Forex FOREX PRO WEEKLY, April 26 - 30, 2021

Sive Morten

Special Consultant to the FPA
Messages
14,742
Fundamentals

This week market was moving in the same fundamental trend, driving by the same factors. The major "new" consensus on the market suggests that recent spike in interest rates was a bit "too early reaction" on inflation that is yet to come. Current view suggests that as stocks as bonds are going higher because of economy recovery. This new approach has reversed two weeks ago bullish trends on dollar and interest rates. Thus, this week "the new" tendency continues as interest rates keep standing under pressure and US dollar keeps downside action. As we've mentioned last week - this "new" theory perfectly matches to our long-term strategy, as we suggest that major upside reversal on dollar should happen a bit later, closer to the autumn, technically - after DXY hits 87 target and fundamentally - when evident signs of inflation come. A the same time, this week additional positive factors have appeared in EU - for instance, much better earnings results of EU companies, even compares to US ones.

Market overview

European companies are set to exit a two-year profit slump with a 60%-plus jump that outperforms U.S. peers and has spurred record-high stock prices, as the world economy rebounds from the worst downturn since World War Two. Profits for companies on the STOXX 600 index are forecast to have risen 61% to 79 billion euros ($95 billion) in the January-March quarter, Refinitiv IBES said.

On an absolute basis, the profits are around 4% below those of the first quarter of 2019, before the pandemic impact was felt. The expected first-quarter jump would mark a rare outperformance versus corporate America. S&P 500 earnings are seen up over 31% in the same quarter.

All in all, European earnings in 2021 are expected to jump almost 39%, a higher growth rate compared to the United States and Asia, based on European equities’ weighting towards cyclical stocks. U.S. stocks, with heavy tech exposure, weathered the downturn, but are now seen as having less upside potential.

“Consensus bottom-up expectations still look relatively conservative,” said Matthew Gilman, eurozone equity strategist at UBS Global Wealth Management’s Chief Investment Office. “Given the strength of the recent data there is potential for both revenues and margins to surprise to the upside.”

The ECB’s decision to keep rates unchanged as widely expected sets the stage for a battle at the June 10 meeting, when policymakers have to decide whether to slow bond buying, even if that means allowing borrowing costs to drift higher.

“If the more optimistic projections for the vaccination rollout really materialise... the next batch of staff projections (in June) could show an upward revision to the growth forecasts and a confirmation of the economic recovery in the second half of the year,” said Carsten Brzeski, global head of macro at ING.

U.S. factory activity powered ahead in early April, though manufacturers increasingly struggled to source raw materials and other inputs as a reopening economy leads to a boom in domestic demand, which could slow momentum in the months ahead.

The flow of strong economic data continued with another report on Friday showing new home sales racing to a more than 14-1/2-year high in March. The economy is being boosted by the White House's massive $1.9 trillion COVID-19 pandemic rescue package and increased vaccinations against the virus.

Retail sales jumped to a record high in March and hiring accelerated, cementing expectations for robust growth in the first quarter and setting up the economy for what could be its best performance in nearly four decades. About 74% of homes sold last month were either under construction or yet to be built.

"Inventories remain tight and while that should be a positive for home building activity, a lack of availability will likely remain a headwind for sales in the near term," said Rubeela Farooqi, chief U.S. economist at High Frequency Economics in White Plains, New York.

Data firm IHS Markit said its flash U.S. manufacturing PMI increased to 60.6 in the first half of this month. That was the highest reading since the series started in May 2007 and followed 59.1 in March.

The euro rose on Friday, edging back towards a seven-week high, having nursed losses after European Central Bank President Christine Lagarde squashed speculation that policymakers will start to consider a tapering of bond purchases.

Flash purchasing managers’ index numbers for April came in better than expected in the euro zone and supported the view that the region’s economic recovery is accelerating, although the already-stronger euro was little moved by that data.

“The ECB sounded much more prudent than the BoC (Bank of Canada), as ECB President Christine Lagarde stressed that risks are still tilted to the downside and that uncertainty remains in place,” UniCredit analysts said. That probably offered investors the opportunity to take profit on EUR-USD after a recent rally, they said.

