Forex FOREX PRO WEEKLY, April 19 - 23, 2021

Sive Morten

Special Consultant to the FPA
Messages
14,727
Fundamentals

This week market keep going in new fundamental environment, when previous inflationary fears calmed down a bit, and inflation now seems not as scary as previously. This new sentiment, supported by multiple Fed comments, results in downside action of Dollar Index and US Interest rates, despite positive statistics and economy recovery. In general, this stage agrees with our long-term view as fundamental as technical. Fundamental factors point on 1st stage of growth after recession in long-term cycle, which has specific feature, when as interest rates as stock market are rising together. Both are rising on anticipation of economy activity - more demand for liquidity, better results from operations. Technically we have long-term Dollar Index target around 87.40 that must be completed before reversal. So, everything goes in correct direction.
But very soon the 2nd stage of cycle starts - inflationary growth, when yields start rising not because of demand for money but because of inflation. Stocks also keep upward action until short-term rates equals to Dividend yield of S&P 500 index. On a way up the pace should slow as stock market starts to feel the interest rates pressure. Historically, stock market usually breaks down when yields hit 2-2.5% area. This 2nd stage is a shine period for US Dollar, as long-term upside action, aka "Dollar smile" begins.
Taking it all together - it is easy to suggest EUR/USD action. Market could return back to the top of 1.25 within few months or even move slightly higher. But as soon as dollar hits 87.40 - major trend should change. All these things we've discussed previously and few times already. In so fragile environment the big concern and major thing is inflation. Despite recent relief - we suggest that this topic becomes hot again very soon.

Market overview

The U.S. dollar fell to three-week lows on Tuesday after data showed inflation making strong gains in March, though the rise was not expected to alter the Federal Reserve’s commitment to keeping interest rates at rock-bottom levels for years to come.

The consumer price index jumped 0.6% last month, the largest gain since August 2012, after rising 0.4% in February, the Labor Department said on Tuesday. Excluding the volatile food and energy components, the CPI rose 0.3%. The so-called core CPI nudged up 0.1% in February.

“It keeps unchanged the outlook of the Fed to stay the low rate course over the foreseeable future,” said Joe Manimbo, senior market analyst at Western Union Business Solutions in Washington. “We’re likely to see inflation move higher, before it eventually moves lower. So far the economy is sticking to the Fed’s script.”

Inflation is expected to show extra bullish comparisons to last year in the coming months due to a drop in price pressures in 2020 when businesses closed due to the spread of COVID-19. The U.S. central bank has said it will look through temporary increases in inflation, and analysts expect it will allow inflation to run hotter than previously expected before raising rates.

Philadelphia Fed Bank President Patrick Harker said on Tuesday it is unlikely that inflation will run out of control this year. The greenback also fell to session lows as Treasury yields fell, following a strong 30-year bond auction, the final sale of coupon-bearing supply this week.

“The whole pro dollar trade is based upon the yield story and given the fact that the yield story has backed off the highs, the dollar has pretty much done the same thing,” said Boris Schlossberg, managing director of FX strategy at BK Asset Management in New York. Until the bond market gets the heebie-jeebies over the inflation fears again, I think the long dollar position remains under assault,” he said.

Fed Chair Jerome Powell said Wednesday that the U.S. central bank will reduce its monthly bond purchases before it commits to an interest rate increase, clarifying the order of monetary policy changes that are still months if not years in the future. Dallas Fed President Robert Kaplan also said that it will be "a while" before the United States reaches full employment, even as he repeated his view that the Fed should begin to withdraw support from the economy sooner than most of his colleagues do.

The U.S. economic recovery accelerated to a moderate pace from late February to early April, the Federal Reserve reported on Wednesday in its latest "Beige Book."

Retail sales increased 9.8% last month, the Commerce Department said on Thursday, beating economists' expectations for a 5.9% increase. A separate report also showed that initial claims for state unemployment benefits totaled a seasonally adjusted 576,000 for the week ended April 10, compared with 769,000 in the prior week. Economists polled by Reuters had forecast 700,000 applications in the latest week

The dollar headed for its worst back-to-back weekly drop this year amid an extended retreat in Treasury yields as investors increasingly bought into the Federal Reserve’s insistence of keeping an accommodative policy stance for a while longer.

