Forex FOREX PRO WEEKLY, August 24 - 28, 2020

Sive Morten

Special Consultant to the FPA
Messages
13,796
Fundamentals

This week market mostly is driven by economy statistics and events around it, such as publications of Fed minutes, but closer to the end of the week, political topics are come on surface as well. It has changed short-term sentiment a bit and trigger pullback that we've discussed previously. Today we would like to talk on GBP as a lot of events now are turning around it. Besides, it has some specific issues and its time to update view on cable. Particular speaking it is a lot of opposite opinions on UK economy perspective and we will try to get over this stuff.

New surfing

The pound hit 8-month highs versus the dollar on Tuesday, driven by weakness in the U.S. currency, but analysts were cautious about the outlook for sterling as a new round of Brexit talks began, with euro-sterling still firmly above 90 pence per euro. The dollar index hit new two-year lows on Tuesday, facing the triple woes of diminishing yields, weak U.S. economic data and decreasing demand for safe havens.Meanwhile, traders are braced for renewed sterling volatility as talks between Britain and the European Union restarted.

“Sterling’s recent good performance and resilience to grim economic data has likely relied on the Brexit story being put on the backburner by investors,” wrote ING strategists Chris Turner, Francesco Pesole and Petr Krpata.“We see a non-negligible risk of markets starting to price back in a no-deal outcome,” they added.

Britain left the EU in January and is in a transition period during which the country remains in the bloc’s single market and customs union. The transition period will finish at the end of 2020 whether or not a trade deal has been reached. Analysts say the impact of dollar weakness on the pound-dollar pairing masks sterling’s true weakness, with the effect of Brexit-related headlines more likely to be visible in euro-sterling. With Britain enduring one of the worst economic contractions among G7 nations, and one of the highest per capita coronavirus death rates in Europe, sterling looks vulnerable to a correction.

Dominic Bunning, senior FX Strategist at HSBC, says sterling’s gains owe much to broad dollar weakness and predicts the pound will fall to $1.20 by the end of 2020.

Monday’s resumption of talks should bring “choppier” trading for the pound, said Kenneth Broux, head of corporate research at Societe Generale. “The point that I’ve been making for the past two weeks is that cable (sterling/dollar) at $1.31 flatters the valuation of the pound, so I would expect cable to drop below $1.30 in the coming weeks, towards $1.27,” he said.“September, October time is really when it’s money time. That’s when things can happen.”


Sterling faces other headwinds too.A lockdown to fight the spread of coronavirus caused the UK economy - now officially in recession - to record a record slump in second-quarter gross domestic product (GDP). To save jobs, the government has borrowed unprecedented amounts, swelling national debt to 99.6% of GDP.

“The UK faces a number of fundamental challenges which will only be highlighted and exacerbated by the economic impact of coronavirus,” Bunning said, listing large fiscal and current account deficits, and a reliance on foreign capital.

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The Bank of England (BoE) sounded relatively upbeat on the economy at its last meeting, while warning it would take until the end of 2021 for the economy to regain its previous size. Analysts believe things will worsen when the government’s jobs furlough scheme, which has supported 9.6 million people through the COVID-19 lockdown, winds down in October. The BoE also said it saw no immediate case to cut interest rates below zero, though money markets suggest that rates could fall into negative territory.

Investors have, meanwhile, further trimmed their net short sterling positions, CFTC data shows.

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But with investors pushing their net long euro positions to record highs, they also appear reluctant to express their negative stance on the dollar via the pound.

Roger Hallam, chief investment officer for currencies at J.P. Morgan Asset Management, said he expected Britain to forge a deal with the EU by Dec. 31. But the deal “will have more of a ‘hard Brexit’ feel,” he said, limiting any gains for sterling.

Negotiations between the European Union and Britain on their future relationship did not move significantly forward in the latest round of talks this week, the bloc’s chief Brexit negotiator said on Friday.

