Forex FOREX PRO WEEKLY, August 22 - 26, 2022

Sive Morten

Special Consultant to the FPA
Messages
16,929
Fundamentals

This week, guys we have huge amount of data for discussion, so I split it between Gold and FX analysis just not to bother you with extreme reading. In the US this week, markets especially were focused on Fed minutes, Retail Sales, Real estate and Philadelphia stats. While in EU we do not have a lot of statistics this week, although everybody worry with extreme climate conditions and energy prices.

In general, all trends that we've mentioned few months ago are gradually progressing. Here and there we see some volatility, such as recent CPI drop, for instance but such a local outbreaks absolutely do not hurt the major tendency, which makes us to be sure in our correct view on situation in general. Summer, after all, has come into its own, there are few non-trivial statistics. Meantime, it can only be noted that in the EU, in the UK, and in the USA, negative trends continue without much stopping.

In other words, the picture becomes more or less typical, some small improvements are quickly replaced by a further increase in inflation and/or an intensification of the recession. For a structural crisis, this is a normal situation, which, moreover, weakly depends on the tightening of the monetary authorities' policy. But for liberal experts, it turns out to be an unpleasant surprise every time.

Market overview

The White House is ramping up efforts to tout the $1 trillion bipartisan infrastructure bill and the effort to refurbish roads, bridges and airports and reduce emissions. Additional money injection into the system. This should help to struggle inflation, probably. U.S. Transportation Secretary Pete Buttigieg will go on a four-day, six-state tour starting Tuesday, visiting Florida, Oklahoma, Minnesota, Ohio, Nevada and New Hampshire to talk up the infrastructure law.

The U.S. dollar index hit a five-week high and posted its biggest weekly gain since April 2020 on Friday as investors adjusted for the likelihood that the Federal Reserve will keep hiking rates to battle inflation. The U.S. central bank needs to keep raising borrowing costs to tame decades-high inflation, a string of its officials said on Thursday, even as they debated how fast and how high to lift them.

The Federal Reserve needs to keep raising borrowing costs to bring high inflation under control, a string of U.S. central bank officials said on Thursday, even as they debated how fast and how high to lift them.

St. Louis Fed President James Bullard, who was among the central bank's earliest advocates last year of a more muscular response to fast-building price pressures, said that given the strength of the economy he is currently leaning toward supporting a third straight 75-basis-point interest rate hike in September.

"I don't really see why you want to drag out interest rate increases into next year," Bullard told the Wall Street Journal, saying he would like to get the Fed's benchmark overnight interest rate to a target range of 3.75% to 4.00% by the end of this year. The Fed's policy rate is currently 2.25%-2.50%.

Earlier on Thursday, San Francisco Fed President Mary Daly said hiking rates by 50 or 75 basis points at the Fed's next policy meeting on Sept. 20-21 would be a "reasonable" way to get short-term borrowing costs to "a little bit above" 3% by the end of this year, and on their way to a little bit higher in 2023. The exact pace would depend on employment data, which has shown brisk growth in recent months, and inflation, Daly told CNN International. Inflation, by the Fed's preferred measure, is running at more than three times the central bank's 2% target.

Fed officials' remarks Thursday suggest an emerging split in the central bank between those who want to push rates higher quickly, and those who are more cautious because of potential damage to the job market and the risk of a rise in the U.S. unemployment rate, now at 3.5%. Trading in futures contracts tied to the Fed's policy rate suggested investors see that rate rising to a range of 3.50%-3.75% by March of next year, but then starting to fall a few months later. Fed funds futures traders are pricing in a 55% expectation that the Fed will hike rates by 50 basis points in September and a 45% probability of a 75 basis points increase.

"For the USD to weaken meaningfully, the Fed has to get more concerned about growth than inflation, and we are not there yet," Bank of America analyst Michalis Rousakis said in a report on Friday. "Meanwhile, we expect the (European Central Bank) to stop hiking next year on concerns around growth and/or spreads. EUR is also exposed to the much worsened terms of trade and the slowdown in China," Rousakis said.

