Forex FOREX PRO WEEKLY, August 23 - 27, 2021

Sive Morten

Special Consultant to the FPA
Messages
15,142
Fundamentals

This week no big shifts in sentiment happens and market mostly was watching for Fed minutes release, China statistics in the beginning of the week and some other minor data releases. Afghanistan events makes limited effect on risk aversion by far. Market makers (especially on the stock market) have tried to shake the boat, triggering massive sell-off by appealing to delta variant and coming tapering from the Fed, leading EU stocks to worst trading week in 6th month, but after robbing of small investors they have return everything back. Now we stand in one step from Jackson Hole meeting. According to market sentiment that we've updated last week - we should not get anything revolutionary from the Fed, as recent inflation and sentiment data was softer. With massive concern over delta and expectation of economy slow down Fed has no rush to announce tapering.

Market overview

The dollar rose on Monday against commodity currencies such as the Australian, New Zealand and Canadian dollars, while the safe-haven yen gained as disappointing economic data from China, political tension in Afghanistan, and the spreading Delta variant of the coronavirus weighed on risk appetite. The dollar's gains came after a slump in consumer sentiment on Friday weakened the U.S. unit.

Currencies overall stuck to broad trading ranges as investors were wary of taking large bets at the start of a busy week for central banks. Long positions on the greenback swelled to their biggest levels since March 2020, suggesting the dollar's recent move lower was more a temporary setback than the beginning of a structural downtrend.

Thousands of civilians desperate to flee Afghanistan thronged Kabul airport on Monday after the Taliban seized the capital over the weekend, prompting the United States to suspend evacuations as it came under mounting criticism at home over its pullout.

China's July retail sales, industrial production and fixed asset investment were all weaker than expected as the latest COVID-19 outbreak weighed on the world's second-biggest economy. Industrial production in the world's second largest economy increased 6.4% year-on-year in July, data from the National Bureau of Statistics (NBS) showed on Monday. Analysts had expected output to rise 7.8% after growing 8.3% in June. Retail sales increased 8.5% in July from a year ago, far lower than the forecast 11.5% rise and June's 12.1% uptick.

Consumption, industrial production and investment could all slow further in August, analysts from Nomura said in a note, due to COVID-19 controls and tightening measures in the property sector and high-polluting industries. Production controls sent crude steel output to the lowest monthly level since April 2020 in July.

A growing number of analysts have been cutting their third quarter growth estimates for China. The country's gross domestic product (GDP) expanded 7.9% in the April-June quarter from a year earlier. ANZ downgraded its GDP forecast for 2021 to 8.3% from 8.8% after the disappointing July data.

"Although they are unlikely to inject massive stimulus to boost headline growth, the central bank will maintain an easing bias," said ANZ analysts in a note.

A much sharper decline than expected in Tuesday's U.S. retail sales curbed gains in the dollar, but that was offset by the higher-than-forecast rise in industrial production, which accelerated the greenback's gains.

Retail sales dropped 1.1% last month. Data for June was revised up to show retail sales increasing 0.7% instead of rising 0.6% as previously reported. Retail sales are 17.2% above their pre-pandemic level. Economists polled by Reuters had forecast retail sales slipping 0.3%. Sales increased 15.8% compared to July last year.

Receipts at auto dealerships fell 3.9% after declining 2.2% in June. Motor vehicle production has been hampered by a global shortage of semiconductors.

Shortages depressed motor vehicle purchases and the boost to spending from the economy's reopening and stimulus checks faded, suggesting a slowdown in economic growth early in the third quarter. The weak sales reported by the Commerce Department on Tuesday also reflected a rotation in spending back to services from goods. Retail sales mostly capture the goods component of consumer spending, which accounts for a smaller share, with bulky services such as healthcare, travel and hotel accommodation making up the rest.

"If anything, today's data suggests that spending is not keeping pace at the start of the third quarter after the fiscal stimulus-fueled and re-opening-led surge in consumption growth in second quarter," said Kevin Cummins, chief U.S. economist at NatWest Markets in Stamford, Connecticut. We still expect sales to bounce back for the quarter as a whole. Spending will benefit from recent strength in job gains and a boost from back-to-school spending as kids begin to return to in-school classrooms."

The National Retail Federation said July's decline did "nothing to derail our outlook for a record year," noting that consumer finances were in good shape. The labor market is strengthening, while higher stock and house prices are boosting household wealth. The foundation for consumer spending growth remains strong. Employers are raising wages as they try to fill a record 10.1 million job openings. Households are sitting on at least $2.5 trillion in excess savings accumulated during the pandemic.

