Sive Morten
Special Consultant to the FPA
- Messages
- 18,737
Fundamentals
This week we do not have significant changes in our long-term view on EUR/USD balance. Overall background mostly stands the same. Market activity was relatively narrower, as EUR finally has turned to upside retracement that we were waiting for few weeks. Major driving factors were episodic events and statements of official persons.
The most important statement has come from Federal Reserve Chair Jerome Powell when he said that he sees little risk that inflation is poised to accelerate beyond the central bank’s target but that steady interest rate hikes are the best way to protect the U.S. economic recovery for now.
The dollar was also hit by moves by the People’s Bank of China to stabilize the yuan, which had been under broad pressure amid trade tensions between the United States and China. China’s central bank said on Friday that it was adjusting its methodology for fixing the yuan’s daily midpoint, amid broad dollar strength and ongoing trade tensions between Washington and Beijing.
As Reuters reports - Powell’s statement that rate hikes are keeping job growth strong and inflation under control was a high-profile endorsement of the central bank’s current policy approach after U.S. President Donald Trump criticized the pace of rate hikes this week.
Powell’s remarks about inflation were seen by some as a signal that the Fed has little need to push rates beyond the bank’s perceived level of the neutral rate, or where the federal funds rate reaches an equilibrium where it neither stimulates nor suppresses economic growth. Policymakers’ latest assessment of that rate was around 2.9 percent, roughly 1 percentage point above the current level of between 1.75 and 2.00 percent.
Indeed, if we take a look at probability distribution of rate change, then we will see that investors expectations on rate increase in Dec have decreased slightly. Still, it seems that Powell's words doesn't make too much effect on expectations by far:
Source: cmegroup.com
Still, according to traders opinion, Powell said nothing new, because his statement mostly follows to recent Fed minutes.
“The dollar’s reaction is a part of a narrative that was established earlier this week, one that we saw in the minutes, with respect to the Fed making progress toward neutral,” Issa said.
“Specifically, the reference there was that some members had become more uncomfortable with the narrative in the Fed policy statements that policy is still accommodative,” Issa said.
Speaking on EU situation recent Fathom consulting report shows that overall sentiment mostly was not harmed by tariffs turmoil.
After peaking at 1.4% in January 2018, our euro area Economic Sentiment Indicator (ESI) has fluctuated around 1.3%, while remaining consistently above quarterly GDP growth over the same period. Looking at the country breakdown, France, Italy and Portugal saw their ESIs decline slightly in July, while Germany and Spain’s were unchanged. Growth in Q2 across the currency bloc, though a little below our forecast at 0.4%, remained well above our estimate of its post-crisis trend. Although the ECB is tightening its monetary policy, Italy is proposing to loosen fiscal policy, which might give the Italian economy a short-term boost.
COT Report
Recent COT data shows that speculative short position has increased again. Open interest has dropped slightly, for 6.3K contracts. Another important moment - hedgers have closed significant short positions. As they usually open opposite positions, closing of the shorts could mean that hedgers do not expect big EUR rally and mostly suggest downside continuation. Taking it all together lets us to suggest that bearish sentiment is still here, but may be it is not as strong as it was couple weeks ago:
So, it seems that bearish trend takes the pause right now and major events yet to happen. Activity sooner or later should return, and probably it will happen within a month or so.
Technicals
Monthly
So price still stands at yearly Pivot and we said that this is more the range rather than precise number. Now we see that price feels some gravitation around it and it will be particular interesting and important what reaction price will show on it. This is major 50% Support area as well.
This week reaction was not bad and it seems that our expectations are started to realize by price action. This level is important not just because of YPP. Take a look - this is upper border of former 1.05-1.14 consolidation. If price will drop back inside it - it will open road to the bottom of 1.05 area. Price has problems with breaking borders of any consolidation, but it has no barriers inside and could freely move from up to bottom.
Another important moment here - our pennant. In fact, EUR shows right now failure breakout, "bearish trap". Usually it least to opposite breakout, which corresponds to our view on weekly chart.