The benchmark 10-year Treasury yield dipped to a one-month low of 1.528% overnight, moving further away from over a one-year high of 1.776% reached at the end of last month, even in the face of Thursday’s stronger-than-expected retail sales and employment data.

San Francisco Fed President Mary Daly said on the same day that the U.S. economy is still far from making “substantial progress” toward the central bank’s goals of 2% inflation and full employment, the bar the Fed has set for beginning to consider reducing its support for the economy. That echoed Fed Chair Jerome Powell’s comments in several speeches over the past week that policymakers will look through near-term rises in prices amid ongoing slack in the labour market.

The gauge, also known as the DXY, had surged with Treasury yields to an almost-five-month high at 93.439 on the final day of March, on bets that massive fiscal spending coupled with continued monetary easing will spur faster U.S. economic growth and higher inflation, particularly compared to places like Europe. But bond and foreign-exchange markets now seem willing to give the Fed the benefit of the doubt that inflation pressure will be transitory and monetary stimulus will remain in place for years to come.

One of the biggest perceived risks to the 2021 recovery story playing out in financial markets is a bond tantrum – or a disorderly rise in U.S. yields,” ING’s global head of markets and regional head of research for UK and CEE, Chris Turner said. Thus, it has been surprising this week to see the large decline in U.S. yields, despite above consensus U.S. CPI and retail sales. We are tempted to say that DXY made an important corrective high at 93.44 at the end of March – and is now heading for a retest of the year’s lows at 89.21,” Turner said.

“From a cross-asset perspective, we are seeing a theme in markets, which seems similar to last year in the sense of falling real US yields, rising commodities, declining vol, strengthening equities and general dollar weakness,” said Mikael Olai Milhøj, chief analyst at Danske Bank.

“It’s a little bit of a change of course,” said Minh Trang, senior FX trader at Silicon Valley Bank. Trang cited some profit-taking after the greenback’s sharp appreciation in March as well as the recent retreat in Treasury yields as main reasons for the dollar’s weakness. Investors’ healthy appetite for riskier assets such as equities has also sapped some of the safe-haven demand the dollar typically enjoys, Trang said.




Some market participants expect the dollar weakness to persist.

“My best guess is the 10-year Treasuries won’t move a great deal from here over the coming quarter and that sets the backdrop for the recent dynamics we’ve seen, with dollar weakness continuing much of this current quarter,” Colin Asher senior economist at Mizuho said.

Will the recovery be inflationary? (By Fathom Consulting)

Households in the major economies have built up substantial excess savings pots during the past 12 months, supported by government programmes set up to limit the economic harm caused by the pandemic. We estimate that, by the end of March, these 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.

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The dramatic increase in household savings was a rational, endogenous response to an extremely difficult set of circumstances. Rather than spend the money on other things that they were allowed to enjoy, like more goods, households chose to save – presumably in order to spend at least some of the money on the temporarily prohibited activities once the prohibition was lifted.

In Fathom’s central scenario, 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 inflation fan chart would have looked very different, with a significant chance of inflation lying above target for most of the forecast horizon.

Recent US data appear consistent with a very strong recovery in activity, with the US economy adding 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 ISM non-manufacturing index 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.

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Just over a year ago, investors were treating the pandemic as primarily deflationary. Back in March 2020, the global economy suffered substantial negative shocks of roughly equal magnitude to both demand and supply. Governments around the world ordered whole industries to stop producing, and simultaneously ordered firms and households to stop buying their products. Since then, investors have gradually reversed their way of thinking. From here on, the consequences of the pandemic are likely to start pushing inflation higher, globally. Just how much higher depends, in part, on the pace at which excess savings pots are spent, and on the reaction of policymakers to a period of above-target inflation at a time when government debt levels are very high.

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CFTC Report

This week we do not have big shift in sentiment on EUR. Open interest has dropped for 6K+ contracts, while net long position slightly has increased:

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Source: cftc.gov
Charting by Investing.com


Next Week To Watch

The European Central Bank meets on Thursday and will likely be pressed on signs of divisions over the future pace of bond purchases, which have been stepped up recently to prevent a rise in borrowing costs from derailing the recovery.