"This morning's retail sales report served to confirm that the U.S. consumer - the world's biggest and most dependable customer - is becoming more cautious," said Karl Schamotta, chief market strategist at Cambridge Global Payments in Toronto. "This, combined with evidence of a slowdown in the Chinese economy and ongoing political turmoil in Afghanistan, is driving investors to pay off dollar-funded borrowing positions and pull money out of high-risk markets," he added.

The U.S. dollar rose to a nine-month high on Thursday, as worries about widespread coronavirus infections and Federal Reserve meeting minutes showing it was considering reducing pandemic-era stimulus this year hit global stocks and commodity-linked currencies.

A decline in debt purchases by the Fed is widely considered positive for the dollar as it is expected to raise U.S. government bond yields, making it more attractive for investors to hold dollar-denominated assets.

The minutes of the Fed's July meeting showed officials largely expect to reduce their monthly bond buying later this year, but consensus on other key issues appeared elusive, including the timing of the start of the taper and whether inflation, joblessness or the coronavirus pandemic pose a bigger risk to economic recovery.

Vassili Serebriakov, FX strategist at UBS in New York, said market expectations ahead of the Fed minutes were probably for a taper later than 2021. "But I don't think the view that the Fed may taper by the end of the year should come as a surprise," Serebriakov added. Serebriakov believes the dollar's rally was more about negative risk sentiment related to among others, the Delta coronavirus variant and the slowdown in China.

The Fed minutes, along with sustained worries about the spread of COVID-19, pushed Wall Street stock indexes lower. European markets were down as well on Thursday, while safe-haven U.S. Treasuries gained, with benchmark 10-year yields 3 basis points lower at 1.241% .

Federal Reserve officials felt their employment benchmark for decreasing support for the economy "could be reached this year," but appeared to disagree on other key aspects of where monetary policy should turn next in the transition from the pandemic crisis, according to minutes from last month's policy meeting.

The account of the July 27-28 meeting showed Fed officials largely expect that later this year they will reduce the central bank's emergency monthly purchases of $120 billion of Treasury bonds and mortgage-backed securities.

But consensus on other key issues appeared elusive, including the start date and pace of the bond-buying "taper," and whether the bigger risk to the recovery is posed by inflation, ongoing joblessness, or the lurking chance that a resurgent coronavirus may throw things into reverse.

As policymakers weighed recent spikes in prices against the value of being "patient" with monetary policy so more hiring could take place, they also noted "the risks that rising COVID-19 cases associated with the spread of the Delta variant could cause delays in returning to work and school, and so damp the economic recovery."

Debate at the July policy meeting was complicated further by what amounts to the initial discussions of a longer-term decision - when to raise the Fed's overnight benchmark interest rate from the current near-zero level.

While that is a separate decision from exiting the bond program, with its own set of tests to be met, officials have nonetheless begun debating whether inflation had already cleared one of those standards, and begun worrying that their upcoming decision on the taper of asset purchases could be confused with a more rigorous tightening of monetary policy.

Inflation has soared this year, with one closely watched measure running at a 3.5% annual rate in June, well above the Fed's 2% target. Yet the economy remains 5.7 million jobs short of where it was before the pandemic. With those core goals seemingly in conflict, the Fed is trying to balance the management of two monetary policy tools - bond purchases and interest rates - without either losing control of inflation or curbing the recovery before the economy regains as many jobs as possible.

The minutes, however, showed broad divisions among the Fed's 18 top officials, who include the six members of the Washington-based board of governors and the 12 heads of the regional Fed banks. Though Bullard and some other Fed regional bank presidents have been vocal in wanting to start the taper soon, it appeared sentiment at the central bank was drifting in the other direction.

"The only thing that is now clearer ... is that the hawkish crowd that has publicly been calling for an ‘early and fast’ tapering does not represent the majority view," Jefferies economists Thomas Simons and Aneta Markowska said in a note after the release of the minutes.

The minutes also magnified the importance of the next few monthly jobs reports, with solid gains needed to meet the Fed's expectations and show the virus has not begun to again slow the economy.

The dollar hardly reacted to weekly unemployment data showing that the number of people on state jobless rolls dropped in early August to levels last seen in mid-March 2020.

The safe-haven U.S. dollar slipped from a 9-1/2-month high on Friday, as risk appetite improved with equities gaining and benchmark Treasury yields higher, although the near-term outlook for the greenback remained upbeat. The U.S currency remained supported overall by concerns that the coronavirus Delta variant could derail global economic recovery just as central banks begin to reverse COVID-19 pandemic-related stimulus.