“Those who were hoping for negotiations to move swiftly forward this week will have bee disappointed And unfortunately I too am frankly disappointed and concerned, and susprised as well,” Barnier told a news conference after two full days of talks in Brussels. “The British negotiators have not shown any real willingness to move forward on issues of fundamental importance for the European Union and this despite the flexibility which we have shown over recent months.”


The Fed minutes were vague, saying a number of committee members thought a revised statement on policy strategy would be helpful at some point, without providing details or timing. They struck a cautious tone about the U.S. recovery. That was enough to push risk assets - a category recently including sterling, given that the currency weakens when deteriorating market sentiment strengthens demand for the safe-haven dollar - into a likely short-lived correction.

“Risk assets around the world are suffering a corrective 24 hours,” said ING analysts.“The catalyst has been a set of FOMC (Federal Open Market Committee) minutes that has failed to feed the rally by seemingly neither offering enough clarity on strategy changes nor fresh stimulus”.

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While the Fed’s words prompted a reaction, the pound shrugged off the European Central Bank’s minutes. The account of the ECB’s July meeting suggested on Thursday that some policymakers are not keen for another increase in the bank’s 1.35 trillion euro (1.2 trillion pounds) pandemic emergency purchase programme (PEPP).

Despite positive Retail Sales data in the morning, the British pound fell more than 1% on Friday on a mix of bad news on the latest Brexit negotiations and gains for the U.S. dollar that combined pushed sterling below $1.31. Britain and the European Union made scant progress towards a deal on future ties in talks this week, and their chief negotiators blamed each other for the stalemate as time ticks down to an end-of-year deadline. A rising U.S. dollar pushed the pound down 1.2% to a one-week low of $1.3059. It was also down 0.4% against the euro at 90.12 pence.

Also on Friday came news that Britain’s public debt went above 2 trillion pounds for the first time in July as the government ramped up public spending to cope with the coronavirus pandemic and tax revenues fell. A large pile of debt, double deficits and an insecure relationship with its biggest trading partner could leave the UK vulnerable to investment outflows and money managers and investors look for better opportunities elsewhere.

And Britain’s official budget forecasters raised their estimate for the size of the country’s public debt pile at the end of the current financial year, after data showed earlier on Friday that it had passed 100% of annual economic output for the first time.Thin summer trading on a Friday could mean that moves may be exaggerated, however.

“The latest round of talks on a trade deal between the UK and the EU have drawn to a close with no breakthrough agreement in sight. Unless this status quo alters in the weeks ahead, EUR/GBP is likely to be pushed higher,” said Jane Foley, senior strategist at Rabobank. “We see risk of a move in EUR/GBP to 0.92 on a two to three month view if a compromise on trade with the EU remains elusive,” she said.

The pound has lost earlier strength on the back of stronger than expected economic data.

Earlier in the day the pound rose to a 1-1/2-month high versus the common currency and inched towards an eight-month high against the greenback after UK retail sales numbers for July came in much higher than expected. Year-on-year sales rose instead of falling as in the previous month while economists polled by Reuters had predicted no growth. Month-on-month numbers also rose higher than expectations, though not as much as June.



“This is supportive for sterling and given the general weakness of the U.S. dollar, further gains for cable (sterling/dollar) over the short-term are possible,” said Derek Halpenny, head of research at MUFG, adding that “there will be an obvious high level of caution in reading too much into this impressive performance.”

On top of that, the recovery among British businesses from the shock of the COVID-19 pandemic quickened again in August, the IHS Markit/CIPS UK Composite Purchasing Managers’ Index (PMI) showed on Friday. The index shot up to a nearly seven-year high of 60.3 from 57.0 in July, far above the 50 threshold for growth, keeping sterling supported.

