Forex FOREX PRO WEEKLY, August 17 - 21, 2020

Sive Morten

Special Consultant to the FPA
Messages
13,796
Fundamentals

This week we mostly have some statistics that makes the shape of the markets. Volatility was moderate, except Gold, probably, and currencies mostly stand around the same levels where they were in the beginning of the week. No drastic shifts in long-term background by far.

News surfing.

The dollar fell from one-week highs and the euro topped $1.18 on Tuesday as investors flocked to currencies that benefit from an improving global market outlook, with the S&P 500 nearing a record high and investor sentiment in Germany rising more than expected. Aside from the euro, sterling and commodity-linked currencies such as the Australian and Canadian dollars, as well as the Norwegian crown, gained against a broadly weakening dollar.

"Europe's political and economic situation in terms of dealing with the pandemic has become far more stable than that of the United States," said Juan Perez, senior currency trader at Tempus Inc. in Washington. "No matter how gradual the recovery may seem in the U.S. and even though the economic indicators may be positive, the reality is that the United States has not handled COVID well and the economic shutdown has created an uncertainty difficult to move away from," he added.

The euro rose after the ZEW survey of economic sentiment rose to 71.5 from 59.3 the previous month, far exceeding a forecast for 58.0 in a Reuters poll of economists. As a result, euro/dollar hit a high of $1.1809.

Congressional leaders and administration officials said on Monday they were ready to resume negotiations on a coronavirus aid deal. It was unclear whether they could bridge their differences. Meanwhile, China imposed sanctions on 11 U.S. citizens, including Republican lawmakers, following Washington's sanctions on Hong Kong and Chinese officials. U.S. Treasury Secretary Steven Mnuchin said companies from China and other countries that do not comply with accounting standards will be delisted from U.S. stock exchanges as of the end of 2021. Market response to the U.S.-China conflict has been limited, but analysts say there could be longer-term implications.

Sterling traded up 0.1% at $1.3088 after Bank of England Deputy Governor Dave Ramsden said the central bank will step up quantitative easing if the British economy struggles again.

The dollar slid on Thursday against some major currencies such as the euro, Swiss franc, and sterling, weighed down by the impasse in Congress about additional U.S. stimulus to help cope with the coronavirus pandemic. Investors, however, remained focused on the stimulus package talks, which broke down last week.

Funding for the U.S. Postal Service and to shore up election infrastructure became a major sticking point in congressional talks on coronavirus relief, as President Donald Trump vowed to block any money to facilitate mail-in voting.

On Wednesday, Trump accused congressional Democrats of not wanting to negotiate over a U.S. coronavirus aid package as Republican and Democratic negotiators traded blame for a five-day lapse in talks over relief legislation.

“The stalemate over the stimulus package is troubling,” said Amo Sahota, executive director at currency advisory firm Klarity FX in San Francisco. “Sticking more band-aid over it, which is what the administration is trying to do right now, is not enduring.” “The dollar being weaker is a sign of positive risk sentiment,” said Klarity’s Sahota. “The market is moving to places that would give them a better return and more comfortable in buying the Australian dollar, euro, and even the pound.”

The dollar also shrugged off better-than-expected U.S. jobless claims data.

Initial claims for state unemployment benefits decreased 228,000 to a seasonally adjusted 963,000 for the week ended Aug. 8. That was the lowest level since mid-March when authorities started shutting down non-essential business to slow the spread of the virus. Economists polled by Reuters had forecast 1.12 million applications in the latest week.

U.S. business inventories declined again in June as sales continued to accelerate amid pent-up demand as establishments reopened after being shuttered to slow the spread of the novel coronavirus. Business inventories fell 1.1% in June after decreasing 2.3% in May, the U.S. Commerce Department said on Friday. Inventories, a key component of gross domestic product, have now declined for six straight months.

Economists polled by Reuters had forecast business stocks falling 1.2% in June.

Retail inventories decreased 2.6% in June as estimated in an advance report published last month. That followed a 6.2% fall in April. Motor vehicle inventories tumbled 6.7% rather than 6.5% as previously reported. Retail inventories excluding autos, which go into the calculation of GDP, dropped 0.8% as reported last month.

