Forex FOREX PRO WEEKLY, April 18 - 22, 2022

Sive Morten

Special Consultant to the FPA
Messages
16,474
Fundamentals

Well, this wee was relatively quiet as we've got no big shifts on political arena, France elections are not over yet and markets mostly were watching for CPI release and ECB meeting. But neither former nor latter have brought big surprises.

Market overview

The U.S. consumer price index rose 1.2% last month, the biggest increase in 16-1/2 years and cementing the case for a 50 basis points interest rate hike from the Federal Reserve next month. The acceleration in prices reported by the Labor Department on Tuesday culminated in annual inflation rising at its fastest pace since the end of 1981. But there is cautious hope that the worst of the post-pandemic inflation surge is behind. Monthly underlying inflation pressures moderated as goods prices, excluding food and energy, dropped by the most in two years. Further declines in the so-called core goods prices are likely as demand shifts back to services amid the rolling back of COVID-19 restrictions on businesses.

"The Fed will take a tiny bit of comfort from today's report, but it still has much work to do to restore price stability," said Sal Guatieri, a senior economist at BMO Capital Markets in Toronto.

In the 12 months through March, the CPI accelerated 8.5%, the largest year-on-year gain since December 1981, after a 7.9% jump in February. It was the sixth straight month of annual CPI readings north of 6%. Last month's increase in inflation was in line with economists' expectations. The core CPI rose 6.5% in the 12 months through March, the largest gain since August 1982, after advancing 6.4% in February.

There is also a sense that consumers, confronted with declining purchasing power, are becoming more price conscious, which could make it harder for businesses to pass on higher price. Inflation-adjusted weekly earnings fell 1.1% in March.

1650094354737.png


"We expect demand for goods to waver as spending pivots back toward services, and this transition should temper goods inflation," said Michael Pugliese, an economist at Wells Fargo in New York. "Pent-up demand for travel should lead to a few more months of solid gains for airfare and lodging prices, but there will likely be less scope for catch-up come autumn."

While U.S. 10-year Treasury yields pulled back from their highs, they are up almost 45 basis points so far this month. More disconcerting for equities is the move in real or inflation-adjusted yields, with the yield on the 10-year U.S. Treasury Inflation-Protected Securities (TIPS) approaching 0% . In Europe, German Bund yields climbed to almost 0.88%, their highest level since 2015 , British gilt yields rose to fresh multi-year highs .

Germany's ZEW economic research institute said its economic sentiment index fell to -41.0 points from -39.3 in March, declining less than expected. An index for current conditions fell to -30.8 from -21.4. The consensus forecast was for a reading of -35.0.

"The ZEW Indicator of Economic Sentiment remains at a low level. The experts are pessimistic about the current economic situation and assume that it will continue to deteriorate," ZEW President Achim Wambach said in a statement. The decline in inflation expectations, which cuts the previous month's considerable increase by about half, gives some cause for hope. However, the prospect of stagflation over the next six months remains," he added.

German business morale also plummeted in March as companies worried about rising energy prices, driver shortages and the stability of supply chains in the wake of the war in Ukraine. Separate data on Tuesday showed Germany's annual harmonised consumer price inflation (HICP) rate ran at 7.6% in March. Wholesale prices rose by 22.6% on the year, the highest annual rate since the calculation of the data began in 1962.

"Germany is threatened with recession," said Thomas Gitzel, chief economist at VP Bank. "Germany, with its export-heavy industry and dependence on intermediate goods from Asia, is without weather protection in a raging logistics hurricane."

The latest warnings from Japanese policymakers, with Prime Minister Fumio Kishida saying on Tuesday that rapid currency moves are undesirable, failed to shore up the yen, which has shed over 3% this month. Japanese Finance Minister Shunichi Suzuki warned on Tuesday that the government is watching yen moves and their impact on the economy "with a sense of urgency".

"Despite repeated verbal intervention over the past few weeks from Japanese policymakers, USD/JPY has continued to rise alongside higher U.S. yields," Goldman Sachs analysts wrote in a note. "The odds of direct FX intervention are rising, in our view," and "should increase significantly once USD/JPY enters the 127-130 range," they said.