CV19 situation

Newly identified coronavirus infections look to have plateaued at around 270,000 a day. The majority of new cases in recent weeks have occurred in the US, Brazil and India. The first two of these countries have already suffered substantial outbreaks. Specifically, close to 500 lives have been lost for every million inhabitants. Empirically, the reproductive rate of the virus, has tended to fall to around 1 at this level of mortality, as our first chart shows. New cases are started fading across the world as well - China, Germany, Spain and other countries that previously reported about potential relapse now show the positive statistics.

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Even in US virus activity starts to exhaust.
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UK Fundamental view by Fathom Consulting

Second-quarter GDP data are now available for many major economies, including the UK. Data released earlier this week showed that the UK economy suffered a 20.4% contraction in Q2, close to the figure of 17.8% that we had pencilled in at the time of our previous quarterly forecast. The UK is alone among the G7 economies in having a monthly measure of economic activity, and in the present circumstances this provides a more useful guide to the path of recovery. Our third chart confirms that activity troughed in April, at some 26% below pre-COVID levels. There was a modest recovery in May, and a stronger recovery in June, with non-essential retailers able to reopen mid-month. By June, the UK economy was one-third of the way back to pre-COVID levels of activity. Further significant growth is likely to have occurred in July, with most of the hospitality industry able to reopen from the beginning of that month.

In its latest Monetary Policy Report, the Bank of England drew attention to the fact that the proportion of UK household expenditure restricted by social-distancing legislation had fallen from almost 40% in the early stages of lockdown, to just 1% from early July. In principle, UK economic activity could return almost to normal. It has not, of course, and is unlikely to do so for some time. In our upcoming Global Economic and Markets Outlook for 2020 Q4 we shall consider the risk that fear and uncertainty, both among firms and households, may prevent a full economic recovery in many countries, leaving them with structurally high levels of unemployment.
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Huge challenges ahead for the UK labour market

The COVID-19 pandemic combined with the policy and behavioural response to it have created the steepest global recession in recorded history and, with it, eye-watering reductions in the demand for labour as seen in the chart below. In the UK, the government has responded with a furlough scheme, subsidising companies to keep those employed who they would have otherwise made redundant. However, transfers of that magnitude cannot last forever, and are currently scheduled to end within the next few months, though of course those plans might change.

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The ‘loser’ sectors, employ around 25% of the UK workforce (just over 9 million people). They tend to be labour intensive, while the second category is less so, and technology will probably reduce even the relatively small labour input to the ‘winner’ sectors in future. Reflecting that, claimant count unemployment has rocketed by some 1.5 million during the crisis so far, much more rapidly than it did in any previous recession at least back to the 1960s.

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But the increase in the claimant count does not capture the full magnitude of the shock to the UK labour market, since many workers who are still formally ‘employed’ are in fact not working, thanks to the furlough scheme. 9.4 million employments have been placed on furlough at some point during the scheme. Many if not most of those currently on furlough will land on the labour market by the autumn, and will struggle to find new employment unless vacancies bounce back drastically. More than debt, the labour market is the biggest economic problem for UK policymakers.

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As a bottom line, on a surface we have two major issues - UK Debt concern, as national as public, difficulties in Brexit negotiations that start to smell with hard scenario and, finally, real problems in employment sector. The tricky moment here is both concerns are not mutually excluded. Using just common sense, it is obvious that public debt has direct relation to employment. Virus pressure is exhausting gradually, putting all countries in equal conditions and moving real economy situation on the first stage. It seems that in relation to USD, cable has some time gap till US elections. During this time USD performance will remain under pressure of political struggle. Once president will be estimated, US should stand on the way to recover. UK, in turn, will appear in most difficult period in November as Brexit deadline approaches.
EU situation in general is much better, and here is difficult to see any reasons by what factors GBP could take the lead over EUR. The only thing, as we've mentioned above is passivity of EU leaders that put on hold supportive measures to economy and do not hurry to develop 1.35 Bln supportive plan. As we've warned previously - this will be negative sign for the EUR on medium term perspective and could as trigger some retracement as slowdown overall upside trend there, that could stop totally closer to the end of the year if US finally finds the ground and turn to recovery.
My personal view guys, I'm not pretending on truth in the last resort, but I suggest that BoE will have to change its rate and finally cut it. First it is suggested by Gilt bond rates, that is flirting near negative territory, second - it is fragile situation with high debt level and unemployment. That's why personally I have moderately bearish view on GBP perspective, but depending on BoE skills, it is possible that drop will be limited and market could turn to wide consolidation, instead of downside trend. The joker is Brexit talks that stands out of our control. Any success in negotiations could turn situation from top to bottom. If nothing will change within two months - downside action could accelerate under impact of as Brexit dead-way as US recovering.