The minutes also flagged an important dimension of the Fed's debate in coming months: when to slow down the rate increases. But analysts said it was wrong to focus on these parts of the minutes instead of the overriding view that rates need to keep heading higher.

"Except for the part about slower pace of rate hikes, the rest of the minutes read very hawkish," Win Thin, global head of currency strategy at Brown Brothers Harriman, said in a report.

"The markets are still trying to figure out the Fed minutes," causing volatility, said Charles Self, chief investment officer at Tandem Wealth Advisors in Appleton, Wisconsin. "The minutes were uniformly hawkish in our view," Self added. "It's clear that among all the voting members that curing inflation is the No. 1 choice and they're going to do whatever is necessary as far as raising rates to get there. We think they're using the labor market as cover."

We also treat recent Fed minutes as hawkish with two major points that have been announced - the tightening effect is yet to be seen on the markets. And, second, which we see as more important and confirming our long term view - employment could start dropping in IIH of 2022.

With the in-depth view on recent policy steps by Fed and US government we have no reasons to suggest on improvement. Despite that Retail Sales were more or less on average level, take a look at consumer loans - it stands at ATH. It means that people do not want to decrease consumption and compensate wealth drop by loaning the money, while they are relatively cheap. Soon somebody has to pay for it, and it seems it should be banks with debt provisions, and profit margin drop. Previously we already have shown that personal savings stand at lowest levels in few decades.

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Real estate market statistics this week also looks bad. Overall drop of existing homes stand for 20%, compares to last year.
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The same story we see on new homes. As experts suggest - it could lead to the bigger blow than 2008 subprime crisis.
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As we previoulsy have shown when we've touched the topic of real estate market - this is barometer of the whole economy. Because people are buying home, making repairing, furniture, buying electronic etc. Thus, here we still see the same trends and situation doesn't become better. The NAHB real estate market index fell from 55 to 49 points in August. For the first time since May 2020, the data indicate a negative assessment of builders of the future prospects of the market. From the end of 2020 to April 2022, the index did not fall below 75 points.

The rapid growth of the housing market after the acute stage of the COVID-19 pandemic has finally ended. An index value below 50 is a wake—up call. Record inflation has led to exorbitant prices for mortgages and rental housing for consumers. This kills the demand, after which the supply will collapse.

Moreover, the developers themselves are unsuccessfully struggling with inflation in the commodity markets. The growth of construction and fuel costs seriously limits business opportunities. Builders complain about the worst sales rates since 2011 and 2014. Companies such as D. R. Horton, Lennar Corp and other major players may suffer.

At the same time, Fed moves with the same tactic - pumping cash into the system, breaking set rules of suggested QT programme. By mid–August, nothing had changed, the Fed completely failed the program of reducing the balance sheet on August 17 - there are no securities sales agreed with the plans (47.5 billion per month, where 30 billion treasuries and 17.5 billion MBS). In fact, in 78 days they sold only 50 billion assets with a sales plan of 120-125 billion during this time, i.e. they are 2.5 times behind schedule, and since September they should sell 95 billion a month. Obviously, there will be no sales…

Thus, the Fed's tactical maneuvers are clear: carefully pour securities into the market at a significantly slower pace, but under favorable conditions, however, in the event of a storm, stop selling.

Accordingly, there will be no implementation of QT with the resumption of sales in the market, which are inevitable in the absence of an organic inflow of cash flows into debt markets. In order for debt markets to exist at record negative real rates, it is necessary to implement intolerable conditions for other asset classes so that, when market risk is balanced, the bond market has an advantage.

In order to bring down inflation, there needs to be increased competition for monetary resources, i.e. money hunger, when the savings model of consumption is actualized. To do this, it is necessary to tighten financial conditions, which cannot be, because at every rustle, the Fed will definitely falter and put on the brakes.
The longer the Fed delays the inflationary struggle and the further it departs from the plan, the more confidence in the Fed is undermined, and along with trust, the fragile monetary structure is destroyed, which provokes rejection, flight from money, unwinding the inflationary spiral.

