Investing.com



Who's afraid of U.S. inflation?

U.S. consumer prices for March are due out Tuesday and markets are ready to scour the data for signs that massive stimulus spending is spurring inflation. Rising inflation expectations helped ignite a first-quarter selloff in Treasuries that pushed yields to pre-pandemic highs.

A strong reading could spark a fresh jump in yields and be bad news for stocks after the S&P climbed to fresh record highs, especially high-flying growth names.

Fed Chair Jerome Powell said a spending surge as the U.S. economy reopens along with bottlenecks in supply will likely push prices higher this year, but not result in the kind of price rises that would constitute inflation. Analysts see consumer prices rising by a median 2.4% for March year-on-year, up from 1.7% in February.

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U.S. corporates - due to kick off the reporting season with the major banks - look on track for the biggest quarterly results gain since Q3 2018, when tax cuts under then President Donald Trump drove a surge in profit growth.

Overall Q1 S&P 500 earnings are expected to have jumped 24.2% from a year earlier, according to IBES data from Refinitiv. The results follow a big rally in sectors including energy and financials - stocks most likely to benefit from the rebound.

A future risk to earnings is the threat of corporate tax rises from 21% currently, as proposed by U.S. President Joe Biden. A 28% tax rate would take 7.4% off S&P 500 companies’ earnings per share, UBS estimates.

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The euro area, still deep in lockdowns to combat COVID-19, has had a dose of good news. More than 10 million people in France have now received a first shot of a vaccine, with a government target for the number reached a week ahead of schedule.

Germany’s COVID vaccination drive too has picked up speed and Italy, which aims to vaccinate at least 80% of its population by the end of September, could soon sign a contract with Moderna for more vaccine doses.

The vaccine race is key to the reopening of economies and news on this front will remain in focus. The forward-looking PMI indicator also gives reason for hope that economies are coping better than expected with new lockdowns. Euro zone business activity bounced back to growth in March - Germany’s ZEW sentiment survey out on Tuesday, may support that picture.

So, market society and investors take a breath after first recovery rush, or reflationary sentiment. Current opinion that initial impulse is fading and dollar could return to existed downside trend for some time. Fed has warned previously that they do not see uncontrolled inflation pace and recent interest rate just stands due speculative games and investors wish to get more reward from bonds.

But this turn in public opinion makes no effect on our long-term view. We even could say that it confirms it. Current market behavior, when interest rates are growing together with stock market makes us to be sure that we're in first stage of growing economy cycle, so-called "non-inflationary" growth. When inflation stands relatively low, money are cheap and it lets companies to care the business at low cost. While global demand starts to grow. Rising interest rates makes no significant impact on cost of capital. That is what we see right now - markets are growing because of economy recovery, rising demand for goods and assets, but not because of inflation.

From technical point of view, we have long-term DXY 87.40 target that suggests last downside swing before major reversal. And recent investors' opinion that dollar rally is exhausting, recent Fed comments are bearish and it could turn down again etc., sounds good to us, as it perfectly matches to our model.

Still our central scenario suggests that near the summer situation could start to change in direction of more inflationary growth, with direct negative impact on stock market, rising of interest rates and changing of Fed rhetoric concerning its supportive policy. As the first signal we watch Fed reduction of long-term bonds buying, so called taper tantrum - the measures that has preceded previous rate upside cycle. Supposedly it should coincide with reaching of 87.40 target by Dollar Index. But it is impossible to talk on the moment precisely. Such major factors as vaccination efficiency, employment and consumption spending could move this event closer or farer in the future. Still, we hope that this happens in 2021, if not interest rate change but at least first signs of changing Fed policy.

Technicals

Monthly

With the fundamental background that we've discussed above, situation is a bit tricky, especially on long-term chart. As we've mentioned last week, technically, context remains bullish by far on monthly chart but EUR is coming too close to vital 1.16 area. April starts on positive tone, but March sell-off was strong due to obviously worse fundamental conditions in EU economy.

At the same time we have long-term target on DXY. It means that here, upside AB-CD target also should be completed somehow. Price stands very close to MACD Predictor that potentially could give upside grabber pattern, supposedly in April-May. But what we should do with H&S shape on weekly chart and 1.16 XOP target in this case?

eur_m_12_04_21.png


Weekly

It is easy to suggest that weekly H&S pattern could fail. In this case upside road is clear. But it is more difficult to combine both scenarios - could EUR complete weekly XOP and turn up later? Currently upside action on weekly chart is just a retracement as trend stands bearish and few Fib resistance levels are ahead. MACD divergence also stands intact and suggests drop below 1.16 level, at least slightly. Strong support area and major XOP target in particular should work like a magnet for EUR.

Technically current recovery looks like reaction on oversold area. At the same time, price action reminds "Morning star" pattern, suggesting more extended upside action. Trying to keep wolves full and sheep whole we could keep an eye on upside action to 1.2050 area where short-term bullish pattern might be completed, then return back to 1.16. While the last stage might be strong upside action in a row with potential DXY downside performance.