To watch on the next week

POWELL TAKES (VIRTUAL) CENTRE STAGE
A lot has been riding on the Fed in recent months: risk assets have surged on the back of its do-whatever-it-takes approach to propping up the economy with asset purchases and zero-bound rates during the pandemic crisis.

Now a key challenge is how to spur inflation. Fed Chair Jerome Powell may give hints on Thursday on the opening day of the Jackson Hole conference, where he will discuss the central bank’s monetary policy framework review.

The review looks at how to revamp Fed tools to guide the economy. As part of that, investors have been anticipating details on possible changes to how it targets inflation.

To guard against the possibility of higher prices ahead, investors have loaded up on assets like gold and TIPs. Still, while five-year five-year forwards - an inflation gauge - have been rising, the measure remains below the Fed’s 2% target.
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QUO VADIS, GREENBACK?
The dollar, slipping to more than two year lows in recent days, looks out of favour thanks to negative inflation-adjusted yields, weaker macro-economic data and tensions between Washington and Beijing. The downward move has fueled familiar talk about the dollar’s decline as the world’s reserve currency.

Investors are trying to gauge where next for the greenback. Intraday volatility has increased across the currency complex suggesting bearish positioning versus the dollar may be at extremes.

And unlike July, when virtually all non-dollar currencies and precious metals gained on the dollar’s 4% fall, August has been a mixed bag. The yen and the Aussie have struggled. Even gold’s eye-watering rally is showing signs of exhaustion after hitting a record near $2,100 per ounce earlier this month.

Throw in a U.S. Federal Reserve wary of pumping in more stimulus just yet, approaching U.S. elections and the greenback may find some fresh legs.

Continued in next post...
 

Sive Morten

Special Consultant to the FPA
Messages
13,796
Technicals
Monthly


First, guys take a look at this chart - that is what I'm thinking about. Let's call it as moderately positive outlook and it seems it has room for all views - as for those who suggests drop to 1.20 as for those who has optimistic look over GBP. In a case of negative scenario, if BoE capitulates in resolving problems, Brexit collapse and US strength -everything could go differently, with new drop to parity.
gbp_m_24_08_20.png


Here is the explanation. First is, we have two grabbers that are still valid and MACD divergence. As upside bounce has good pace, it seems that market indeed could challenge previous top. Further upside action is under question as fundamentally as technically as we have monthly O.bought area and major Fib level. Then we could get scenario of minor H&S pattern that we will discuss below, on weekly chart. Once and if it will be completed - here, we could get scenario of large H&S that you can see on the chart.

Of course and of these swings should have some fundamental background as this is monthly chart and nothing occasional here could happen. As you understand reversal could be formed only based on positive scenario. Negative case suggests failure of reversal patterns and proceeding to all time OP target around 0.95.

Weekly

Here we could consider the first pattern - relatively minor H&S pattern. Our epic weekly trade was over last week, when price hits OP around 1.3270. Here we also see that price challenges K-resistance area and hovers around overbought level. This stuff creates the background for relief and downside action on daily chart.
Still, overall upside action has great pace, monthly chart and grabbers in particular suggest slightly higher action before major reversal, somewhere to 1.36 area where we have another K-resistance area that even stronger, and monthly oversold.
Thus, in a week or two, we could get temporal pullback here, but it would be better to not treat it as reversal as final spike up is suggested. Once it will happen (and if our theory is correct), we indeed could get drop back to 1.20 where second shoulder has to be formed.