Additionally to the breaking of QT programme, we see hard use of US Treasury balance - 400+Bln already were pumped in the system. The half were pumped in July-August that makes artificial effect on stock and crypto markets, making them to turn up. Besides, US Treasury makes no big new debt placements since March 2022. Another Fed source of liquidity are extreme Banks' reserves (including US Treasuries primary dealers) on Fed accounts for ~2.2 Trln.
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As we've mentioned previously US Treasuries intends to increase debt issue up to 440 Bln until September. Now the only assets that they have - $2.6 Trln of banks reserves and US Treasury account. Foreign investors can't help now to finance US Debt. China -US relations are deteriorating fast, that leads to massive contraction of China holdings in the US Treasuries:
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Later this phenomenon will have another negative impact on US. While US population getting poorer, the US is forced to increase purchases of Chinese cheap goods, as the standard of living of the population is falling. EU, Japan and other donors due to big jump in energy price also drop in Trade deficit, having no free money to deliver:
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Besides, economy situation in the EU is devastating. Germany PPI has hit 37% level:
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Rising recession probability above 50%:
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The situation in the rest of EU hardly looks better with inflation around 10%. With the huge price jump on electricity and gas - companies try to put it on final consumers, which, potentially could lead to social instability and political risks. The EU has one important feature – it is a highly fragmented region, where there is an imbalance between the participating countries in financial security, economic stability, in the structure of the economy and priorities of foreign trade communications.

The backbone of the EU (Germany and France) may remain stable, but the periphery will crumble, involving all new participants in the destructive process, even those who were distinguished by balance. The EU is an extremely heterogeneous political and economic bloc. The current set of crisis processes increases tension in the system and centrifugal forces, provoking internal political instability.

What does a record trade deficit mean for Europe? This is a narrowing of the current account surplus to zero and going into deficit, and therefore, in the absence of a management mechanism for gold reserves, they will need to cover the current account deficit through financial account inflows (direct, portfolio and other investments). In other words, from the world's main distributor of capital, Europe becomes the main sink.

There are two problems here: there is only one "The king of the mountain" one - in the current foreign policy configuration, this is the United States. And there will not be enough world capital for everyone in the conditions of a record current account deficit in the United States.

The second point is that it is impossible to achieve a steady inflow of foreign capital into the EU with the current composition of risk factors (war in Europe, weakness of the European economy, energy, food, debt crises and the growing political crisis, the growing toxicity of the EU). Who will invest in Europe? Saudi Arabia, Middle Eastern countries, maybe China? Doubtful.

Therefore, we should expect an increase in the existing imbalances in Europe and the emergence of hotbeds of tension and political destabilization - there are too many weak links in the chain, and the system is going to break.

Besides, the US already do not have additional reserves to contract the budget deficit. In recent year it has contracted from ~2.4 Trln to 900+ Bln because of printing machine stop and mobilizing existed resources. Since then they already have contracted spendings in social sphere and medicine. This has made an effect, but this source is exhausted already:
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Almost all emergency programs were shut down in fiscal year 2022. In 2022, expenditures decreased by more than $1 trillion, where helicopter money decreased by 725 billion (Income Security), and subsidized lending (Commerce and Housing Credit) decreased by $ 336 billion, i.e. these two categories made the main contribution to the reduction of total federal budget expenditures.

The main category of expenses is Social Security, i.e. pensions of $ 1 trillion for 10 months, while Income Security includes targeted benefits and subsidies mainly for people of working age and children. It was from this category that the primary inflationary impulse and the degradation of the labor force came.

The second most important category - healthcare (Health) is growing aggressively by 16%, due to inflation and the number of people who are included in receiving medical care. Defense spending fell slightly by 2%, transportation costs decreased by 20% due to the closure of subsidy programs for the aviation industry.

Taxes increased mainly due to taxes and fees from individuals (almost 90% of the total income growth). Factors: the abolition of tax benefits in 2020-2021 and the inflation of income of individuals.

