Forex FOREX PRO WEEKLY, August 02 - 06, 2021

Sive Morten

Special Consultant to the FPA
Messages
15,175
Fundamentals

This week is not too different from few previous ones, when activity was standing low and some particular event made the day. So, this time the story repeats. Fed statement has inspired markets that they still have some time to get fun in an environment of low interest rates. So, we see upward action across the board. Not only on FX market but on gold and other commodities, stocks, bonds. But the major question now is how long this celebration lasts? Something tells me that not too long. Very soon the expectations of Wyoming and September meeting, together with higher inflation data start press on the minds of investors... At least indirect signs and consensus of Big Whales on interest rates level by the end of the year suggests strength in US Dollar.

Market overview

As we've discussed many times - once inflation Fed target is achieved, it pays major attention to employment. And this is major reason why they extend time till rate change on 2023. According to our calculations with average NFP around 400K per month they should be in time to beginning of 2023 to restore employment to pre-pandemic level, as they still need ~ 6.8-7 Mln more jobs. So, JP told the same on recent meeting. It seems that our suggestion was correct - Fed doesn't need to tell something in July while it should have decisive speech just within a month.

The dollar eased on Wednesday after the U.S. Federal Reserve said the economic recovery is on track despite a rise in COVID-19 infections in a policy statement that was upbeat but did not set a timeline for tapering Fed asset purchase.

While daily U.S. COVID-19 infections have quadrupled since the last Fed meeting in June, the central bank indicated it still had faith that an ongoing vaccination drive would "reduce the effect of the public health crisis on the economy" and allow a robust reopening to proceed.

Fed policymakers, in a unanimous statement, also said they were moving ahead with discussions about when to reduce the central bank's $120 billion in monthly bond purchases, a precursor to eventually raising interest rates.

"The statement dropped hints at the conversation around tapering large scale asset purchases, but did not commit to any future plans beyond continuing to assess the situation," said James Marple, senior economist at TD Economics. "We expect a more fulsome discussion at the Jackson Hole summit in late August and plans around tapering may be reflected in the September statement when new economic forecasts will also be released," Marple added.

The Federal Reserve needs to see more improvement in the pandemic-hammered U.S. labor market before pulling back on support for the economy, Fed Governor Lael Brainard said on Friday, adding that she’ll be more confident in judging that progress once she has September data in hand.

“The determination of when to begin to slow asset purchases will depend importantly on the accumulation of evidence that substantial further progress on employment has been achieved,” Brainard said in remarks prepared for delivery to the Aspen Economic Strategy Group. “As of today, employment has some distance to go.”

Brainard’s assessment of progress on the labor market front was in line with that of Fed Chair Jerome Powell, who at the end of the Fed’s meeting on Wednesday said the U.S. job market still had “some ground to cover” before the Fed could start to taper its bond purchases.

But Brainard also offered something new: a potential hint on the timing of any taper decision, at least for her.

“Importantly, I expect to be more confident in assessing the rate of progress once we have data in hand for September, when consumption, school, and work patterns should be settling into a post pandemic normal,” Brainard said. If job gains continue at the same pace as the second quarter, she said, about half of the 9 million jobs gap relative to the pre-pandemic trend would be made up by the end of 2021. “If, instead, the rate of job growth were to accelerate notably, those levels could be reached somewhat sooner,” she added.

In addition to progress on employment, the Fed’s taper decision depends on progress towards the Fed’s 2% inflation goal.

Inflation readings in recent months have come in higher than expected, with the core PCE price index shooting up 3.5% in the 12 months through June, the largest gain in the Fed’s preferred inflation gauge since December 1991. It rose 3.4% in May.

Those high readings are likely to be transitory, Brainard said Friday, as they reflect supply-demand imbalances in a “handful” of sectors like cars and travel. On a 24-month measure, she noted, core PCE inflation is running at 2.3%. While she is attentive to the risks that upward inflation pressures could broaden or prove persistent, she said, she sees no signs that they are getting embedded into consumers’ and businesses’ inflation expectations.

“If inflation moves persistently and materially above our target, we would adjust policy to guide inflation gently back to target,” she said.

Worries about the potential for high inflation are, however, prompting several of the Fed’s 18 policymakers to want to get going quickly on the bond-buying taper.