As it should happen within 1-2 months, it might be driven by next fiasco in Brexit negotiations in October and BoE dovish measures as current situation sooner or later but forces them to cut the rate.

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Daily

So lets go further to the next step...Despite that drop on GBP has started slightly differently compares to what we've expected, the core remains the same and triggered retracement. Now it is easy to recognize puny H&S pattern right at top. As we expect just minor pullback and not drastic reversal, as we've mentioned above - here we could consider two levels. IT seems that 1.2878 could be reached with high probability, while second one, around 1.2550-1.2640, or let's call it roughly as 1.27 area is under question. This is the area that suggested by another analysis, mentioned above:

Kenneth Broux, head of corporate research at Societe Generale. “The point that I’ve been making for the past two weeks is that cable (sterling/dollar) at $1.31 flatters the valuation of the pound, so I would expect cable to drop below $1.30 in the coming weeks, towards $1.27,” he said.“September, October time is really when it’s money time. That’s when things can happen.”

First level is not just potential H&S target but minimum reaction to butterfly that suggests at least 3/8 pullback. Besides, as you can see, below 1.27 is an area of daily oversold.
gbp_d_24_08_20.png


Intraday

Here guys we have the riddle what will happen in the short-term. Yes, in general we understand that market should turn up somewhere around to reach 1.3160 area and form right arm of the pattern. Put no clear hint on how this should happen. Whether market completes OP and "222" Buy pattern and turn up? Or it drops first to 1.27 AB-CD extension around neckline?
The one thing that is obvious - if you trade GBP short, it's time to think about profit booking or, at least stop tightening, as reversal could happen fast:
gbp_4h_24_08_20.png


On 1H chart it makes sense to keep an eye on the thrust. First, we could get fast B&B trade, second - appearing of DRPO Buy tells that price is reversing and action directly to 1.3160 could happen. Thus, if you even do not intend to trade these patterns, just keep an eye on them, they could help you in decision making concerning existed short position.

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Conclusion:
As you can see, situation on GBP is far from obvious and it is not final point in this story yet. All roads are open by far, at least in the long-term perspective. Coming 1-2 weeks are promised to be extremely interesting.
 

Sive Morten

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

Let's keep going with GBP as on EUR is nothing to discuss by far - price forms 2nd inside session in a row and market stands in flag consolidation on daily chart. While on GBP we have some progress and more clarity, some hints on what shape the price could take.

As we've estimated in weekly report, our medium term plan suggest temporal pullback, that should not be too deep. Then market should follow somewhere to 1.36 area and only after that major drop to 1.20 could start. Of course, everything will depend on fundamental picture as well. But at current moment this is our basic view.

Thus, we're dealing with the first step of this setup - daily moderate pullback. Most probable target is 1.2878 Fib support, but drop to 1.2650-1.27 is not totally excluded as well. Market now is forming clear shape of H&S pattern:
gbp_d_25_08_20.png


On weekend we had some concern on how market will turn up, and there were few suggestions. Now, our first idea is done as GBP has hit OP target. At the same time we see that bearish grabber is forming but not confirmed yet. If it still will be confirmed by close price - drop to 1.27 XOP and neckline becomes very probable. And this gives clear information to scalp traders - where to close shorts (as we still have it) and where is to go long for those who would like to.
For us, as we mostly deal with daily time frame - 1.3167 level is the major to watch for, as this will be the top of right arm of the pattern, and potentially good area for taking short position, based on the daily H&S. Daily analysis doesn't suggest trading GBP long from the neckline, only if you trade on intraday charts...