All these means that the space for reducing the deficit has exhausted, because the most mobile and redundant category (subsidized loans and helicopter money) has been reduced, and incomes against the background of a deteriorating economy completed the growth momentum in mid-2022.

Next Week To Watch

Jackson Hole

Investors hope the Federal Reserve may shed light on those questions when central banking heavyweights meet on Aug. 25-27 for their annual symposium in Jackson Hole, Wyoming. Some investors believe Chairman Jerome Powell will push back against the market’s optimism again, reminding investors that there is one more inflation report and another jobs number before the Fed’s September meeting.Also in demand are further details on the Fed’s reduction of its $9 trillion balance sheet, known as quantitative tightening, which some investors have flagged as a potential risk to market liquidity.

PMI data
Concerns the euro zone economy is hurtling toward recession are building. Flash purchasing managers index survey data should shed some light on how soon that might happen. The August numbers, due on Tuesday, may show another month of business activity contraction after S&P Global's final composite Purchasing Managers' Index (PMI), seen as a good gauge of economic health, fell to a 17-month low of 49.9 in July.

Euro zone businesses are struggling from soaring energy prices and shortages, surging inflation and expectations of higher interest rates. An economic sentiment index for euro zone powerhouse Germany recently showed investor sentiment falling in August as fears grow that the rising cost of living will hit private consumption.

Tuesday will also include the release of flash PMI numbers for the United States and Britain.
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PCE Index

With markets twitching on any inkling that surging inflation has peaked or remains at four-decade highs, the U.S. Federal Reserve's preferred measure of prices is due on Aug. 26. In the 12 months through June, the PCE price index advanced 6.8%, the largest increase since January 1982. With recession fears lingering and investors eager for any clues about the economy's strength, data on new home sales hits on Tuesday and durable goods on Wednesday.

Conclusion

As we've mentioned in the beginning of the report - major trends are still the same. Despite rising big problems in the US economy - they have tactical reserves that let them to stay on the surface for 6-12 months. Government is doing everything right now to hold the face on coming November elections, trying to support markets and disguise economy problems. But this can't last for too long. It is less and less free assets that could support the US. We even haven't mentioned yet that EU is not selling yet huge positions on the US Stock market. With current trend in Europe, they will have start doing it to cover big trading deficit.

Due to the reasons, mentioned above, EU fragmentation structure, its non-independent policy following mostly to the US interests making situation very fragile, suggesting that US Dollar performance should be better, at least in nearest few months. So, our 0.9 EUR/USD target remains on the table.
 

Sive Morten

Special Consultant to the FPA
Messages
16,929
Technicals
Monthly

And all these processes, mentioned above is finding the way into technical picture. August still stands inside the July range, but price performance perfectly fits the technical background - sharp drop, no strong support area and OP ignoring - is a direct road to the next downside targets.

Long-term picture on EUR remains bearish, MACD stands bearish as well.

Technically, to give even minor bullish hints, EUR has to climb above 1.10 area which is now seems hardly likely. 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 that are not on horizon as well.

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, but now it is unclear where the pullback is possible, maybe from butterfly target, as recent daily retracement seems to be over.

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

Weekly harmonic pattern stands stable in both directions, forming almost equal accurate swings. Now it shows that next destination point should be around 0.97 area that agrees with the butterfly 0.9750 monthly target:
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Daily

Here, as the nearest target we consider the COP around 0.9960, which means re-testing of the lows. Since COP agrees with Oversold, maybe tactical bounce could happen from it, before EUR proceeds to OP of 0.97-0.9750, matching to major monthly/weekly destination point:
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Intraday

So, for position structuring for the next week, we need to consider areas for possible short entry. Local 1H AB-CD pattern shows that action to OP is already started. It means that there should be no extended upside pullback and most probable bounce, if it happens at all might reach the nearest 1.0091 area. Thus, 1.0128-1.0158 K-area and re-testing of "B" lows is invalidation point for tactical bearish setup here.

OP target agrees with daily COP around the same 0.9960 area:
eur_1h_22_08_22.png
 

RogerTC

Special Consultant to the FPA
Messages
352
Higher timeframe (Quarterly Chart) cluster of XOP support levels that I m looking to flip my usd holdings to eur.

