Forex FOREX PRO WEEKLY, August 15 - 19, 2022

Sive Morten

Special Consultant to the FPA
Messages
16,705
Fundamentals

This week, no doubts, CPI report has become a major driver. Markets were so inspired with decrease that it has provided positive impulse right to the end of the week. Not only on stock market but on bonds, Gold, FX and others. At the same time a lot of political events stand now in the US and J. Biden government authorized few legal acts that confirm our suggestion - Democrats pull out all the stops. Events of this week confirm our long-term view adjustment with expectations of softer Fed policy.

Market overview

Wall Street equities rallied and the dollar tumbled after signs of sharply decelerating U.S. inflation prompted bets that the Federal Reserve would raise interest rates at a slower pace than previously expected. Treasury yields mostly pulled back from an earlier plunge as investors digested data showing that consumer prices did not rise in July as the cost of gasoline fell, delivering the first notable sign of relief for Americans who have watched inflation soar over the past two years. Traders priced in a 50 basis points rate hike next month, compared with the 75 bps increase that had been expected before inflation report.

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During Wednesday's session, Chicago Fed President Charles Evans said inflation is still "unacceptably" high, and the Fed will likely need to lift its policy rate to 3.25%-3.50% this year and to 3.75%-4.00% by the end of next year.

Minneapolis Federal Reserve Bank President Neel Kashkari said that while the cooling in price pressures in July was "welcome," the Fed is "far, far away from declaring victory" and needs to raise the policy rate much higher than its current 2.25%-2.50% range.

The Fed has indicated that several monthly declines in CPI growth will be needed before it lets up on the aggressive monetary policy tightening it has delivered to tame inflation currently running at four-decade highs.

U.S. Treasury yields were down as traders weighed a likely moderation of the Fed's monetary policy stance. Benchmark 10-year note yields dipped to 2.8385%, after reaching 2.902% on Thursday, the highest since July 22.

"With inflation coming down, consumer confidence is going to be coming back, and employment is still strong, you could see a situation where the market has stabilized and the economic numbers continue to slow based on the lag effect of the Fed tightening that has already happened," said Thomas Hayes, chairman at Great Hill Capital.

Data over the last two weeks bolstered hopes that the Fed can achieve a soft landing for the economy. While last week’s strong jobs report allayed fears of recession, inflation numbers this week showed the largest month-on-month deceleration of consumer price increases since 1973. The shift in market mood was reflected in data released by BoFA Global Research on Friday: tech stocks saw their largest inflows in around two months over the past week, while Treasury Inflation-Protected Securities, or TIPS, which are used to hedge against inflation, notched their fifth straight week of outflows.

“If in fact a soft landing is possible, then you’d want to see the kind of data inputs that we have seen thus far," said Art Hogan, chief market strategist at B. Riley Wealth. "Strong jobs number and declining inflation would both be important inputs into that theory.”

Investors next week will be watching retail sales and housing data. Earnings reports are also due from a number of top retailers, including Walmart and Home Depot, that will give fresh insight into the health of the consumer. Seasonality may also play a role. September - when the Fed holds its next monetary policy meeting - has been the worst month for stocks, with the S&P 500 losing an average 1.04% since 1928, Refinitiv data showed.

Walmart and Target which report second-quarter earnings on Tuesday and Wednesday, respectively, have recently cut forecasts and warned inflation was squeezing margins and forcing consumers to reduce discretionary purchases. Retailers' outlook for consumer behavior will be key for investors looking to assess the pace of inflation. U.S. consumer prices were unchanged last month, the largest month-on-month deceleration of price increases since 1973.

Other big retailers reporting include Home Depot on Tuesday and Lowe's the following day, while U.S. retail sales data, set for Wednesday, will give a broad picture of how the consumer is faring.

The question on stock market performance is very tricky, as current S&P shape accurately repeats the one of 2008 crisis, dotcom bubble crush and 1930-1937 crisis of Great Depression.