If no grabber will be formed - GBP probably proceeds higher, at least to 1.3167 right from OP lows.
gbp_4h_25_08_20.png
 

Sive Morten

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

Finally we could take a look at EUR, although it is too lazy and forming no attractive setup right now. Well, it is normal as everybody waits for Powell's speech in Wyoming, particular speaking any hints on inflation.

Last time when we've talked about EUR was on Thu, right after bearish engulfing pattern has been formed and we said that EUR probably should reach the lower bottom of the flag consolidation. Once this has happened price is forming inside sessions since the beginning of the week, forming nothing interesting.

Technically it is good that 3x3 DMA envelops current price action after 2nd close below DMA, if we speak about potential DRPO "Sell". But, for the truth sake, whether DRPO will work or not depends mostly from the Fed...
eur_d_26_08_20.png


As we see relatively strong drops on 4H chart both times, we probably could reach the OP target and EUR could form butterfly to complete it. Besides, existed divergence also suggests reaching of previous lows. But, at the same time, overall price action looks not inspiring for any position taking by far...
eur_4h_26_08_20.png
 

Sive Morten

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

Today we again take a look at GBP as overall action on EUR looks a bit boring. Besides, on GBP we have longer-term setup in play as well. And now this setup is coming on the first stage. As we've said in weekly report, before major drop could happen on cable, price supposedly should rise to 1.36 area. And the major concern in the beginning of the week was about the way, how this could happen. Now we have the clarity and have to say that H&S scenario is destroyed, which means that now deeper retracement will happen. On daily chart we see bullish reversal session and clear signs of bullish dynamic pressure that suggests action above recent top:
gold_d_27_08_20.png


On 4H chart market stopped downside action precisely at OP, forming big "222" Buy pattern. MACD divergence is also very important here as it suggests action above the previous top as well. Besides, the way how market is moving here absolutely doesn't correspond to idea of bearish reversal. Price action is too strong:
gold_4h_27_08_20.png


Right now, on 1H chart market is coming to OP target, forming "222" Sell pattern that should lead to technical pullback, hopefully to K-support area. This could become good chance to consider long entry, if you would like to:
gold_1h_27_08_20.png


But, be aware of J. Powell speech. Technical picture looks bullish, but this is only the half of the story. The second half is Fed statement, and it could change situation drastically. Thus, you have to be ready to accept this risk, if you intend to take position.
 

Sive Morten

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

So, yesterday we've got first clarity on Fed position as they decide not to struggle the inflation but stimulate it and lead to target 2% level. At the same time - stimulate employment. It means that rates remain at zero level for long time, as well as new stimulus probably yet to come.

We will get 2nd Powell's speech today as well, but first result you already can see as EUR, Gold and GBP tend higher. In general, this action stands in agreement with our medium-term view. On daily chart we probably could consider a bit more extended view. It is not the perspective of nearest days, but it could become applicable within 3-4 weeks probably.

As market is trying to break above Agreement resistance, with the same AB-CD we also have XOP target around 1.40. Where is also 1.27 extension of big daily drop stands. 1.40 is relatively close to the next strong monthly resistance cluster that we've discussed in our weekly report and which is the level, where market, as we believe, is coming to:
gbp_d_28_08_20.png


On 4H chart, despite yesterday's spikes, GBP is trying to overcome it, moving back to the top. Patterns that we have are already reached their minimum targets - as MACD divergence as grabbers, because market has created the new top already:
gbp_4h_28_08_20.png


Yesterday's 1H setup has worked nice - upward action has started right from the K-support, which was the minimum target of "222" Sell pattern as well. If you weren't washed down by spikes and doom& gloom of Powell's speech, position still could be held...
gbp_1h_28_08_20.png


For others, who doesn't have any positions, I prefer to make decisions on Monday and do not open new trade right before the weekend. But this is just my trading habit. In general it is possible to consider Fib support levels and long entry once market will show moderate pullback. Now I suggest that 1.32 consolidation is good enough for this purpose...
 
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