Earlier Friday, St. Louis Fed President James Bullard said the Fed should start reducing its bond purchases this fall so that it doesn’t end up needing to raise rates sharply, and possibly spark a recession, if inflation remains high.

Brainard’s comments did not suggest any such rush. She noted that the decision to taper is distinct from any decision to raise rates. That will depend on a three-part test the Fed laid out last fall: reaching full employment, 2% inflation and being on track to exceed 2% inflation for some time.

“Remaining attentive to changing conditions and steady in our step-by-step approach to implementing policy under our new framework should ensure that the economy’s momentum is sufficient when tailwinds shift to headwinds” later this year and beyond, as the support from massive government spending during the pandemic fades, she said.

Investors looking for clear guidelines on when the Federal Reserve will begin tapering its massive bond purchases were left waiting Wednesday, with all eyes next on the annual Jackson Hole conference of central bankers in August.

The central bank has been buying $120 billion in fixed income assets per month - $80 billion in Treasuries and $40 billion in mortgage-backed securities - to support the economy as it recovers from the impact of the coronavirus pandemic, and markets have been fixated on when the Fed will start tapering.

The Federal Reserve will likely reduce its monthly purchases of mortgage-backed securities and Treasuries simultaneously when it is time to pare back its support for the U.S. economy, though policymakers are debating whether to wind down the buying of MBS at a faster pace, Fed Chair Jerome Powell said on Wednesday.

Some U.S. central bank policymakers have said they want to end their monthly $40 billion of MBS purchases faster than the $80 billion in Treasuries because of the hot U.S. housing market.

"There really is little support for the idea of tapering MBS earlier than Treasuries. I think we will taper them at the same time," Powell said in a news conference after a two-day policy meeting that marked the Fed's first "deep dive" into when and how it could start reducing its asset purchases. The idea of reducing MBS purchases at a somewhat faster pace than Treasuries does have some attraction for some people - others not so much," he added. "I think it’s something that we’ll be continuing to discuss."

A Fed decision to cut its purchases of both Treasuries and MBS simultaneously would show that the central bank is probably following the same playbook it used when it began tapering its asset purchases in 2014, said Tom Garretson, senior portfolio strategist at RBC Wealth Management. To change the approach from the last cycle would muddy the messaging and there’s no benefit to it," Garretson said. "The market expectation was that they would go at the same time."

As a result, the market will likely now focus heavily on whether the central bank will give further indications at the Jackson Hole conference on Aug. 26-28 of its policy to allow inflation run hotter than normal to make up for periods of low inflation, said Kimball. The Fed owes us an update on their thinking" given the economic recovery in the year since, Kimball said.

Rick Rieder, chief investment officer of global fixed income at investment firm BlackRock, said he sees the Fed beginning to outline tapering at Jackson Hole, but will give more specificity at its September policy-setting meeting.

Powell said he is in the process of writing a speech for the event, but declined to give details.

Some analysts such as Brian Rose, senior economist, Americas at UBS Global Wealth Management believes the Fed could announce tapering in December.

“In the short-term, there’s been a reduction of taper fears, and that’s why we’ve seen the dollar heading lower,” said Jeffrey Halley, senior analyst at brokerage OANDA in Jakarta.

"The dollar's reign over the euro appears over as the Fed appears nowhere near tapering as the economy slowly makes its way to achieving substantial progress in the labor market," said Edward Moya, senior market analyst for the Americas at OANDA.

Data showed that while the U.S. economy grew solidly in the second quarter, boosted by massive government aid, growth fell short of economists' expectations.

GDP increased just at a 6.5% annualised rate last quarter, the Commerce Department said on Thursday, well below the 8.5% rate economists polled by Reuters had forecast.

"With the dollar already under pressure today as the risk environment stabilises and markets embrace the dovish rhetoric from Fed Chair (Jerome) Powell yesterday, the near-2-percentage-point miss in Q2 GDP did little to relieve the greenback," said Simon Harvey, senior FX market analyst at Monex Europe.

U.S. Treasury yields trended lower after Wednesday's Fed statement, with inflation-adjusted real yields tumbling to a new low, weighing on the U.S. currency. , .

"Should the yield curve continue to slowly steepen with risk appetite remaining in place, dollar bearishness could accelerate in the coming weeks," said OANDA's Moya.