An admission from a central banker that rapid policy tightening may cause a hard landing for economic growth -- Federal Reserve Governor Chris Waller described rate hikes as a "blunt force" tool that may act like a "hammer", causing collateral damage to the economy. The hope now is that the threat of rate hikes and tighter financial conditions will start to put a lid on inflation. Inflation pressures are everywhere, in fact, even in Japan which earlier in the day reported record wholesale price growth, while Britain's three-month jobless rate fell to 3.8% -- it last fell below that level in 1974.

The US labour market remains extraordinarily strong. That, together with inflation around a forty-year high, is putting significant pressure on the Fed to reduce the level of monetary accommodation quickly. Initial jobless claims in the latest week were just 166K – the joint lowest (with the week ending March 19) since November 1968. This statistic is all the more striking given that the US labour force is around twice as large as it was in 1968. There is a growing likelihood that the Fed may tighten rates by 50bps at its meeting on 4 May, and it is likely to begin the process of winding down its balance sheet. This process, often referred to as quantitative tightening, looks set to occur at a faster pace than previously thought. Against the backdrop of Fed policy tightening and Ukraine, Fathom is currently cautious on risky assets.

1650095172306.png


"The United States economy seems to be isolated enough and showing enough signs of inflation that the Fed is going to continue maintaining a very, very hawkish line and acting on it, and by doing so, of course, improving the dollar value," said Juan Perez, director of trading, at Monex USA in Washington.

The European Central Bank stuck to plans on Thursday to finally end its stimulus programme in the third quarter but gave no further clues on its schedule, stressing uncertainties linked to the war in Ukraine as well as the path of inflation. Euro zone bond yields fell after the policy statement, with German two-year bond yields falling more than 10 bps on the day. The reduction of rate hike bets also hurt the euro, which tumbled to a two-year low at $1.07580 and hit its lowest level versus sterling since March 7, at 82.75 pence. Money markets also trimmed expectations of rate hikes by the end of the year.

Futures dated to the ECB's July meeting price in around 15 bps worth of hikes, down from 20 bps earlier on Thursday.

"Today's statement makes more than two hikes in 2022 almost impossible, whereas part of the market expected something like end of the (asset purchase programme) in June announced today and consequently possibly three hikes," said Louis Harreau, ECB watcher at Credit Agricole. So the communique kind of removes this extreme pricing."

The European Central Bank confirmed plans on Thursday to end its hallmark stimulus scheme in the third quarter, worried that high inflation could become entrenched, even as the war in Ukraine left the outlook exceptionally uncertain. The ECB has been unwinding support at a glacial pace, far slower than its peers, worried that growth could quickly crumble as the war, sky-high energy prices and the risk of losing access to Russian gas batter an already fragile economy.

Even on Thursday it maintained a non-committal tone, avoiding any firm pledge beyond the end of bond buys, stressing that policy is flexible and can quickly change.

"The downside risks to the growth outlook have increased substantially as a result of the war in Ukraine," ECB President Christine Lagarde said. "We will maintain optionality, gradualism and flexibility in the conduct of our monetary policy," she said, speaking from home where she is recovering from the coronavirus.

But Lagarde also delivered a stark warning on inflation, noting that longer-term inflation expectations were showing early signs of moving above the ECB's 2% target.
Such a shift, called de-anchoring in central bank-speak, is a worrisome sign, suggesting markets' loss of confidence in the bank's ability to maintain price stability.

"The last thing that we want is to see inflation expectations at the risk of de-anchoring," Lagarde said, adding that "close monitoring" would be required.

While Lagarde largely avoided discussion of any rate hike, her comments that it could come "a week" or months after the end of bond buys suggest that policymakers could discuss the issue at their late July meeting. Sources close to the discussion agreed, noting that a July rate move is still on the table but there were divisions in the Governing Council about risks, including on longer-term inflation prospects.

Economists meanwhile zeroed in on a later move but took note that Lagarde did not rule out a change in the minus 0.5% deposit rate during the summer, just before policymakers leave for their holidays.