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Besides, one of the largest BlackRock Inc. shareholders, Laurence Fink has sold ~ 8% of company shares. Why, if it is cloudless stock market future on the horizon? Last time he has sold shares on 30th of January 2020 - at the eve of CV-19 collapse...
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The cooling U.S. housing market gets a couple of gut checks in the coming week as well. July data on housing starts is due on Tuesday, after new U.S. home-building activity fell to a nine-month low in June. Data on U.S. existing home sales for last month is released on Thursday after such sales fell for a fifth straight month in June to the lowest level in two years.

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CPI COMPONENTS ANALYSIS

To get clear understanding on what has happened and is it really we should be inspired with recent numbers - we have to take a look at the CPI major components. It is not necessary to be a prophet to understand that drop mostly has happened because of hydrocarbons and gasoline price drop. But it doesn't resolve all the problems. Yes, energy has dropped for 4.6% and gasoline in particular - 7.7%. It takes 5.33% share in CPI index value.

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At the same time, Food is rising for 10.9% YoY (with 13% growth for food at home), and core inflation without energy stands for 6.6% (YoY). At the same time we see stable growth in rent, medical services, and this growth is constant. By taking a look at the components we could acknowledge that inflation is coming to average level of 6-7%. This is precisely the one that Credit Suisse Zoltan Pozsar has mentioned in its analysis:

The result is that inflation is now a structural problem, rather than a cyclical one. Supply disruptions have arisen from the changes in Russia and China, along with tighter labor markets due to immigration restrictions and a reduction in mobility caused by the coronavirus pandemic, Pozsar said. There’s now a risk the Federal Reserve under Chair Jerome Powell has to raise interest rates to 5% or 6% and keep them there(!!!) to create a substantial and sustained reduction of aggregate demand to match the tighter supply profile, he said.

The CPI decrease that we see is an exhausting of two components in commodities part - war premium and general slowdown of global economy. War premium were standing very high in Electricity, gas, oil, grain wheat and other components. But now it is gradually exhausting. Additionally decreasing of global demand on other commodities and partially on hydrocarbons (or, anticipation of this decreasing), pushes prices lower/keep it stable, making CPI slowdown a bit. Thus, we could say that the CPI structure is becoming smoother. At the same time, all other components keep growing.

There are two other thoughts on CPI. We need to track a dynamic for a few months to make final conclusion, because CPI seasonally is decreasing on summer and because it is not correct to make conclusion by just a single outbreak.

Besides, labour cost indicator, which is a leading one to CPI/PPI should keep us in tension as it shows growth for 10.6%:
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And weekly claims keep going higher:
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As a result, the real wage, with adjustment to inflation has dropped significantly:
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Also we've mentioned epic drop in the US Productivity. In a IQ 2022 it has dropped for 7.6%, in IIQ for -4.6%, which is the largest drop in 75 years. Productivity has minor impact on the markets in short-term, but longer term effect is important. The higher productivity is, the more wage you could pay and the more people could consume without triggering inflation. Rising of labor cost together with productivity drop creates additional inflationary pressure.

All in all, inflation will drop not because of oversupply or price decreasing but because of households' wealth deterioration, as people just can't pay for it. Previously we already have shown you that the gasoline consumption is dropping, despite the "High season" on summer, which is the reason of inflation drop, but not because the gasoline becomes cheaper.

Besides, US is burning its strategic oil reserves, trying to saturate the market. Thus, it is still the question of gasoline price drop... maybe Democrats are preparing to November elections, trying to use all tools to create the visuality of improvements - consume crude oil reserves, printing money to support stock market and keep rates stable? With market economy, the cheap US gasoline/oil should start flow to Europe where it is still expensive. Why it is not flowing there? This also suggests that we see administrative intruding in economy, where price is artificially damped inside the country for some time.


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Conclusion:

Hypothetically, if Fed would keep rising rates, leading them to 5%, at least, inflation would have to stabilize first around 5-6% and then gradually decrease, leading economy to the health condition. But in particular example, we see multiple deviations from the theoretical scenario. Keeping aside high US debt and its service expenses, difficulties with debt replacement etc., we see that average structural inflation rate is coming to 6%. The process of "war premium" exhausting in commodity prices should continue. But problems come from another side. First is Fed doesn't intend to rise rate so high. Now consensus suggests it around 3.5-4% at best case. Second problem is more significant - Fed doesn't intend to contract money supply to hold inflation and turns to opposite, a kind of QE but in a bit different way.