Friday’s gains for the U.S. currency came as stocks fell following a glum earnings report by Amazon, growing concerns over the rapid spread of the COVID-19 Delta variant, and in the wake of a regulatory crackdown by China on its technology and education sectors.

“We’re at the end of the month and August tends to be the cruelest month for the financial markets on a seasonal basis, on a 10-year basis, it’s the weakest month,” said Kathy Lien, managing director at BK Asset Management. So with the Delta variant as well as the uncertainties around China, investors are getting nervous and I think they’re worried about a more durable correction in stocks and so you’re beginning to see the dollar catch a safe haven bid,” she said.

The dollar also got a lift after St. Louis Federal Reserve President James Bullard said the Fed should start reducing its $120 billion in monthly bond purchases this fall and cut them “fairly rapidly” so the program ends in the first months of 2022 to pave the way for a rate increase that year if needed.

“While the dollar suffered a notable setback this week, how significant it could prove may be gleaned by nonfarm payrolls next week,” said Joe Manimbo, senior market analyst at Western Union Business Solutions in Washington.

Economic data on Friday was dollar-positive, showing a higher-than-expected rise in U.S. consumer spending in June as COVID-19 vaccinations boosted demand for travel-related services and recreation, even though part of the increase reflected higher prices, with annual inflation accelerating further above the Fed’s 2% target.

EU data showed the euro zone economy grew more quickly than expected in the second quarter, pulling out of a pandemic-related recession, while inflation shot past the European Central Bank’s 2% target in July.

Fed Fund futures, a widely used security for hedging short-term interest rate risk, have fully priced a 25-basis point tightening by the first quarter of 2023, unchanged from prior to the release of the Fed statement.

COT Report

Although market was showing nice upward performance this week, net long position is dropped again - not too much, but anyway this drop stands in a row of long term trend. Open interest is decreased as well:

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Source: cftc.gov
Charting by Investing.com


Next week to watch

#1US NFP Report

Is this year's sharp U.S. growth rebound losing momentum? A raft of economic data due in the world's biggest economy will provide clues.

U.S. non-farm payrolls on Aug. 6 will offer a snapshot of July hiring. Economists polled by Reuters forecast the economy added 926,000 jobs in July after June's forecast-beating 850,000 in June. Before the payrolls, the ISM manufacturing report and Purchasing Managers' Index (PMI) surveys will be released. The strength of U.S. economic numbers has at least partly driven stock market gains. But forecast-beating data might become the exception rather than the rule.

Have a look at Citi's U.S. Economic Surprise Index, which measures the degree to which the data is beating or missing economists' forecasts. It stands at 3.2 -- a far cry from July 2020's record high of 271.
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#2 BOE Meeting

The Bank of England is set to keep stimulus running at full speed when it meets on Thursday, despite some dissent within its board over the size of its bond-buying programme amid rising inflation and improving economic growth. Thanks to a speedy COVID-19 vaccination rollout and an economy adapting well to lockdown and subsequent reopening, the International Monetary Fund expects Britain's 2021 growth to hit a stellar 7%.

It's all rosier than a few months ago and sterling has rallied as Britain's reopening remains on track.

What to watch for at the BOE meeting? Its view on the economy of course, but after two policymakers broke ranks recently to suggest an early end to its nearly 900 billion pound ($1.2 trillion) bond-buying scheme, it will be interesting to gauge whether that view is garnering more support.

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So, it seems that situation becomes more complicated. In short-term it seems that everything is clear - till the end of the August markets have chance to be driven by their own factors. It means that upward action could last a bit more - for 1-2 weeks. The first bump that get will be NFP on next week. Strong positive surprise could make solid pressure on the dollar rivals.
In a longer-term things are getting tricky. James Bullard calls for fast tapering and first rate change in 2022. At the same time, indeed as BlackRock tells - 120-200 Bln per month is not sufficient volume for 22 Trln market, and what the pace of tapering will be place no big role technically. It should have more the psychological effect. With all these talks and rumors about inflation, employment - interest rates are not changing, recently they have dropped to 1.2% area. At the same time major banks, such as UBS, BofA, Nomura, Nordea, HSBC have average expectations of 1.65-1.75% by the end of the year. Should some interest rates acceleration starts later, in August or September? Maybe. But using of common sense, interest rates has no room to drop more and keep existent downside trend. They could either change the trend or turn to some flat sideways action across the zero line - no other options exist. But flirting with the zero looks out of sense when economy returns to pre-pandemic level and US have inflation in excess of 2%. Taking it all together, it seems that most probable scenario - interest rates should start rising, no matter how fast. Correspondingly, US Dollar should start rising as well. Hence, the only question is how deep current retracement could be... I'm just keep in mind uncompleted long-term 87.40 DXY target... maybe it completes on "swan song", in a last swing before collapse? If, say US interest rates drop back to the lows for very short-term moment. Or maybe market will be disappointed with tapering volume, or tapering will be postponed? We do not know yet. The one thing that we could say is we stand somewhere near the reversal but right no it is not the time yet to make bets on long-term dollar strength. Reversal process could be extended.