"We still believe the ECB is unlikely to hike in July, but Lagarde wanted to make clear that the option was available," Pictet strategist Frederik Ducrozet said.

Markets now price in 63 basis points of rate hikes before the end of the year, a modest retreat compared with 70 basis points priced in prior to the meeting. The euro meanwhile fell sharply as some expected Lagarde to unveil a more decisive schedule to tighten policy.

Carsten Brzeski, an economist at ING, also saw September as the more likely lift-off date. "We expect the ECB to stop net asset purchases in July and start hiking interest rates in September," he said. The ECB will definitely not get ahead of the central banks’ pack any time soon in terms of policy normalisation. It will be normalisation at a snail’s pace."

Among the world's most cautious central banks, the ECB is already lagging far behind nearly all its major peers, many of which started raising rates last year. In the past two days alone, the central banks of Canada, South Korea and New Zealand have all increased the cost of borrowing. The U.S Federal Reserve is meanwhile expected to raise rates eight times or more over the next two years, leading the world in policy tightening.

Part of the ECB's caution is that the drivers of high inflation now are likely to weigh on price growth further out. Energy prices driven higher by the Ukraine war are draining household savings and uncertainty caused by the conflict is halting corporate investment. Banks are also tightening access to credit as they naturally do during wars, potentially exacerbating the downturn.

"Recession in Europe is already our base case, but its magnitude and duration crucially depend on the nature of further sanctions on Russia. As a full energy embargo is becoming more likely, so is the worst-case recession scenario. We believe as the growth shock becomes more evident in the data over the next few weeks, the ECB's focus will likely shift away from high inflation towards trying to limit economic and market distress as the war and its consequences continues to ripple through the system. Contrary to market pricing, we do not expect the ECB to hike rates until Q4 this year or early 2023, said Fidelity International.

"Europe is different and the ECB is different. Instead of any panic reaction, the ECB continues with its very gradual normalisation, which in our view is bringing an end to net asset purchases over the summer and an end to the era of negative interest rates before the end of the year, ING said

Analysts at Goldman Sachs put the cumulative net outflow from euro zone fixed income markets since 2014 at almost 3 trillion euros. The reversal appears to be underway.

"A reversal of these persistent outflows could have important implications for the euro," wrote Goldman strategist Zach Pandl last month when he and his team raised their euro forecast to a bullish and out-of-consensus $1.20 over 12 months and $1.30 by the end of 2024. The euro was at $1.09 on Wednesday.

1650099054994.png


Net foreign inflows into Treasuries rose for a fourth straight month in February in the amount of $75.3 billion, data from the U.S. Treasury department showed on Friday. Of that, private overseas investors bought $91.9 billion in Treasuries and foreign official institutions sold $16.2 billion. Foreigners have bought Treasuries in 10 of the last 12 months, including a record net monthly purchase of $118 billion in March 2021.

The overall foreign buying came as U.S. yields rose. U.S. benchmark 10-year Treasury yields peaked at 2.0650% in February, reaching the highest level since July 2019, and ended the month at 1.8216%, up about 4 basis points from the end of January.

Optimism among fund managers over global economic growth has hit an all-time low while concerns of possible stagflation have risen to the highest since August 2008, a monthly survey by investment bank BoFA Securities showed on Tuesday. The survey, which took the views of firms managing a total of more than $833 billion, is one of the biggest regular tests of fund manager views and comes as inflationary pressures rise even as the risk of recession increases in major economies.

Asked about their expectations for global growth in the coming months, a net 71% of survey respondents were pessimistic about prospects, the most since the survey records began in the early 1990s. The European edition of the survey found investors continuing to cut their European growth projections, with a net 81% of survey respondents expecting the region's economy to weaken over the coming year compared with 69% in the March edition.

Participants in the survey expect the U.S. Federal Reserve to raise interest rates by as many as seven times in the current cycle, compared with four times in the previous edition, with a majority of investors expecting inflation to soften over the next 12 months. Global profit expectations deteriorated to their weakest levels since March 2020, BoFA said.