Couple of weeks ago when we've estimated that Fed is defeated by inflation, we've suggested that it should start using Treasury money for bonds buying. The most recent data confirms this idea - Fed balance has increased for ~5 Bln while Treasury deposit has dropped for the same sum.

Previously we've mentioned that US Treasury already double the limit of borrowing until September. This is new liquidity injection for 440 Bln. Democrats have approved different programmes - semiconductor, tax reducing, eco energy etc. for ~760 Bln. This is additional 1 Trln inflows until the end of the year. Besides we have doubts that energy prices have decreased naturally. But, even with this suggestion, and suggestion that inflation in long-term will gravitate to 6-7% level - this basic level of structural inflation will keep rising because of reasons that we've mentioned here.

We expect that CPI/PPI numbers will bring a lot of chaos in investors' minds in nearest 3-5 months. Because of artificial manipulation of oil and gasoline prices and natural rebalancing of the components of the index. It will give us higher volatility in numbers.

Finally we have to remember that CPI is not the reason for the crisis, it is just a reflection, the indicator, that is changing under impact of the US economy fundamentals, which do not show any signs of improvements yet, whatever sphere you take a look - production, services, manufacturing, consumption, PMI, savings, sentiment etc. Deterioration on real estate market continues. People are loosing wealth and this makes them to take more loans while they are relatively cheap. Consumer loans rise for 12% this year - the fastest pace in last 15 years (ex. mortgage loans). But as loan rates lag behind inflation - this should hurt banks' profit margin later and increase defaults and provisions that sooner or later but make negative impact on banking sector. Who will pay for this consumption?
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As situation in Europe stands even worse (Food inflation in Germany also around 14.6%) and will become worse more as we're coming to winter, we do not see reasons yet to change our long-term expectations of dollar domination over EUR and change our 0.9 EUR/USD target. Still, the one thing that we have to acknowledge though, that USD appreciation could become slower and more choppy, as closer we're coming to November elections. Rising domestic political confrontation hardly brings stability and improve situation.
 

Sive Morten

Special Consultant to the FPA
Messages
16,705
Technicals
Monthly

This week we haven't got any big shifts in technical picture, as market stand in tight range.

Long-term picture on EUR remains bearish, MACD stands bearish as well. July has closed in the middle of the range as market now needs time to adjust expectations based on information that we've discussed above. August performance barely impacts on the whole picture by far.

Technically, to give even minor bullish hints, EUR has to climb above 1.10 area. Until price is flirting below OP target - situation remains clearly bearish, as it could be treated as the way to XOP. Without strong technical support levels market could change the direction only by big shift in fundamentals. GDP drop was forgotten fast and is shaded by superb NFP and CPI numbers. So, GDP effect is muted.

With the drop below OP, it is the only direction to XOP, as market enters new extension mode. Our major target that we could calculate is 0.9, nearest local target is 0.9750, which is 1.27 butterfly extension. Downside action shows good thrust and appearing of B&B "Sell" here is definitely welcome.

As we've suggested, downside action probably should slowdown a bit, and EUR could show higher pullback, but recent changes are not enough to break the downside trend as advantage still stands on the US side.

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Weekly

By taking a look at weekly chart, I would say that bears have more aces on the hands than bulls. Yes, we have MACD trend and divergence here, but maybe we should fade MACD against monthly bearish trend at strong K-resistance area by DiNapoli approach? Divergence, in turn, has no background as all major support Fib levels have been broken already.