0.89 looks a good spot to long the market.

Eurusd Quarterly.PNG
 

Sive Morten

Special Consultant to the FPA
Messages
16,929
Morning everybody,

So, just few minor updates we could make to EUR situation... COP expectedly has been passed fast on daily chart, which means that now we're turning to OP - 0.97-0.9750 target. It is not just OP here but butterfly target on monthly chart.

As we're coming to Wyoming meeting as well, it very often happens that major targets are played by market at important fundamental events. Thus, here is once again might happen that EUR hits 0.97 on a background of Jackson Hole meeting...
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As EUR right now is not at support and not at oversold and actually has "free space" until major target - on intraday charts we could watch for minor tactical bounces, especially because overall thrusting action looks nice. And we could watch for B&B "Sell" or something like this.

On 4H chart next downside target stands is XOP around 0.98. It could be used for intraday trading as well.
eur_4h_23_08_22.png


That's being said, until market stands above 0.97-0.9750 we could use any intraday setups for taking the short position.
 

Sive Morten

Special Consultant to the FPA
Messages
16,929
Morning everybody,

So, all major points we already have discussed, let's take a look how it goes. The B&B setup that we've discussed recently has been formed and minimum target is done already. We hope that B&B could provide more potential as market is going to XOP @0.98 area.
Thus, if you have short position with the B&B - move stops to breakeven and book the 50%:
eur_4h_24_08_22.png


Those who do not have any shorts - you could consider possible AB-CD higher upward bounce, if it happens, of course. In this case we could get "222" Sell, that also might be suitable for short entry. Right now it is not very attractive to take short position.
eur_1h_24_08_22.png


On GBP we have very similar situation with just minor difference - 4H B&B is not done yet the minimum target. Thus, scalp traders on 15-30 min chart still could consider taking very fast short position
gbp_4h_24_08_22.png


The following "222" Sell pattern on GBP potentially is very similar to EUR, if 2nd leg of upside bounce starts later...
gbp_1h_24_08_22.png
 

Sive Morten

Special Consultant to the FPA
Messages
16,929
Morning folks,

So, as closer we're coming to Wyoming as more gentle price performance becomes. On daily chart is nothing changed in last two sessions. Thus, we're mostly focused on intraday performance and next step of our trading plan is ready.

Despite that market very accurate in our target executions - don't be calmed by that. As turbulence of Jackson Hole stands on horizon - we should be ready for surprises. Meantime, once B&B has been completed, our 2nd stage of plan, upside AB=CD action is done as well:
eur_1h_25_08_22.png


Now we have "222" Sell and good K-resistance level slightly higher for position protection and stop placement. Nearest downside target is XOP @0.9811.

On GBP we have very similar performance, B&B is done there as well perfectly, but cable is not completed yet upside AB=CD. It makes me think that it could form downside butterfly instead of "222". This is minor difference but in general setups are very similar.
gbp_1h_25_08_22.png


Still, guys, be prepared for surprises or maybe just do nothing until meeting ends. Everything looks too accurate and easy...
 

Sive Morten

Special Consultant to the FPA
Messages
16,929
Morning folks,

So, on EUR pattern is working nice and needs no comments by far. On GBP we're getting a bit different one but with the same direction. Daily GBP shows bearish situation as price, after failure to complete 3-Drive and to form H&S pattern now is consolidating around the lows. This is the sign of coming downside breakout.

Here we have the butterfly with 1.1615 and 1.1430 target, with the former might be completed today
gbp_d_25_08_22.png


On 4H chart, inside the daily pennant we have another butterfly that we've discussed yesterday.
gbp_4h_25_08_22.png


So, those who already sold could move stops to breakeven. If you still think about short entry - take a look at 1H chart. Market is completing local AB-CD pattern here that agrees with major 5/8 support. In a case of minor bounce you could think about to sell it.
Invalidation point of intraday bearish context - butterfly's high.
gbp_1h_25_08_22.png
 
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