In terms of regional stock market allocations, investors were most bullish on U.S. equities, while European and UK equities were the top bearish bets. Despite the growing recession concerns, a majority of survey respondents expect European equities to mark new highs in the currency economic cycle, with less than 30% of survey respondents expecting market weakness. The UK remains the favourite equity market in Europe, while Germany and Italy are the least preferred, the European edition of the survey said.

British house prices in February were 10.9% higher than a year earlier, up from a 10.2% increase in January and one of the biggest annual increases in more than 15 years, official figures showed on Wednesday. Annual house price inflation in Britain hit a record 13.5% in June 2021 and 11.5% in September, due to expiring deadlines for a temporary reduction in purchase taxes.
British lenders expect loan defaults to rise over the coming months and also plan to rein in mortgage lending by the greatest amount since the early days of the COVID-19 pandemic, a Bank of England survey showed on Thursday. The BoE's quarterly credit conditions survey showed lenders expect more defaults on mortgages, unsecured consumer lending and business loans in the three months to the end of May, although outright losses on mortgage lending were expected to remain stable.

The dollar rose to a two-decade peak against the yen and kept close to a two-year high to the euro on Friday, as more hawkish comments from Federal Reserve officials reinforced expectations for faster U.S. policy tightening. New York Fed President John Williams said on Thursday that the U.S. Federal Reserve should reasonably consider raising interest rates by a half percentage point at its next meeting in May, which was seen as a further sign that even more cautious policymakers are on board with bigger rate hikes.

"Williams spoke openly of the need to move rates more swiftly and above neutral," further buoying the dollar, Tim Riddell, a macro strategist at Westpac wrote in a client note. By contrast, the ECB "revealed a more dovish reaction function to the inflation news than the market had discounted," he said.

To be continued...
 

Sive Morten

Special Consultant to the FPA
Messages
16,474
Next week to watch

Two central banks in countries at opposite ends of the Pacific Ocean meet on Wednesday and could deliver the first half-point interest rate rises in any developed nation of this cycle. Also on Wednesday the U.S. Fed, expected to follow Canada and New Zealand's lead in May, gets March inflation data. The following day the ECB will face pressure from its hawkish factions to start tightening policy.

And while a French election upset did not happen during Sunday's voting round, it could yet materialise in the runoff later this month.

#1 French elections results

A late opinion poll resurgence for far-right French politician Marine Le Pen ahead of Sunday's presidential election voting round had markets running scared. She ended up trailing incumbent Emmanuel Macron -- as expected -- but the April 24 run-off between the two promises to be a cliffhanger. Macron is still expected to win the presidency. But some pollsters predict the vote split at 51%/49%, meaning victory either way is within the margin of error

#2 EU statistics

Next week we get Germany PPI data, indicating inflation in production. Later, on the week we get EU CPI on Thu, and Germany/EU PMI on Friday. Also PMI data will be released for the US.

#3 Real estate US data
Usually this data doesn't stand among most important, but in current circumstances, we suggest that particularly real estate area might be great indicator of real situation in the US economy. There are few numbers that we intend to keep an eye on - Mortgage 30 year rate, Building permits/Housing starts and Home Sales.