The prolonged inventory drawdown contributed to GDP declining at a record 32.9% annualized rate in the second quarter. Inventories subtracted almost 4 percentage points from GDP, the most since the fourth quarter of 1982. Inventories have declined for five straight quarters. The economy fell into recession is February.

Wholesale inventories fell 1.4% in June. Stocks at manufacturers rose 0.6%.

Business sales increased 8.4% in June after rebounding 8.5% in the prior month. At June’s sales pace, it would take 1.37 months for businesses to clear shelves, down from 1.50 months in May.

The delay in the passage of additional U.S. stimulus for virus relief did not help the dollar’s cause as well.

The dollar’s eight consecutive weeks of losses represent its longest weekly run of declines in a decade, Refinitiv data showed, with Friday’s decent batch of U.S. economic data failing to lift the greenback.

“Because of higher coronavirus case counts in the U.S., you have the prospect of longer restrictions,” said Ranko Berich, head of market analysis, at Monex Europe in London. “You have the prospect of longer-lasting drags to human behavior and that means slower recovery in the United States than other developed economies.”

The United States has 5.01 million confirmed coronavirus cases and more than 160,000 deaths, more than any country.

Hopes for additional stimulus to combat the pandemic faded on Friday, with the Senate and House of Representatives in recess and no fresh talks scheduled with U.S. President Donald Trump’s negotiators.

Trump, however, announced on Friday the White House is preparing to provide relief for the economic pain caused by the virus as legislation stalls in Congress, saying his administration is ramping up to send money to families, state and local governments, and businesses. Markets, however, reacted little to his announcement.

The dollar was unmoved after data showing a 1.2% rise in the U.S. retail sales’ headline number in July, which was lower than expected, but a higher than forecast gain of 1.9%, excluding autos. Other reports such as U.S. consumer sentiment and industrial production had little dollar impact on Friday.

Growing faith in Europe’s rebound and concern about the U.S. response as the coronavirus spreads and politicians remain deadlocked over the next relief package have bolstered the euro.

“We saw the euro touch $1.19 last week, but we haven’t really gotten up there again,” said John Doyle, vice president of dealing and trading at Tempus, Inc. in Washington. “That dollar demise that people have been calling for hasn’t come to fruition yet. The big momentum behind the dollar falling maybe slowing somewhat.”

Interest rates turn to motion

Euro zone government bonds sold off on Wednesday and the German 30-year bond yield turned briefly positive ahead of the largest-ever 10-year U.S. Treasury auction and as signs emerged of inflation in the world’s largest economy.

U.S. consumer prices, meanwhile, rose more than expected in July and a measure of underlying inflation increased by the most in more than 29 years, core euro zone bonds sold off, with most yields up 2 to 3 basis points. The 10-year U.S. Treasury yield rose the most in two months on Tuesday and extended those gains on Wednesday to reach a five-week high of 0.686%.

Investors’ expectations for inflation are rising - posing a risk to bondholders because the ECB’s asset purchasing programme targets inflation and if price pressures rise quickly, it might force the central bank to rethink its aggressive bond purchases.

Despite the recent rise in bond yields, however, inflation-adjusted bond yields in Germany remain firmly in negative territory.

“One key feature of the markets in recent months has been that despite low and stable 10 year nominal bond yields, a dramatically divergent move has occurred beneath the surface with real yields plunging to record lows and inflation expectations surging,” wrote Societe Generale strategist Albert Edwards.

“It started off as a technical move because of the issuance that we have from the U.S. later,” said Antoine Bouvet, rates strategist at ING. “But the real reason is that stocks are strong and there’s momentum in the market. We are cautious because we are quite bearish about the global economy and the U.S. in particular.”

“Risk-on in recent days is taking its toll, but also the U.S. supply avalanche we’re seeing this week requires some concessions,” said Christoph Rieger, head of rates and credit research at Commerzbank. Commerzbank wrote in a note to clients that the sell-off was premature. “Fundamentally nothing has changed,” Rieger said. “The coronavirus situation has not improved, the macro situation has not changed, if anything the political risk from U.S.-China has increased.”


Also a broader risk-adverse mood in global markets supported safe haven bonds as stocks are losing ground after lacklustre Chinese macro data which dampened hopes of a quick economic recovery from the coronavirus crisis.