Dutch central bank head Klaas Knot believes the acceleration is temporary, while ECB chief Christine Lagarde says the economy is still standing on “crutches” and stimulus cannot be withdrawn.

The euro area is still grappling with lockdowns and a third wave of COVID-19 but business activity appears to be holding up. The April flash purchasing managers index on Friday should provide fresh clues on the outlook. Signs of a swift recovery could raise questions over when the ECB will slow its bond buying, putting recent bond market calm to the test.

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UK POST-LOCKDOWN


The coming days offer up the first real sense of how the UK economy has fared since it began emerging from lockdown.

A rapid vaccination rollout, which has eclipsed most major rivals, and tumbling COVID-19 infection rates makes Britain a litmus test for how confidently businesses and consumers stocked up on savings will respond to a reopening of the economy.

So, a clutch of data including March retail sales, inflation, employment numbers, and flash purchasing managers index surveys for April released from Tuesday onwards should shed light on how ready consumers and companies are to start spending again.

Inflation numbers will also be of interest after the Bank of England’s chief economist, a policy hawk who has sounded the alarm about inflation and has remained upbeat about a post-COVID-19 recovery, announced he would quit in June.

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Thus, as we could see - investment banks (ING, Mizuho) accurately confirms our view as well. ING suggests re-testing of 89 lows by DXY (our suggestion 87.40 level), while Mizuho tells that as US interest rates as US Dollar should keep downside trend in 2nd quarter. For us it means that medium term sentiment stands bullish, and until the summer EUR/USD should keep climbing higher, although the overall pace is uncertain. Supposedly it should not be too fast. Just because major positive data comes from the US and EU, although making efforts but still is lagging on recovery and vaccination.

In a longer-term perspective inflationary expectations are high, so we keep our view intact as well. Closer to the end of the year, supposedly when dollar hits 87.40 - trend of FX market and EUR/USD in particular should change. In the beginning of 2022 we expect first steps from the Fed - contracting of long-term bonds purchasing as an initial step and following rate hiking cycle.

Technicals

Monthly

So, new fundamental environment pushes EUR higher. Despite that market has come very close to 1.16 vital area - EUR was able to stay above it. April shows good upside performance with bullish MACD. Taking the parallel view on Dollar Index - EUR has corresponding upside AB-CD with 1.2860 OP, standing near Yearly Pivot Resistance of 1.26. If our suggestion is correct - 1.26-1.28 is an area that corresponds to DXY 87.40 target.

eur_m_19_04_21.png


Weekly

This time frame is most tricky among all the others. Fundamental environment suggests upside continuation but weekly chart still has valid bearish signs - potential H&S shape, major XOP target around 1.16 area and bearish MACD Divergence. Last week we've considered scenario when upside reversal might happen with completion of 1.16 target.

Whatever scenario will happen - 1.2050 area is crucial. Upside breakout means erasing of H&S shape and very probably leads to direct upside continuation. At the same time downside pullback from 1.20-1.2050 suggests reversal with our daily H&S pattern, and ultimately, if daily H&S fails - some kind of 3-Drive Buy with touching of 1.16 support cluster. But, for the truth sake, I have doubts that 1.16 level will be reached. Daily H&S pattern now looks like most probable scenario.

Still, if somehow EUR appears around 1.16 - that will be the real gift and perfect chances to buy it.

eur_w_19_04_21.png


Daily

This is well known chart for us, as we've talked about it through the whole week. So, it is easy to imagine H&S shape right now, when the first half of the pattern stands in place, price is around neckline. Currently we do not consider drop to 1.16 just because it stands too low for coming week, outside daily Oversold area. Thus, we consider two scenarios that could happen.

First one is direct upside continuation with neckline breakout, ignoring H&S pattern. This is worse way to us as it makes more difficult entry process. Still, in this case we could keep an eye on retracement back to broken K-area of 1.1950 and re-testing it. This often happens, when K-areas are broken without any respect.