While rising coronavirus vaccination rates and an improving economic outlook are reasons to be optimistic, investors are scaling back expectations for a withdrawal of monetary easing after Lagarde said talk of phasing out emergency bond purchases was premature, analysts said.

Fed Chairman Jerome Powell is expected to repeat her message next week after the central bank’s two-day meeting beginning April 27. That would put downward pressure on Treasury yields and cap the dollar’s gains against most currencies. Analysts also said that while U.S. President Joe Biden’s stimulus packages have boosted the outlook for growth and the dollar recently, the longer-term picture was less clear.

Real yields in the U.S. remain deeply negative on a 10-year basis and reflect some of this uncertainty that will continue to limit the upside for the U.S. dollar,” said Derek Halpenny, an analyst at MUFG.

"Powell has to reiterate the continuation of easy monetary policy just like Lagarde," said Masafumi Yamamoto, chief currency strategist at Mizuho Securities. As a result, the dollar is likely to fall against the yen, but the larger trend for the dollar is still mixed. The dollar can still rise against commodity currencies if commodity prices start falling again."


The dollar fell against major currencies on Friday as U.S. yields languished and the euro got an extra late-day lift following a earlier boost from an upbeat survey of purchasing managers. More than half of the euro's appreciation came late in the day after the market digested earlier economic news.

"This is thin markets on a Friday afternoon," said Marc Chandler, chief market strategist at Bannockburn Global Forex in New York. "The euro making new highs for the week late in the day suggests it is going to have momentum into next week."

WAITING FOR THE FED

Next week, investors will be keeping a close eye on the Federal Reserve's monetary policy meeting, as well as a speech by U.S. President Joe Biden to Congress.

The Federal Reserve's policy meeting ending April 28 may help markets glean how it might respond to U.S. economic recovery and higher inflation after consumer prices rose by the most in more than 8-1/2 years in March.

Fed chairman Jerome Powell sees inflation “a little higher” this year but remains committed to limiting any overshoot, according to a letter sent to Senator Rick Scott.

Ten-year yields have stabilized and the inflation rebound to 2.6%, well above target, is likely to be short-lived. Still, swaps show that market expectations of future inflation are rising and that means Treasury volatility may not be over yet.

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Fed Chair Jerome Powell is expected to echo Thursday's message from European Central Bank President Christine Lagarde that scaled back some expectations for a withdrawal of monetary easing. Powell's remarks could put more downward pressure on Treasury yields and limit any bounce of the dollar.

Auctions of U.S. Treasuries next week are not likely to be big factor, Shaun Osborne, chief currency strategist at Scotiabank told the Reuters Global Markets forum on Friday.

"There still appears to be good demand for Treasury product," Osborne said. The FOMC will likely be the highlight of a busy data week for the U.S. Overall, he expects that "low yields, low volatility plus strengthening global growth should drive diversification away from the USD to riskier assets."

ACHTUNG

It's rare for markets to get excited about German politics. But as chances rise of the Greens becoming a key member of the next government, investors are waking up to election risk in Europe's largest economy.

Annalena Baerbock will be the first Green candidate for chancellor in the 40-year history of the party, which has overtaken the conservative bloc in one poll.

In-fighting and a face mask procurement scandal have hurt the ruling CDU/CSU alliance. The choice of centrist Armin Laschet as their candidate to succeed Angela Merkel as chancellor, over the more popular Bavarian Markus Soeder, may hurt its chances in September's election.

A future government comprising the Greens could see increased spending on climate friendly projects and a push for deeper European integration. It explains why German Bund yields are near seven-week highs.

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CFTC Report

Recent CFTC data looks positive to the EUR, showing solid jump in open interest and increasing of net long speculative position. Data shows that hedger also have increased significantly the hedge value against EUR appreciation - taking almost 29K short contracts. Speculative position jumps for 15K contracts.