US-Sino relations

New regulations took effect on Thursday barring the U.S. government from buying goods or services from any company that uses products from five Chinese companies including Huawei Technologies, Hikvision and Dahua, a U.S. official said. Any company using equipment or services in day-to-day operations from these five companies will no longer be able to sell to the U.S. government without obtaining a government waiver. The U.S. government annually awards more than $500 billion in contracts, according to the Government Accountability Office.

The United States and China have delayed a review of their Phase 1 trade deal initially slated for Saturday, sources familiar with the plans told Reuters, citing scheduling conflicts and the need to allow time for more Chinese purchases of U.S. exports. No new date for the initial six-month compliance review between U.S. Trade Representative Robert Lighthizer, U.S. Treasury Secretary Steven Mnuchin and Chinese Vice Premier Liu He has been agreed, the sources said.

U.S. President Donald Trump on Friday repeated his view that the trade deal was “doing very well,” but did not comment on the delayed meeting. The White House referred queries on the talks to Lighthizer’s office, which did not respond to a Reuters query about plans for the review. Another source familiar with the plans said that U.S. officials wanted more time to allow China to increase purchases of U.S. goods agreed in the deal, to improve the political optics of the review.

China’s imports of U.S. farm and manufactured goods, energy and services are well behind the pace needed to meet a first-year target increase of $77 billion over 2017 purchases. But as China’s economy has recovered from a coronavirus lockdown earlier this year, purchases have increased. On Friday, the U.S. Department of Agriculture reported the sale of 126,000 tonnes of soybeans to China, marking the eighth consecutive weekday with large sales to Chinese buyers.

U.S. oil traders, shipbrokers and Chinese importers also told Reuters that Chinese state-owned oil firms have tentatively booked tankers to carry at least 20 million barrels of U.S. crude for August and September, indicating a ramp-up in energy purchases.

Trump administration officials have signaled that they are satisfied with the pace of purchases in recent weeks and have no plans to abandon the trade deal, which also includes some increased access for U.S. financial services firms in China, strengthened intellectual property protections and removal of some agricultural trade barriers..

The disparity between countries’ second quarter GDP outturns is striking. Data from China — which is ahead of the most others in terms of bringing the disease back under control — show a strong rebound in economic activity in the three months to June. To the extent that this is sustainable, it raises hopes that a V-shaped recovery is possible. However, how countries handle the spread of the virus remains key; countries with success in this (e.g. South Korea and Vietnam) have experienced milder contractions than those who have not done so well (e.g. the US and the euro area). Provisional data from Sweden suggest that bad economic outcomes can occur even without government-imposed lockdowns.
1597481404161.png


CFTC Data

EUR goes to new records as net long position is rising. At the same time the first signs of tiredness are appearing - open interest start dropping, despite surplus in net position. As speculators as hedgers keep bullish dynamic, but take a look - a lot spreading positions were closed, while number of new longs are not too large and jump in net position mostly stands due short covering:
1597481590685.png


Take a look that position is almost reached 200K contracts level - 50K contracts higher than previous top...
1597481724864.png

Source: cftc.gov
Charting by Investing.com



Next week

U.S. lawmakers negotiating a fresh dose of stimulus have reached an impasse.Trillions of dollars injected by the Federal Reserve and huge government spending increases have stemmed coronavirus-linked economic damage, fuelling a rebound in a Citi index that tracks economic data relative to expectations.

But with almost 30 million Americans unemployed and coronavirus still spreading, Fed policymakers have been warning the recovery could sputter unless politicians come through with further measures. The S&P500 index is holding just off record highs. The wait is on to see if negotiations resume and bear fruit.

-White House, Democrats show no sign of budging on U.S. coronavirus aid-COVID-19 crushes U.S. economy in second quarter; rising virus cases loom over recovery

1597481902179.png



New round of EU-UK negotiations

The twin troubles of Brexit and coronavirus ensured Britain’s second-quarter contraction of 20.4% was greater than any other major economy’s. And recovery will be elusive unless a free-trade deal is reached with the European Union before the post-Brexit transition period ends on Dec. 31.

EU-UK talks begin on Aug 17. The two sides remain far apart, but the meetings may show if they can lay aside their differences in time to reach a deal by the Oct. 2 deadline. An impasse may spell trouble for sterling and further pressure on domestic-focused shares.