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Daily

Friday has become an inside session, making no impact on daily picture. Context here stands bullish - MACD trend is up and market is not at overbought. As we've discussed yesterday, H&S probably will be with sloped neckline due existence of strong 1950 resistance area. Once H&S shape will be completed - we have to keep an eye on 1.1850 area, right arm bottom. Because we have two scenarios here that both fit to our long-term view - upside AB-CD action to 1.21 and H&S failure with direct drop to 1.16 XOP as well.
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Intraday

On Friday we've made suggestion that it might be 3-Drive "Sell" pattern formed, as it is still some room till 1.1950 resistance area. On Friday we've got hidden bullish divergence as well. Now the crossing of drives' extensions stand relatively close, making overall shape acceptable.

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Sive Morten

Special Consultant to the FPA
Messages
14,742
Morning everybody,

Despite recent choppy action on intraday chart, EUR mostly keeps our trading plan valid. On daily chart recent action reminds pennant pattern, which is more bullish rather than bearish and keeps chances on upside action to 1950 major resistance area:
eur_d_13_04_21.png


On 4H chart we also see some signs of bullish dynamic pressure - MACD trend stands bearish while price is forming higher lows. Dynamic pressure also suggests taking of previous top:
eur_4h_13_04_21.png


Finally on 1H chart, despite choppy action, as we said above - major points of the plan still hold. Bullish MACD divergence and target around 1.1943-1.1947 are still in place. We could construct here the butterfly, if we want, but it doesn't chance the core, as anyway it has the same target.

Thus, currently we do not see any reasons to change our plan. So let's keep going with it. Besides, for us it is not as important when EUR turns down - right here or from 1.1950 area. The major thing for us is to get clear shape of daily H&S pattern, and price around 1.1830 where we intend to consider long entry.
eur_1h_13_04_21.png
 

Sive Morten

Special Consultant to the FPA
Messages
14,742
Greetings everybody,

So, EUR has completed short-term setup, jumping finally to 1950 K-resistance area. The reason as you know, CPI release that we've discussed in weekly report. Numbers were mostly in a row with expectation and this has decreased inflationary pressure, pushing dollar and interest rates down.

Now, we have two possible scenarios - straight upward breakout and forming of H&S pattern, which actually our central plan by far. In a case of direct acceleration and breakout of K-area without any respect we need to wait for re-testing of the K-area after breakout to consider long entry.

With our H&S pattern is everything clear - we're waiting for the right arm's bottom around 1835-1850
eur_d_14_04_21.png


On 4H chart bullish dynamic has worked nice as well, butterfly is completed. In fact, market climbs slightly higher than our 3-Drive Sell target:
eur_4h_14_04_21.png


On 1H chart we do not have yet something definite. Supposedly it could be H&S, but in general we will be happy with any AB-CD to 1850 area.
eur_1h_14_04_21.png
 

Sive Morten

Special Consultant to the FPA
Messages
14,742
Morning everybody,

Since we've discussed everything, concerning EUR in short-term and while EUR is coiling around the resistance area - let's take a look at GBP. Now any upward action on currencies and GBP in particular should be related not to inner factors but mostly to Dollar weakness. We have short-term bearish context on USD and Interest rates. This supports its rivals, including GBP. Thus, if in longer-term we have some doubts about bullish reversal and still hope that we will see GBP around 1.35 area, in short-term - some upside continuation is possible:
gbp_d_15_04_21.png


If you remember our previous update - we said that if GBP holds above the lows and outside of broken wedge pattern, it keeps bullish context and chances on upside action. So, this has happened. And although upside action looks choppy and not impressive (that's the reason btw, why we still keep in mind 1.35), in nearest few sessions upward action could continue. So, currently we wouldn't consider any short positions by far:
gbp_4h_15_04_21.png


On 1H chart, response on wedge line support takes the shape of reverse H&S, and OP target is completed already. At the same time, price turns to triangle consolidation but not to reversal. This is bullish sign and makes us think that GBP should try to challenge 1.38 resistance area, trying to proceed higher and hit XOP around 1.3865. It stands close to K-resistance of 1.3885.
gbp_1h_15_04_21.png


Setup fails, if price drops out of triangle and start moving closer to "C" point, somewhere to 1.3725-1.3735 area.
 

Sive Morten

Special Consultant to the FPA
Messages
14,742
Morning guys,

So, while EUR is flirting with neckline of potential H&S and GBP short-term setup has failed - it's time to take a look at AUD. The setup that we've discussed month ago is coming to culmination. Recall, that on weekly chart we have reversal week at top that, as a rule, has a continuation. This was the reason why we've decided to keep an eye on AUD and potential bearish patterns that might be formed.

Now setup is almost ready for trading. On daily chart we have clear H&S pattern:
aud_d_16_04_21.png



Still, for position taking I would consider slightly higher standing level - 5/8 and XOP agreement around 0.7835. The reason is - fast action of CD leg. OP is passed and market is above 3/8 Fib resistance. As CD leg shows acceleration and is faster than AB - this is the reasons to suggest higher action to XOP target. Besides, 0.7835 is perfectly match to H&S harmony. Once market will be there we could consider short entry. Alternatively, H&S failure is also important pattern that we could keep in mind. But anyway, XOP Agreement is good resistance, so, some minor bounce out from it should happen, if even H&S fails. This makes this trade relatively of low risk.
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