Second one is a central scenario with H&S. Here we just sit on the hands and wait for 1.1850 area, when right arm potentially should be formed. And this is at the same time supposed entry area. H&S scenario is important by another reason as well. Thus, if EUR starts dropping below 1.18 - it could be the signal that 1.16 still could be reached.
eur_d_19_04_21.png


Intraday

Here we do not have yet any clear signs of reversal. It is not as important for daily setup where we would like to buy EUR and actually do not care from what point it could start dropping. But for scalp traders here, on 1H chart it might be important. Currently we have just few minor hints, that downside action could start. First is MACD divergence and puny W&R at the top that often happens in a case of Double Top pattern.

Still, despite these hints, I would wait a bit more to get something more valuable. It should be more evident reversal context in a case of turning down.
eur_1h_19_04_21.png
 

Sive Morten

Special Consultant to the FPA
Messages
14,727
Morning everybody,

Today we mostly will talk about GBP. EUR as you can see, is following to our scenario with direct upside breakout and according to our trading plan - we have no choice but to wait the pullback, supposedly to 1.20 area where we should get the chance to buy.

Also we keep an eye on AUD as it stands right at the triggering point of daily H&S pattern.

On GBP - we've said that if price holds above recent daily lows, it keeps bullish context. Of course, fundamental reasons have become the major driving factor, but, anyway - right now GBP has erased daily bearish AB-CD pattern and keeps bullish context.

Price stands at daily overbought and major 5/8 Fib level that together create DiNapoli bearish "Stretch" pattern. It gives good chances for pullback and buying GBP later at some support levels:
gbp_d_20_04_21.png


On 4H chart, as one of the possible scenarios, we could get reverse wide H&S pattern, with the double head. It means that an area of 1.38-1.3885 is suitable for position taking:
gbp_4h_20_04_21.png


Scalp traders also could consider bearish positions due daily Stretch, and based on the 1H thrusty action. For instance, DRPO "Sell" stands in place and should trigger downside retracement. As a target, it is possible to use 1.39 K-support area:
gbp_1h_20_04_21.png
 

Sive Morten

Special Consultant to the FPA
Messages
14,727
Morning everybody,

So, let's go back to EUR. The pullback that we need is started, so currently we have to keep an eye on broken 1.1955 area, where we should get the chance to step in. I intentionally keep broken K-area on the chart:
eur_d_21_04_21.png


On 4H chart we have K-support approx. in the same area now. Nice "Evening star" has been formed on the top, that suggests compounding shape of retracement, AB-CD as a rule:
eur_4h_21_04_21.png


On 1H chart it could take the shape of H&S pattern. Supposedly, it could reach 1.1960-1.1970, slightly above K-area. Once price will reach it, we make a decision on taking long position:
eur_1h_21_04_21.png
 

Sive Morten

Special Consultant to the FPA
Messages
14,727
Morning everybody,

As situation is changing slow, today in the video we've run through all three setups that we have briefly. Here, on EUR we're following to our trading plan. Market already has tested 1st Fib level, showing upward bounce. Hopefully we get downside AB-CD and good entry level if not around 1.1955, but at least around 1.1960-1.1965 area:
eur_4h_22_04_21.png


On 1H chart it might be falling wedge/pennant pattern that potentially is bullish as well. Still, chances exist on immediate upside continuation as you could recognize here minor reverse H&S inside the wedge. This is the reason why every time we call for position split and step entry every Fib level. If you did it - now you could move stop to breakeven. If not - well, unfortunately the only option is to wait for downside AB-CD:

eur_1h_22_04_21.png
 

Sive Morten

Special Consultant to the FPA
Messages
14,727
Morning everybody,

While EUR is coiling around 1.20 area, GBP is coming to important level for us. If you remember, we were talking about potential reverse H&S pattern that could trigger further upward continuation. Alternatively, potential failure of this pattern is also directional and important, as it points on downside breakout.

So, if you have an intention to trade it - market has completed OP retracement target and stands near the harmonic right arm bottom around 1.38. It means that it is moment of decision. From H&S point of view - price could fluctuate around 1.38 and still reach major 5/8 Fib support, but this is minor nuance as price mostly already stands around major point.

gbp_4h_23_04_21.png



On 1H chart DRPO "Sell" has worked perfect and take a look - OP agrees with another, closer standing Fib support area.
gbp_1h_23_04_21.png


Thus, you have few options - split positions in parts for entry, wait for some reversal pattern and reaching of 1.38 area, or combining both methods.
 
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