The Bank of England is not considering negative interest rates just yet, but the prospect of crashing out of the European Union without a deal might leave it with no alternative.

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Technicals
Monthly


This week technical picture has not changed too much as price mostly is hovering around 1.1850 through the week.
By taking in a longer-term, our view is mostly the same. Existed driving factors should provide long lasting effect on EUR. Even rough approximation suggests that market could reach 1.20-1.23 area. The same was mentioned by other analysts as well. Besides, large grabber ultimately suggests action above 1.26 in long-term perspective, although now it seems unbelievable. I'm not an expert in EW, and lets professionals correct me, but it looks like 3rd wave up has started which should become the major swing in upside tendency. Theoretically it should be significantly in excess of "2" wave's top @ 1.25. Price stands above YPR1 as well that indicates new upside trend but not retracement to existing bearish tendency. Monthly overbought area stands far from here and provides room for more upside action.

But that is for long-term perspective. In short-term we have few technical limitations. First is and the major one - overextended net long position on EUR. Market sets the new record of ~200K contracts. Second - market meets monthly major 5/8 resistance level and something tells me that hardly it will be passed unsigned. It means that we should be prepared to the pullback, keeping long-term view intact.

The first week of August shows no big action and it seems that market indeed feels the barrier of the level. At the same time very fast action as of AB leg as current CD leg gives no doubts on upside continuation in medium-term perspective. As COP stands close - we should be aware of possible spike by some reason, but without immediate upside continuation.

eur_m_17_08_20.png


Weekly

Here we've got another inside week that barely impacts on overall picture. The major targets also stand slightly above the market. Due combination of Fib resistance and Overbought (that is DiNapoli bearish "Stretch" pattern by the way), we can't count on upside rally right now. But, some spikes could happen, just to complete as monthly COP as weekly targets. The doji shape last week indicates rising doubts, indecision and some concern on short-term direction. So, the background for pullback still holds.

eur_w_17_08_20.png


Daily

For the whole week we were monitoring possible signs of coming retracement, and even have made few tactical attempts to take short position. But, finally we come to conclusion that upside continuation is more likely here. Mostly because of price behavior. When market turns to retracement, traders are driven by fear and hurry up to grab the profit off the table. As a rule, this leads to direction, straight action down. Not necessary it should deep, but it should be faster. Here we do not see this. It means no fear on the market right now and it mostly looks like consolidation before upside continuation.

At the same time, due the reasons mentioned above, we do not expect historical breakout as well. EUR probably will turn to pullback, but now it seems that this is more probable after major targets around 1.20 area will be hit:
eur_d_17_08_20.png


Intraday

It means that carefully we could consider short-term bullish setups, if we get some more or less acceptable context and patterns. For instance, the grabber setup that we've discussed on Friday on 4H chart. Take a look - grabber is formed and EUR is moving higher. Still, the pattern has not reached the target yet. Additionally we have other relative bullish factors - divergence and failure to form any bearish reversal pattern (as we were looking for Double Top initially). This makes situation around grabber suitable for position taking. And, in general, while market stands above 1.1730 trend line - overall situation holds the view of bullish consolidation.

eur_4h_17_08_20.png


Conclusion:
This week we do not see drastic shifts as in fundamental background as in technical picture. On a fundamental stage everything now in the hands of EU leaders and ECB. EUR drifts higher by the durability of known factors, and in general while US recovery delays - EUR gets advantage. At the same time it could accelerate if EU leaders take more aggressive measures on boosting EU economy. EU/UK negotiation breakout also could provide short-term effect.

In shorter-term we tend to idea of another leg up before major retracement will start as current price behavior on daily/intraday chart doesn't match to how retracement market should look like.
 

Sive Morten

Special Consultant to the FPA
Messages
13,796
Morning everybody,

Today we take a look at GBP as setup there is very similar to EUR. Both currencies have upside targets that stands slightly above the current price. As we've said last week, EUR price action doesn't correspond to idea of pullback as all potential bearish patterns have not been formed. That makes us think that EUR is tending to major target slightly above 1.20...