Conversely, overall price shape has the flag shape, which is bearish pattern, EUR has completed harmonic retracement and price under 1.0446-1.0460 K-resistance area. This makes us pay attention to it and watch for possible bearish patterns around:
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Daily

Here we do not have anything special. Price is pulling back out from overbought level and resistance. Trend remains bullish by far. Weekly K-area around 1.0440-1.0460 is accompanied with overbought as well:
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Intraday

For bearish position taking, I would be happy to get "222" Sell here right around strong weekly resistance area. Supposedly this is the major pattern that bears could keep an eye on:
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EUR has shown nice upside performance on Friday, although later in the session failed to keep going higher. Now we need to keep an eye on 1.02 strong support area. Normally bullish market should hold it and turn up. Downside breakout doesn't mean that everything is lost, but significantly hurts bullish context. So, if you watch for scalp bullish trade - keep an eye on 1.02 support, just avoid fast drop if it happens.
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Brett Reynolds

Sergeant Major
Messages
972
I use RSI to look for divergence and it shows nice on weekly. Very oversold on monthly. Looking to get long on nice PA on 1 hr or 4hr chart on Monday.
Very similar chart on £GBP. Nice weekly divergence on RSI and oversold on Monthly.
Invalidation for £GBP is Daily close 'Below £1.20. Nice PA on Monday around $1.21 levels could show good opportunity to 'buy' with weekly targets upward of $1.2450.!? :cool:
 

DannyFMA

Recruit
Messages
6
Hi Sire Sive ! Great work as usual . I quickly want to know if DOSC and Momentum indicators could equally be used to detect divergence? Thanks in advance .
 

Brett Reynolds

Sergeant Major
Messages
972
I use RSI to look for divergence and it shows nice on weekly. Very oversold on monthly. Looking to get long on nice PA on 1 hr or 4hr chart on Monday.
Very similar chart on £GBP. Nice weekly divergence on RSI and oversold on Monthly.
Invalidation for £GBP is Daily close 'Below £1.20. Nice PA on Monday around $1.21 levels could show good opportunity to 'buy' with weekly targets upward of $1.2450.!? :cool:
No PA yet to 'Buy' on GBP. Market hovering at $1.21 level. There is News on Unemployment at 7am Tues 16th Aug. Market could be waiting for this..?? ;)
 
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Sive Morten

Special Consultant to the FPA
Messages
16,705
Hi Sire Sive ! Great work as usual . I quickly want to know if DOSC and Momentum indicators could equally be used to detect divergence? Thanks in advance .
Hi Danny, there are two different momentum exist. First is absolute - it is equal to DOSC and calculates as Price(t)-Price (t-n), where t and n number of periods. DOSC = Close (1) - Close (7). So, if you use in absolute Momentum parameters 1 and 7 - you get very similar line to DOSC.

Relative Momentum is Pt/P(t-n)*100% - it is normalized and closer to RSI indicator. So better to use first one. Besides, for Divergence you could use any other non-normalized indicator. I often use MACD.
 

Sive Morten

Special Consultant to the FPA
Messages
16,705
Morning guys,

Markets across the board shows more weakness that we've suggested. Bulls still have chances but they are less than before.

On daily chart EUR comes to MACDP line and as usual we will be watching for possible bullish grabber. it might simple life to the bulls significantly. Or, at least, reduce risk on the trade.
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Intraday performance meantime looks brings some doubts on bullish perspective. In particular - price was not able to complete OP target. Upside action was limited just by minor 1.27 butterfly pattern. Price has dropped, breaking short-term upside channel.

If you have missed entry because of OP ignoring - today you could keep an eye on possible B&B "Sell" pattern on 4H chart.
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Another sign of weakness stands on 1H chart. Market has broken through strong support area - our XOP Agreement with 1.02 K-area. It was a response for ~40-50 pips, but normally, bullish market should have to keep going higher, that has not happened. Below we still have major 5/8 of 1.0111 but it still weaker than the broken one. It means that bulls have to wait for more confirmation of reversal. First is daily grabber, additionally it is preferrable to get some reversal pattern here as well...
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That's being said, today bears could watch for 4H B&B "Sell", while bulls to get patient and wait more bullish signs, as overall performance looks weak.
 

Sive Morten

Special Consultant to the FPA
Messages
16,705
Morning guys,

First is - minor update on EUR... On daily chart we haven't got any grabber, so, the potential bullish trade now has a bit weaker foundation that it might be. Today Retail sales data could bring volatility on the markets. Although people are loosing wealth due inflation - we see record growth of consumer credit, that compensates it. Thus, it should not be too strong drop in consumption today, but - this is just our suggestion.