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Source: cftc.gov
Charting by Investing.com



So, overall fundamental background stands relatively immaculate. Data are different and but mostly supports existed trend. This week EU has shown good numbers of recovery - as statistics as corporate earnings, despite lag in vaccination pace behind the US. ECB comments born rumors on policy changes in the summer. Although they were denied later by C. Lagarde, but there is no smoke without fire and the background was put already. Positive EU economy performance could clear out doubts and indeed something could happen in the summer.
Flat Fed policy decision, as it is expected to be, also supports existing tendency. Market statistics shows good sentiment on the EUR as well, so, as you can see, we do not have any valuable reasons to suggest that something goes wrong. Now, at first glance everything is going well. And it makes us to suggest further EUR appreciation.

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 and shows perfect recovery. MACD trend stands bullish. It is just one week till the April's end, so we could get strong bullish engulfing pattern here. Besides, from technical point of view, this is great that price is jumping up from YPP.
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_26_04_21.png


Weekly

So, new fundamental environment brings a lot of important technical signs as well. Here, on weekly chart we've got important psychological confirmation of 1.20 level breakout. This confirms breaking even theoretical chances of H&S pattern that we've discussed previously. Second - price returns back into 1.20-1.24 trading range.

Next moment is hidden bullish MACD divergence instead of previous bearish one. Finally, I suspect that we've got "Three white soldiers" pattern here. Although it stands not at some important lows, but candles' shape matches perfect to the pattern conditions.

Still, as price stands at resistance now - we still need to keep an eye on MACDP. Although market sentiment gives small chances to the bearish grabber, we still need to keep in mind that it is possible and control its appearance here. In general our plan suggests long entry, if any reasonable bounce happens from 5/8 Fib resistance:

eur_w_26_04_21.png


Daily

On Friday market has shown good jump and has shown only 1.20 retracement through the week. This situation again tells that position taking split, gradual entry very often is better than waiting for "perfect" level, especially when you're sure with fundamental background.

Here are few important moments that could help us a lot with trading process. As we've said above - EUR has entered in new trading zone (blue lines) that market previously protected. It is approximately 1.20-1.24 area. Now, it is crucial for the EUR to stay inside it and not dropped out from it. Second bearish out from the area contradicts current sentiment and environment and will lead to downside continuation.

This, in turn, points on crucial area of 1.1950-1.1960 K-support that market has to stay above of. Price has formed bullish reversal swing on "V" shape of recovery which suggests strong sentiment. As price now stands at 5/8 Fib level - hopefully we get some retracement. But it might be small, just to 1.20 area again, as EUR is not at overbought. At the same time we know our vital area. This "2+2" combination shows us the major point of the trading plan - consider long entry from these two levels with the stops under the K-area.

eur_d_26_04_21.png


Intraday

On intraday charts, as jump has happened right on Friday, we do not see yet something special that could point on retracement or on its shape - no patterns or bearish signs by far. So, probably we should get something within 1-2 days. At the same time, we can't exclude the scenario of direct upside continuation. As market has passed through 1.1950 K-area without response, why it can't do the same through just single standing 5/8 level...
 

Sive Morten

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

So, changes come slowly by far, and it seems that this situation could last till Wed, when Fed meets. Still, on EUR currency we see some response to 1.21 area, as we've suggested in weekly report. Hopefully, it will be strong enough to push price to 1.20 at least, or even our preferable 1.1950 K-area.

On GBP we're keep watching for reverse H&S pattern and whether cable keeps upward action or not. On daily chart, as you can see - situation is absolutely the same as on EUR, market response to 5/8 resistance. But, if on EUR this response is yet to be started, here, on GBP we see the first reaction in place already:
gbp_d_27_04_21.png


Well, major details of this trading setup we already discussed last week. Hopefully, GBP keeps shoulders' symmetry and drops a bit more, to 1.38 area, which is exceptionally important for this trading setup.

The reason why we still think that it could happen stands in overall downside action and reaction to OP. As you could see downside CD leg shows acceleration, while upside reaction is rather choppy, that is more common to retracement type of action. Besides, market could wait for Fed and flirting around existing support area, which means tending to 5/8 level.

Still, if you consider long entry, there are few tactic questions that need to resolve. No doubts, it is perfect, if we would get drop to 1.38 and sharp reversal up from there. Compromise solution suggests position split and gradual entry, while GBP is moving to 1.38 area.