On GBP is very similar situation and it is also start moving in direction of our target as soon as minor respect of butterfly target has been completed. Take a look, GBP has OP around 1.3270 that also makes an Agreement with major weekly 5/8 Fib level. Chances on pullback once this target will be completed is significant:

gbp_d_18_08_20.png


On 4H chart market stands above our previous XOP target and forming something that looks like butterfly. At least upside extensions accurately correspond to major daily OP target:
gbp_4h_18_08_20.png


On 1H chart we could better see the price action around the top. Here we could recognize either reverse H&S type of action , or you could call it as cup&handle, it doesn't matter. Extensions of these patterns point approximately at the same area:
gbp_1h_18_08_20.png


Thus, who keeps long - be prepared to protect profit or book it around daily OP. Those who is watching for short-entry pay attention to price action around the same OP as bearish patterns could start to form there.

EUR probably should hit its own target around 1.2010 at the same time as GBP hits OP around 1.3270
 

Sive Morten

Special Consultant to the FPA
Messages
13,796
Morning everybody,

So GBP has hit our daily target. Further upward continuation stands under question due the reasons that we've discussed yesterday. Thus, I would watch for bearish signs on Cable in nearest term.

EUR still stands 60 pips out from 1.20 objective point but it has good chances to hit it on Fed minutes release in the evening:
eur_m_19_08_20.png


As market will hit weekly Overbought around the same area, here, immediate upside continuation also stands under question as retracement is ripen here as well. Reasons are different compares to GBP, but reaction probably will be in the same direction. Also, do not forget that EUR has ultimate high net long position that also makes technical pressure on the price. Thus, it seems, that short-term reversal could start by 4H butterfly pattern, once monthly COP will be hit:
eur_4h_19_08_20.png


If you would like to short something - better to short the GBP as it has worse fundamentals...
 

Sive Morten

Special Consultant to the FPA
Messages
13,796
Morning guys,

Miracle has not happened, and EUR missed just 30 pips to complete monthly COP forming bearish engulfing pattern on daily chart. It seems that we have to postpone reaching of 1.20 to the next week, albeit something outstanding will happen that push EUR to the target in a way of some spike maybe.
Beyond of this possibility, pure technical picture suggests at least another leg of retracement down inside the flag pattern, as we have engulfing. The same story on GBP, by the way. So, you could put this analysis to GBP as well as we have the same setup there, even better...
eur_d_20_08_20.png


So, on 4H chart we have first push down to 50% support level and now EUR is pulling back a bit. Engulfing pattern suggests AB-CD type of action. Thus, AB leg is in place already, now we're in BC where we could consider taking the short position:
eur_4h_20_08_20.png


1H chart shows two levels. First one is where price right now - K-resistance, while next level is around 1.19-1.1915. I've plot here just one. Once resistance will be reached, theoretically, we should get downside action, which is CD leg:
eur_1h_20_08_20.png


But, guys, if you really consider short entry - it would be better to do this on GBP by few reasons. GBP has hit major target - EUR is not, GBP stands at Agreement weekly resistance - EUR is not, reversal on GBP is sharper. So, GBP has better looking background and less potential pits on a way of this retracement...
 

Sive Morten

Special Consultant to the FPA
Messages
13,796
Morning guys,

Surprisingly, but despite GBP was looking better for retracement purposes, it has shown stronger upside reaction than EUR. As within few minutes we've got UK PMI's, it is interesting to see what will happen. We do not cancel yet retracement scenario as resistance on GBP is really strong, but some stop grabbing could happen around 1.3270 top...
On EUR recent bearish engulfing has special meaning by our view as it break out from normal price action and forms early reversal leaving major target untouched. It means that something stands beyond this behavior and EUR could drop a bit lower.
On daily chart we again could return to idea of DRPO pattern. It looks a bit ugly here, but today's close at current levels or lower fits theoretical conditions of DRPO pattern:
eur_d_21_08_20.png


On 4H chart we could focus on grabber. If it will be confirmed, we should get more confidence on downside continuation:
eur_4h_21_08_20.png


In this case, we could consider AB-CD pattern and its two targets. COP that stands slightly under the recent lows perfectly matches to potential grabber's target, while OP agrees with support line of flag consolidation on 4H chart. So let's see what will happen...
Currently we do not see good setups for long entry as monthly 1.20 target stands too close and current point provides not very attractive risk/reward ratio. For short position - do not risk too much. For example, you could try to stick with the grabber once it will be confirmed and try to sell against its top with nearest target as weekend is near...
eur_1h_21_08_20.png
 
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