The only setup that makes to watch for today is 4H thrust and potential DRPO "Buy" or its Failure patterns. As we've suggested, EUR has dropped to 1/2-6/8 Fib support area. Thus, bulls could watch for the pattern. Its minimal target should be around 1.0250-1.0260 area - 50% of the downside thrust. While bears has to wait when DRPO will be completed - our fails. In second scenario it is possible to consider Stop "Sell" entry order near DRPO lows.
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Meantime on the GBP we're watching for completion of 3-Drive minimal target around 1.2405 top - between 2nd and 3rd Drives. Weaker Retail Sales could provide minor push to let GBP to do it. In this case DRPO on EUR should work as well, I suppose. But, all in all - action on GBP is too slow and weak and I wouldn't count on serious upside continuation. We also watch here for H&S pattern, but it is still a question whether it could be completed...
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On 4H chart we have some reasons to suggest upside action. First is - market forms narrowing consolidation accompanied by bullish divergence. Potentially, it could lead to appearing of upside butterfly, which, in turn, could finalize the 3-Drive pattern.
Alternatively with stronger Retail Sales GBP could form "222" Buy around the same support area. So if you would like to take part in all this stuff - it would be better to combine both pattern in single position, placing stop initially below 5/8 Fib support... Bears once again should watch either for completion of upside targets, of downside breakout of 5/8 support. In this case GBP will start aiming on the major weekly lows...
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Sive Morten

Special Consultant to the FPA
Messages
16,705
Morning everybody,

So, as we've suggested Retail Sales have brought no big surprises as people compensate wealth drop by consumer loans that let consumption stands at average level. Although hardly it lasts for too long. More important what we've got from the Fed minutes recently. There are two major points - first is unemployment will start rising in II half of the year - things that we were speaking about in recent few weeks on our weekly reports. Second - the effect of tightening is not yet totally feeled by markets. In general minutes are relatively hawkish, keeping Fed on 50-75 bp. next move.

With all these background, it is difficult to set on bullish mood, guys. Especially with the big bearish grabber on weekly Gold. Recent EUR and GBP performance looks week. On 4H chart formally we've got DRPO shape - but by price action it is not the DRPO as we do not see bears capitulation and upside acceleration. It means that we should be ready for another move down today. We almost have DRPO "Failure"
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As market still stands around 1.011 support area - minor tactical bounce could happen. If, say, we get reverse H&S here, or something of this kind. But only tactical, as reasons to suggest solid upside continuation are totally absent.

Bears could keep an eye on the same stuff - for scalp trading, consider 222 Sell and DRPO Failure, while for trading on higher time frames - either downside breakout 1.01 support which is more probable. Or, if miracle will happen - the pullback from 1.011 in a shape of some bullish pattern on 1H chart.

In general it seems that we should prepare for downside continuation as performance looks weak
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On GBP short term story is very similar - market is coiling around support and also keeps chances on tactical bounce. Fore example, it might be started by Butterfly or reverse H&S pattern as well. In general setup, that we've mentioned recently is not failed yet.
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But it is more and more doubts appear concerning larger H&S performance on daily chart... The faith in its proper action is melting... If 4H setup starts working then daily pattern also gets the chance. Downside breakout of 1.19 area cancels as local as daily bullish setups.
 

Sive Morten

Special Consultant to the FPA
Messages
16,705
Morning everybody,

So, some phantom chances for the bounce as on EUR as on GBP that were existed at least theoretically - now totally cancelled. Miracle has not happened, as we've suggested. Under pressure of bad statistics, hawkish Fed minutes and fast economical deterioration in EU EUR remains under pressure. It seems that daily pullback is over already market is aiming on the lows:
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There are two other things confirming this on 4H chart. First is - upside OP was totally ignored and second - price has dropped below "C" point, erasing AB-CD pattern and forming bearish reversal swing. DRPO "Failure" pattern has worked nice:
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Now we have new downside AB-CD pattern, where COP is almost reached already, while OP stands around 0.9960 - right around the daily lows. On 1H chart market still stands around 1.011 support, forming downside 1.618 extension and near COP. But all these things are not enough to provide good bullish context. The only thing that we might be interested here is upside bounce to get better price for short entry...
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