Finally 1.38 level is important as an indicator of possible H&S failure. If price drops below it and start tending to the bottom - that might be the first sign of action to 1.35 strong support area. Thus, H&S is a trading setup, but also the pattern that could clarify direction, depending on what will happen around 1.38
gbp_4h_27_04_21.png
 

Sive Morten

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

Let's go back to EUR discussion. On daily chart situation stands quiet, EUR resists to rising interest rates better than other assets, say, Gold or GBP and stands in very tight range below 1.21 Fib level. Investors just wait for Fed statement:
eur_d_28_04_21.png


On 4H chart we have few indirect bullish signs. First is the shape of upward action, when price shows retracement only to the broken top and goes higher. This is so-called "trending market" that is more typical for stocks, but in general it suggests existing of stable bullish sentiment and gradual demand for the asset. Right on top we do not see extended sell-off and market stands tight, right under 1.21 level. It means that EUR is building an energy for breakout. Although we still hope to get pullback at least to 1.20 or better to 1.1950 and it would be great if we get it, but, at the same time, If we wouldn't have Fed today, I would say that hardly we will get this pullback. Chances on upside breakout looks better.
Pay attention that all these moments stand on a background of rising interest rates that EUR resists to very well.
Although here we have the divergence, but for the truth's sake - this is the only bearish moment here.
eur_4h_28_04_21.png


On 1H chart price action takes the shape of triangle that is also bullish
eur_1h_28_04_21.png


In current circumstances there are few ways exist, how to deal with this situation. First is - wait for the Fed and hope for the retracement to predefined levels. Second, as usual, split position and take some part inside the triangle. Finally, it is possible to use Stop "Buy" near the top order together or separately with previous two scenarios.
 

Sive Morten

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

So, it seems that our scenario was correct. Fed statement has not brought any surprises and EUR jumped up immediately. Now we gradually should start thinking about next step. Since in longer term we suggest new low on DXY, which means new high on EUR and there should be something that could push it.

By looking at daily chart, it seems that we could get reverse H&S pattern. Nearest upside target here stands around 1.2166 and it coincides with theoretical neckline of the pattern. Thus, within next 1-2 weeks we could get few trading setups. First one is downside retracement, second - major setup for the long entry with H&S pattern, if it will be formed, of course:
eur_d_29_04_21.png


On 4H chart market keeps existed tendency that we've mentioned. Triangle on 1H chart has been broken up, and here we have another "2 step forward" and now "1 step back" to re-test broken top. This tendency probably stay until 1.2165 daily target:
eur_4h_29_04_21.png
 

Sive Morten

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

Today we take a look at GBP, while it is nothing new to comment on EUR. So, on the cable we consider reverse H&S pattern and market gradually is coming to solution of this riddle. Thus, downside AB-CD pattern on daily chart with 1.35 target has been cancelled, so, unfortunately we should forget about sweet 1.35 for some time and focus on possible upside continuation to 1.42 first:

gbp_d_30_04_21.png


Still, on 4H chart situation stands a bit tricky. Price has formed perfect "222" Sell and it could lead as to downside AB-CD with 1.3790 target as to just minor retracement and upward reversal. Currently, as upside swings stand relatively fast - chances exist that GBP doesn't drop back to 1.38 area but stuck in current swing range and turn up again.
gbp_4h_30_04_21.png


On 1H chart, you could see both scenarios. Downside "blue" AB-CD, in a case of ultimate drop. With this scenario GBP forms perfect "222" Buy" on daily and Agreement with 4H 5/8 Fib support area. Those of you, who like conservative approach could focus on this scenario.

At the same time, GBP could be stopped by some minor Fib levels. For instance, right now it stands around 1.39 K -area. And in general 1.3880-1.39 is the one to watch today, as price could turn up right from there. Only drop below 1.3860 lows will be in favor of the 1st scenario.
gbp_1h_30_04_21.png


Thus, you could focus on 1st scenario or second, or make a compromise to combine the both by using gradual entry.
 
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