"In the near term, we expect the dollar to appreciate a bit further," wrote Jonas Goltermann, senior markets economist at Capital Economics, in his latest research note. "We think that robust growth in the U.S. relative to other major economies and a gradual tightening of monetary policy will put further upward pressure on the greenback."

Eyes on Wyoming

Traders in U.S. equity options do not expect the Federal Reserve’s symposium in Jackson Hole, Wyoming later this month to spark big moves in stocks, even as a focus on the Fed's taper timeline amplifies the buzz around the annual event, data and interviews with market participants showed.

Investors typically place bets, or hedges, that would protect their portfolios around events that could generate market volatility. While there has been some hedging demand ahead of Jackson Hole, it pales in comparison with what was seen in the run-up to potentially consequential events in the recent past, such as last year’s presidential election, the Georgia Senate runoffs earlier this year and the Fed’s last monetary policy meeting, a Reuters analysis showed.

Strategists gave several reasons why investors have gone lighter on protection against market swings that could occur around the Aug. 26-28 symposium. One possibility is timing. Some investors believe the Fed will want to see more data before announcing taper plans, making the central bank's September meeting a more likely date for outlining a possible unwind. Around 65% of economists polled by Reuters expect the Fed to announce a plan to taper its asset purchases only in September.

History also suggests the Fed chair's speech at Jackson Hole has not sparked big market moves in the short term. The S&P 500 Index logged an average move of 0.6% in either direction on the day of the Fed chair’s speech over the last 10 years, a Reuters analysis showed. S&P 500 options are currently pricing a 1-day move of about 1%, according to Matt Amberson of analytics firm ORATS.

Ilya Feygin, senior strategist at WallachBeth Capital, is among those who believe the event will yield little to spark market turbulence. He points to recent speakers such as Fed Governor Lael Brainard, who said the central bank needs to see more improvement in the labor market before pulling back on support for the economy.

"It's most likely that the outcome will be a lot of nothing from Jackson Hole," he said.

To be sure, hedging might pick up closer to the symposium. And while traders may be displaying little appetite for hedges against modest pullbacks, demand for protection against an outsized drop in stocks remains historically high despite weeks of relatively placid trading. Analysts at BoFA Global Research cautioned that past instances when the S&P has gone long without a 5% pullback ended with upsurges of volatility in August 2015 and February 2018.

"History suggests to tread carefully from here, as some of the largest fragility shocks have been preceded by similar episodes of extreme market steadiness," the bank's analysts wrote.
BofA Global Research analysts earlier this week moved up their timeline for the start of the Fed’s taper to November, from a previous forecast of January, believing that minutes from the central bank’s most recent policy meeting, released Wednesday, signaled a greater likelihood of an unwind beginning this year.

CFTC Data

So, here is the result of sentiment change on the market that we've discussed last week. Recall that it was triggered by weak inflation and sentiment data that suggest postponing of Fed hawkish steps. At the first look - jump is solid, big increase in net long positions.

1629537262708.png

Source: cftc.gov, charting by Investing.com

But now look at the numbers - open interest dropped. Speculative positions indeed, shows big positive jump, but hedgers activity is very weak. This combination of changings suggest that positive shift in sentiment is a short-term, at least right now. We have no new inflows in bullish positions on EUR and mostly they have increased because of short-term change in speculators' mood.

1629537194159.png


So, despite some volatility in the middle of the week that speaking honestly was mostly speculative, we do not see any big shifts in sentiment. Today's fundamental analysis once again points on the same major issues - coming NFP report is vital, weaker and ceiling statistics in US and China and rising delta cases across the Globe let Fed to wait with drastic steps in monetary policy. Thus, it seems that we have nothing to change by far - no tapering announcement in Wyoming. If August NFP will be weak or flat as well - no announcement in September as well. This is bullish signs for risky assets and dollar rivals. Surprise could come from political risks but they stand out of our control. It means that technically EUR should hit 1.1620 area on anticipation of some Fed action as investors will be "selling on rumors", but it means that once technical target is hit - we could get very good background to take long positions as "buying on fact" starts.

Next week to watch

#1 Central bankers Wyoming meeting

Fronted by Jerome Powell, the great and good of the central banking world gather at Jackson Hole, Wyoming, from Thursday to Saturday. The big question for the Federal Reserve Chair: When is taper time? The Fed is expected to outline taper plans in September but markets are hoping for signals from Powell at the annual research conference on the trajectory of the $120 billion-a-month asset purchase programme.