TrFKmT13


Technicals
Monthly


Just take a look at July trading range - it is nothing to comment on monthly chart. Bearish trend on monthly chart is confirmed now. Still today we could try to take a bit different look at monthly picture. Previously we've talked a lot about far standing targets. This is 1.26-1.28 to the upside and parity to the downside. Long-term fundamental background stands not in favor of the EUR, but as we've said above - it is a question when this background turns to active stage.

Slowly but stubbornly market was forming pennant consolidation. It looks like triangle on weekly chart and we already used it in our analysis. With this pennant price is able to stay above YPP that is positive sign. On a way to pennant EUR has shown nice acceleration, and in general, price shows very small retracement, just about 30%. So, tight standing is also good sign.

In general, pennant is a continuation pattern. Still as it takes shape of triangle - it keeps door open for both directions by far. For example, butterfly here could be formed as to upside as to the downside. But as market's sentiment has changed and EUR has got the time to fun while US interest rates are low - it is not time yet to go short here for long-term perspective. Market has chance to climb higher, as we could suggest few sources of risk that could trigger this action.

eur_m_02_08_21.png


Weekly

This chart brings minimal information for analysis. You could see the butterfly that might be formed here and complete major upside target for EUR and DXY. But trend stands bearish, upside reaction stands very weak and we easily could imagine the downside butterfly here...

We could repeat mostly the same setups for trading. Classic and conservative approach with minimum risks suggests that we should wait for 1.1620-1.1690 K-support area to consider long entry.
But traders who likes to tickle the nerves could consider long entry with the butterfly with stops below its lows, or even below K-area. This scenario needs assistance from fundamental background - it should bring some positive surprise to EUR, so here the room for gambling exist. But, in a case of success this is going to be best performance. Risk now stands very small, as price is very close to butterfly invalidation point.

eur_w_02_08_21.png


Daily

On Friday market hit our intraday target and touched nearest resistance level and daily overbought. Trend stands bullish here. EUR has formed bullish reversal swing here, and it means that it could show moderate retracement on intraday charts. The same thing has happened on some other currencies, say on GBP...

Still we do not have good context to trade it daily chart directly. Trend stands bullish and we do not have any bearish directional patterns, so we can't go short on daily chart. But it is uncomfortable to buy as well as market stands near resistance. Thus, for long entry, we need the pullback. For short entry here - trend has to change at least, and it would be better if all intraday support levels will be broken.

Existed MACD divergence deserves additional attention from the bulls.

eur_d_02_08_21.png


Intraday

On intraday charts, it is possible to consider scalp short scenario. Market is dropping out from strong resistance area after our XOP target has been hit. Since, as we've said, this is upside reversal swing, retracement should be more or less significant. Trend has turned bearish here:
eur_4h_02_08_21.png


On 1H chart we have classic performance out from achieved target. Bears could consider appearing, say, "222" Sell pattern, accompanied with the grabber (or without it) with stops above the top. While for daily long position we should wait when this retracement will be over:

eur_1h_02_08_21.png
 

Sive Morten

Special Consultant to the FPA
Messages
15,175
Morning everybody,

So, as we've said in weekly report - market's sentiment is changing and we could see it by some indirect signs, such as US interest rates. Despite that tapering announcement right around the corner - rates are dropping. It could mean that some surprises are waiting us either from the Fed or from statistics. Anyway, this points that EUR has chances to climb higher.