Conclusion

Recent events have brought nothing new to our long term vision. As we've said last week - we do not expect hawkish rhetoric from ECB, just because they can't rise rates in the situation that EU economy stand. Making money more expensive as for producers as for households, when your economy stands one step in recession already is bad idea. It just leads to another spiral of inflation. To resolve current problem you have to balance real economy earnings (GDP) with consumption that now stands too high, compares to what EU economy produces.
Goldman Sachs provides revolutionary view of EUR rally to 1.20 area within a year, and 1.30 later one but for me this performance looks hardly possible if it based purely on EU economy achievements and performance in nearest 2 years. The only way how it could happen - if US economy turns to steep nosedive, pushing dollar to miserable plunge. Thus, I could accept relative EUR appreciation to the Dollar at some known circumstances, but I do not believe in absolute EUR positive performance.
Geopolitically, the first results of 50-days military campaign, it becomes evident that Russia started it too gently, suggesting that with the first signs of global crisis knocking, common sense should prevail, keeping door open for compromise. It was gentle on the battlefield as well, but both things should change, as no expectations have realized. This gentle approach borns the illusion that war is not as scaring as it was seemed, Russia is not as powerful and awful, and you even could use it for PR, taking political points on domestic arena as many EU politicians trying to do right now. Now we do not see any space for reasonable compromise in any sphere, and expect escalation as military operation as mutual relations with EU. This should deepen crisis effect in economy and next "bad wave" covers EU in the late summer-autumn on a background of coming winter and problems with food supply. With this situation ECB could be forced to change rate by strong public opinion, but we think that rate could be changed only nominally to satisfy the croud, but still to keep it relatively low making no additional barriers to economy. In two words speaking, the process that we see now is setting proper buying power of EU currency. It is overvalued now as it is too many EUR printed while real GDP now stands negative. It means that people have to work and additionally to pay for it, instead of getting wage. This turns in inflation as national currency is loosing value, setting to its real purchasing power. This process of balancing is not fast and could take for years (usually around 3-5). The breaking existed economical relations, logistics and supply changes, accelerates the first stage of depreciation. The same thing should happen later in the US but at much stronger degree as the dollars supply 3 times greater than the EUR. Now the US enjoys capitals coming from EU and, as we've said previously, the "truth" should become visible by the end of the summer.
From that standpoint I do not see any solid reasons for EUR appreciation in near term. And we a bit scaring what happens, if US economy starts to show signs of big problems later. This is maybe too far perspective, but what if the US take the ultimate step and spread the war over the Europe to safe its own economy, currency and saving their domination? The perspective of Marshall's plan №2 looks inspiring for the US, but this is really thin edge, suggesting that war in this case will be limited in EU borders. This is the substance that is impossible to control in general, especially with the modern weapon. That is what we're aware of most of all... hopefully the US economy crisis will not become disastrous and makes no necessity to use geopolitics tools for recovering.

Technicals
Monthly

Here we see the process that is expected. Reaction on YPS1 and trend line support is over and price is returning back. This week price drops below March lows and below YPS1. 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. The intermediate target is the next lows around 1.0635
EUR_m_18_04_22.png


Weekly

So, here we do not have a lot of things to discuss. Grabber target is completed. Trend is bearish as well here and price is not at oversold. Since we could have monthly grabber on Aussie dollar as well, and EUR lags a bit behind Dollar Index performance, it is logical to suggest downside continuation, although we do not see something evident for now.
EUR_w_18_04_22.png


Daily

So, on daily chart context remains bearish and here we see two moments that seem important. First is, we do not need to watch over far standing levels and the ceil of next week should be limited with 1.1020 5/8 Fib resistance, just because this is daily overbought. Second moment - take a look at the price performance on lows breakout. Initial reaction, once stops have been triggered was up, trying to show W&R type of action, but next day price drops back under the lows. This is bearish type of performance, suggesting that downside breakout seems to be real:
EUR_d_18_04_22.png


Intraday

Of course, we should keep mind open for possible bullish performance as well. For instance, retracement might happen, if we get divergence on daily chart and some bullish performance here, on intraday. But currently, it seems that we're getting rising bearish dynamic pressure instead. While MACD shows bullish trend, market is forming LH-LL tendency:
EUR_4h_18_04_22.png


While on the 1H chart is nothing to be happy with by far - sell-off on Thu was sharp and now it seems that market is forming something like pennant, which is potentially continuation pattern. Thus, if you search chances to go long - something else is needed as now it is definitely lack of bullish context.

EUR_1h_18_04_22.png
 

Sive Morten

Special Consultant to the FPA
Messages
16,474
Morning everybody,

Today we take brief look as EUR is just waking up after Easter, so we do not have big changes by far. On daily chart, EUR stands with the same direction and slowly but stubbornly moving to the lows. It seems that our suggestion of "true" breakout is correct as no attempts more to show W&R. Usually this "slowdown" on a way to the lows might suggest fast downside breakout, especially because now EUR is not at oversold and not at any support area:

EUR_d_19_04_22.png


On 1H chart, the bearish dynamic pressure works nice. Pennant that we've discussed in weekend was broken down as well, although with slow pace by far. As DXY has shown upside action yesterday and 10-year yields jumped to new top of 2.88%, adv. stands on the bears' side.
It means for scalp traders, who intends to take long position on EUR it is absolutely necessary to get reversal pattern. Currently it is difficult to say what it might be - maybe reverse H&S.... but now it is too dangerous to buy without pattern or making any attempt to anticipate its appearing.
EUR_1h_19_04_22.png


With other setups on GBP, JPY and AUD that we've discussed last week - everything goes with the plan. GBP also stands heavy and coiling near butterfly target, preparing for another drop, JPY is challenging monthly 127 resistance area and now it seems that it should hit 133 before any retracement, if BoJ makes no intervention. AUD keeps bearish context, showing minor pullback, that you could consider if you think about short entry there.
 

Sive Morten

Special Consultant to the FPA
Messages
16,474
Morning everybody,

So price is coiling in the Friday's breakout range and EUR tries to make shy attempts to move out of the lows. Daily trend stands bearish and we need to keep an eye on possible grabbers as price is coming closer to MACDP:
EUR_d_20_04_22.png


As yields as dollar are rising, and this creates negative background for the EUR, making us doubt on the pullback distance. Thus, on 4H chart, we could probably consider the upper border of the channel as the target, but now we're not ready to consider something more extended:
EUR_4h_20_04_22.png


It is too far until large H&S pattern that we've discussed yesterday and it is not the fact that we get it. Now we have only the minor H&S on the bottom with two extensions. XOP agrees with the 4H trend line resistance. If grabber will be formed - that might become the scenario to consider for short entry.
EUR_1h_20_04_22.png


Speaking about bullish positions, I would wait for something more valuable, such as big H&S here, as I prefer a bit longer time frame scale. For now, based on the reasons mentioned above, we do not consider taking the long position here.
 

Sive Morten

Special Consultant to the FPA
Messages
16,474
Morning, everybody,

So, as we've suggested in our weekly report few weeks ago - EU PPI hits 30%, the level that was not seen since 1949. It is no reasons to be happy actually, but by looking at EUR dynamic, market finds something positive. Anyway, as we've talked yesterday, now we could turn to extended reverse H&S pattern on 1H chart.

On daily chart we have divergence, and potentially could get weekly engulfing pattern, that stands in favor of higher pullback:
EUR_d_21_04_22.png


On 4H chart market hits K-resistance level that also is the neckline of potential H&S pattern:
EUR_4h_21_04_22.png


On 1H chart, reaction on yesterday's XOP was nice, but later EUR was keep going higher. Now we use different AB-CD extension with the OP at the same level of 1.0930 that agrees with the K-area and the neckline:
EUR_1h_21_04_22.png


Thus, theoretically it is possible to consider scalp short position around 1.0920-1.0940 but very careful and with tight stop. While bulls could follow the H&S with classic way - consider the right arm's bottom for long entry.
 

Sive Morten

Special Consultant to the FPA
Messages
16,474
Morning everybody,

So, EUR setup has worked perfect as price turns down precisely from OP and resistance area, but unfortunately it doesn't add points to the bulls. J. Powell yesterday has spoken with very hawkish tone, in fact, promising of 0.5% rate change, while C. Lagarde has made the opposite - said that ECB needs to revise down expected EU economy performance. So, despite we stand at the point of long entry decision making - chances that this setup works are minimal.
Besides, while on the EUR daily chart we see only shooting star pattern - on DXY this is also the grabber, suggesting action to the new bottom. As you could see - the H&S perspectives look doubtful by far.
1650611058554.png


On 4H chart, EUR almost stands around 1.08. Those who would like to buy - need to make a decision. Additionally I would say that we have bearish engulfing pattern here as well.
EUR_4h_22_04_22.png


The same stuff on the 1H chart:
EUR_1h_22_04_22.png


That's being said, those who would like to buy - let's decide. As, I'm conservative a bit, for me it is poor background for long entry.
Bears who already have short position, could keep it longer probably, just manage the risk. If you only think about short entry - you could use engulfing pattern and minor upside bounce for position taking, or use Stop "Sell" order when & if 5/8 support will be broken. Somewhere on the halfway to the head.
 
Top