Easy-money policies have buttressed equities, and any inklings about Fed plans to dial back could cause ructions, with July minutes having just provided a taste of that. Policymakers looked far from united in their views. But the prospect of stimulus being reduced when the spread of the Delta coronavirus variant and supply chain issues loom over a recovery that has started to look tired has spooked markets.

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#2 EU and UK PMI Release

It's been a good few months for European stocks. Since March 2020, they've climbed more than 70%, hitting a record high in recent days thanks to accelerating growth and falling interest rates. European PMIs rose to a 20-year high and inflation-adjusted bond yields are at record lows. But there are headwinds in the form of rising prices, supply chain issues, labour shortages and the Delta variant. PMIs in the region over the next few days will show just how strong those might be.

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#3 China Drawdown

In recent weeks data for China's export growth, factory output and retail sales have all missed forecasts as COVID-19 outbreaks dampened demand at home and abroad.

Industrial profits due Friday may find some relief in the recent retreat of commodity prices. But it's clear the world's second-biggest economy now faces challenges and not all of them can be dismissed by investors as short-term distortions.

Policymakers have tried to help by cutting bank reserve requirements to boost lending, and they have also attempted to soothe worries about scattergun crackdowns. But that has yet to calm equity markets, which have shed about $1 trillion in value since February and still seem in search of a stable floor.

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#4 Germany Elections

The past few national elections in Germany have been rather unexciting affairs. But a shift indicated in recent opinion polls suggests the one on Sept. 26 could prove different. The centre-left Social Democrats have overtaken the Greens and are closing the gap with Chancellor Angela Merkel's conservative Christian Democrats.

That means for the first time this year, a two-way coalition between her conservatives and the Greens, one anticipated outcome, is forecast to be narrowly short of a majority of seats. If that turns out to be the case, Europe's biggest economy could be set for months of uncertainty; analysts note the range of possible three-way coalition tie-ups is much wider than in the past. Don't be surprised if markets pay more attention to Germany in coming days.

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Technicals
Monthly

This week we do not have any big shifts in technical picture as market was relatively quiet these days. On monthly chart price gradually is moving the check point - yearly Pivot at 1.1620 area. The rest of analysis mostly stands the same as on previous week.

Despite important shifts in sentiment and fundamental background, we do not have any of this kind on a technical side. Monthly chart stands bearish, price is moving out from the triangle, but August is not closed yet and it would be interesting to see where we get the close price.

In general technical vital points provide big range to act for bullish context. While market stands above 1.06 low it keeps chances for bullish action. Drop below 1.09 YPS1 will be the strong sign, but right now, a bit deeper retracement doesn't mean yet that everything is over.

eur_m_23_08_21.png


Weekly

Here market has erased even theoretical chances on bullish patterns and butterfly in particular with drop below the recent lows. It means that now we could totally focus on "222" Buy" pattern. The result of this pattern might be twofold. First is, short-term reaction that could push price to 1.20 area and wide compound H&S pattern might be formed here. Or, alternatively, EUR could start new long-term upside trend if overall background in nearest months will be not dollar supportive.
Jump to 1.20 area could be based on empty Wyoming meeting next week and potentially another postponing of tapering announcement. So, this target looks realistic now. Besides, keep in mind DXY 87.40 long term target. We should not write it off by far.

eur_w_23_08_21.png


Daily

On a daily chart is nothing to add. Those who have short positions could hold them and stay aimed on major OP, while now we're mostly focused on buying opportunities around major weekly support and Agreement area. Any bounce that could happen on next week, prior OP completing, should be very small.

eur_d_23_08_21.png


Intraday

Here we have some bullish signs but all of them are not reliable enough as overruled by daily OP. Here we see MACD divergence and you could try to find 1.618 3-Drive Buy pattern, but they are forming prior reaching of major support level, in a "free space" and has no sufficient foundation. So, I wouldn't consider taking long position based on them and leaving daily OP behind.
Falling wedge is good sign as it could become additional bullish pattern in reversal point. Minor AB-CD pattern has approximately the same target as the major one.

eur_4h_23_08_21.png
 

Sive Morten

Special Consultant to the FPA
Messages
15,142
Morning everybody,

So, EUR starts to show early bullish signs. Daily trend has turned up already, we have growing divergence here and on intraday charts some minor bullish signs are forming as well. But our major OP is not completed yet, bearish tendency of lower highs and lower lows is still valid and price action on intraday charts looks not as strong as we would like to see at reversal.
eur_d_24_08_21.png


on 4H chart we see the same wedge that we've discussed in weekend and 3-Drive pattern that we've mentioned now could be seen better. At least ratios between retracements agree very accurately to each other. MACD divergence also stands in place:
eur_4h_24_08_21.png