Now, as price stands near resistance we're still watching for pullback on intraday chart to get proper area for possible long entry. Although we have untouched OP here, on daily, but it could be completed later while in nearest term EUR could show higher retracement.
eur_d_03_08_21.png


On 4H chart we have two potential areas that look interesting and both of them are Agreements. No doubts, XOP Agreement looks perfect, but some chances exist still that reversal might happen from OP Agreement as well. Thus, here you need to make choice what to do - either to wait for XOP or split position and take some at OP as well:
eur_4h_03_08_21.png


On 1H chart "222" Sell works nice, so if you have taken short position - move stops to b/e. Also keep an eye on triangle, market has to break it down to confirm our idea on downside retracement. For scalp short positions - consider OP Agreement as a target on 4H chart.

eur_1h_03_08_21.png
 

Sive Morten

Special Consultant to the FPA
Messages
15,175
Morning everybody,

It seems, guys that the story of last week repeats - market again turns to very narrow trading range, providing just few moments for discussion. First is, consolidation now looks bullish on the daily chart taking the shape of pennant. Obviously today situation depends on ADP and NFP report that could change everything. But if we get numbers more or less in a row with expectations, upward action should continue. Next target on daily chart is K-area of 1.1950-1.1990, accompanied by OBought level.
eur_d_04_08_21.png


On 4H chart situation also becomes more bullish. Take a look that we have triangle shape. While trend stands bearish price is forming higher lows - this is the sign of potential bullish dynamic pressure. Besides, even without DiNapoli terms - tight consolidation right under strong resistance is a bullish sign, energy building process for breakout. Thus, if we get at least OP target here, thanks to ADP report or some other event - that would be great. I even not talk about XOP right now.
eur_4h_04_08_21.png


On 1H chart EUR forms 3rd in a row "222" Sell pattern. Despite that downside tick has happened yesterday, it hasn't become action to OP target. So, if you have any bearish position - move stops to breakeven. Due to the situation discussed above - it is tricky and rather risky to take short positions by far.
eur_1h_04_08_21.png
 

Sive Morten

Special Consultant to the FPA
Messages
15,175
Morning everybody,

So, EUR has shown dramatic action recently, mostly because of unexpected Fed intruding. Because ADP numbers appeared to be poor - two times smaller than expected and support upward action, that actually was the first swing in dramatic action yesterday. As Freddy FX correctly said above -
....and then we got this sudden drop to 1.18420...........interesting.....and more action a bit later today.

This can't be foreseen anyhow, as Fed surprisingly has made an evident statement, without any hints - tapering later in this year, first rate hike in the beginning of 2023. As a result, market has collapsed and hits our intraday OP.

So, while on daily chart it doesn't hurt picture too much, context remains bullish. As we've got bearish reversal candle there - we're start watching for deeper support areas for long entry, especially if we get bullish grabber.
But, intraday setups have changed drastically...
eur_d_05_08_21.png


On 4H chart we have the same reversal candle and huge bearish engulfing pattern. Just yesterday we've said that "It would be nice to get EUR at OP", but today we do not want to buy here and intend to watch for XOP or 5/8 Fib support at least:
eur_4h_05_08_21.png


On 1H chart we do not see something important by far. Yesterday "222" is done well, even before ADP report... Now, if you intend to trade engulfing - watch for some bounce, supposedly to 1.1850-1.1860 area where is natural resistance stands as well. Maybe another "222" will be formed. EUR forms it rather often recently.
For daily traders idea is the same - wait for next support area and see market response to it. Fed intruding makes no impact on daily scenario.
eur_1h_05_08_21.png
 

Sive Morten

Special Consultant to the FPA
Messages
15,175
Morning everybody,

so, market tricks (or better to say - Fed tricks), now let us to consider lower standing levels for buying EUR. On daily chart we have at least two moments that could be interesting. First is - if EUR keeps some harmony here, which happens often, the bottom to the left - 1.1780 level might be the one that new low could match to.
Second is - MACD line, market is coming in touch with it that could give us the bullish grabber. Combination of these to factors could create acceptable background for long entry.
Besides, overall context here still stands bullish, and EUR is still cold show more extended upward action.
eur_d_06_08_21.png


On 4H chart it seems that makes sense to watch for XOP, the same we said yesterday. Fed sell-off looks strong and if NFP will be not as bad as ADP report, EUR could continue downside action. Besides, XOP perfectly agrees with daily 1.1780 area. So it would be nice if we get daily grabber around XOP. So let's keep watching for this:
eur_4h_06_08_21.png
 
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