But on 1H chart market is coming to 1.1750 K-resistance which is also natural resistance area:
eur_1h_24_08_21.png


Overall situation makes me think that market makers start to shake the boat before Wyoming. Upward action is choppy and gradual, and uncompleted daily target overrules bullish signs that we have, at least for me. Besides, 1.1620 is weekly K-area, bullish reaction should be more or less extended in time that should let us to take position without rush.
Still, if you trade on long term charts and hold position for weeks, feel a bit nervous that you need to catch the entry moment - it is possible to take position now with the stops below the K-area. For weekly chart 100-150 pips is not a big distance. For others, shorter term traders it would be better to wait a bit.
 

Sive Morten

Special Consultant to the FPA
Messages
15,142
Morning guys,

Today we take a look at CAD, because it is nothing to add to EUR analysis by far. CAD now provides interesting setups on different time frames. Thus, on 1M chart we have B&B "Sell" in place and potentially, we could get Double Top. Unfortunately I'm not tracking Canadian economy performance and do not know exactly what drivers stand behind CAD strength, but technical picture suggests that they exist. I just could suggest that maybe Canada is closer to fiscal policy change than the Fed...

Anyway, we're interested in short-term reaction by far. And here you could treat it either as monthly B&B or just as daily huge Evening star (like engulfing) pattern. Market has reached major 3/8 Fib level and daily overbought area showing inability to reach upside XOP target. Here I see some bulls' capitulation action. So, we intend to deal with this pattern as we usually do - waiting for minor upside bounce for short entry from some intraday resistance. Potential target is 5/8 Fib support @ 1.2370 area:
cad_d_25_08_21.png


On 4H chart we have another thrust down that again - might be used separately for intraday trading. Here we're watching for pattern that could trigger upside bounce. Most probable that it is DRPO "Buy" or B&B "Sell". Once pullback happens we consider short entry. Scalp traders could use mentioned patterns for short-term long positions theoretically...
cad_4h_25_08_21.png
 

Sive Morten

Special Consultant to the FPA
Messages
15,142
Morning everybody,

Markets stand quiet at the eve of Jackson Hole starting day and following results on Saturday. In general, daily chart on EUR has not changed too much. And we treat the OP target as more important than any upward action started recently. We suggest that last word in downside action is not said yet and until we see untouched OP or clear signs of reversal - long entry is not attractive and overruled by daily target. So, it would be better to wait a bit more and not hurry with long entry. We believe that this patience should be rewarded.
eur_d_26_08_21.png


On 4H chart former wedge has turned to the channel but price still keeps ratios suitable for 3-Drive pattern. In general all 4H targets stand very close to OP with 10-15 pips around it, so 3-Drive with some minor spike down could become the pattern that trigger upside action. Alternatively we could get butterfly pattern here (or as a part of 3-Drive that happens very often)
eur_4h_26_08_21.png


On 1H chart price has broken K-area but stuck inside natural resistance zone of previous bottom. With choppy upside action, bearish divergence in place and untouched daily OP - recent price action doesn't look inspiring for immediate EUR buying. Besides downside tendency of LL and LH are still valid.
eur_1h_26_08_21.png


So, the major idea now is not hurry when market is entering in most hot stage of this week. As our support area stands on the daily and weekly - reversal also will be extended in time and should be prepared by more or less significant pattern, not by 1H engulfing or something of that sort.
 

Sive Morten

Special Consultant to the FPA
Messages
15,142
Morning everybody,

So, EUR is not too active recently and today we have nothing to add by far. That's why lets take a look at GBP instead. Last week we said that Cable could proceed with daily H&S pattern, at least to nearest COP target as it agrees with strong K-support.

Recently GBP was not able to complete it, showing upside bounce but yesterday we've got bearish grabber on daily chart. It means that another attempt to go down could be taken. It is difficult to foresee how fundamental events lay in a picture of this action, but pure technical setup suggests that it could happen:
gbp_d_27_08_21.png


Also we have weekly DRPO "Buy" pattern on EUR/GBP that indirectly also suggests some relative weakness in GBP compare to EUR:
EURGBPWeekly.png


On 1H chart downside reversal swing has happened and now market stands in upward bounce. Here we have B&B "Sell" in place, but once it will be worked out, GBP could climb higher as previous upward momentum was solid:
gbp_1h_27_08_21.png


Thus it is possible to watch for continuation patterns, such as B&B mentioned above or, say, "222" Sell around major Fib resistance levels for position taking.
 
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