But in longer term perspective situation is more thrilling and somewhere scaring may be. In fact, guys, Dollar Index has completed our minimum target - requirement of deep retracement up after reversal swing. And its done - 5/8 bounce:
Usually, in most cases any market continues action down in this circumstances. The only exception exists if diamond pattern will be formed. In this case USD should skyrocket above previous top. Previously I didn't treat this hazard too serious, but today I've read Fathom expectations till 2020 based on Crude Oil prices, and they expect drop to 20$ and world global recession. It means that demand for USD will jump again.
This is definitely the scenario that we should keep an eye on...
Weekly
So, here EUR starts to show more bullish signs. Once bearish reversal swing has been formed - market turned to reasonable upside bounce from major 50% Fib support, weekly Oversold. As three weeks has passed, now we have clear morning star candlestick pattern here. It suggests upside action at least to 1.18-1.19 area.
In fact, here we have the same situation as on dollar index chart, mentioned above - after reversal swing market tends to show deep retracement. Here is again, our anticipated 1.20-1.21 area is 5/8 Fib resistance level:
Daily
Market struggles here with cluster of 5/8 Fib levels and daily OB. Retracement that we've discussed within a week was smaller than we expected, or - maybe it still stands ahead. On Friday market has hit major 5/8 Fib level that is based on thrusting black candle.
Since we have Morning star pattern on weekly - there is more than 50% probability of retracement back in the body of this pattern. Morning star has the same nature as bullish engulfing. Thus, despite recent rally, we still should get our chance to go long.
In general thrusting action looks good and confirms our long-term scenario.
Intraday
So, our Friday suggestion was correct - as soon as market has moved above 1.1585 (C-point of our AB-CD pattern) on hourly chart, upside action has continued. Now we know that it was triggered mostly by Powell's comments.
Anyway, as probability mostly stands in favor of retracement, and market at resistance, we treat 1.15 area as suitable target of possible bounce, just because this is K-support area:
4H shows hint on possible MACD divergence. Thus, in the beginning of the week we need to keep an eye on two levels - extensions of recent retracement. We do not exclude appearing of H&S pattern. Strong break above 1.1680 will open road directly to 1.18 area:
Conclusion:
Today we've made important discovery - world could meet global recession in 2020. Currently we're following with our major scenario still - upside retracement to 1.20-1.21 and then drop to 1.08, but this new fundamental vision could change situation drastically.
On coming week, odds suggest some retracement still. Thus, we should be patient and wait for proper entry level, do not try to jump in running train.
The technical portion of Sive's analysis owes a great deal to Joe DiNapoli's methods, and uses a number of Joe's proprietary indicators. Please note that Sive's analysis is his own view of the market and is not endorsed by Joe DiNapoli or any related companies.
This week we do not have significant changes in our long-term view on EUR/USD balance. Overall background mostly stands the same. Market activity was relatively narrower, as EUR finally has turned to upside retracement that we were waiting for few weeks. Major driving factors were episodic events and statements of official persons.
The most important statement has come from Federal Reserve Chair Jerome Powell when he said that he sees little risk that inflation is poised to accelerate beyond the central bank’s target but that steady interest rate hikes are the best way to protect the U.S. economic recovery for now.
The dollar was also hit by moves by the People’s Bank of China to stabilize the yuan, which had been under broad pressure amid trade tensions between the United States and China. China’s central bank said on Friday that it was adjusting its methodology for fixing the yuan’s daily midpoint, amid broad dollar strength and ongoing trade tensions between Washington and Beijing.
As Reuters reports - Powell’s statement that rate hikes are keeping job growth strong and inflation under control was a high-profile endorsement of the central bank’s current policy approach after U.S. President Donald Trump criticized the pace of rate hikes this week.
Powell’s remarks about inflation were seen by some as a signal that the Fed has little need to push rates beyond the bank’s perceived level of the neutral rate, or where the federal funds rate reaches an equilibrium where it neither stimulates nor suppresses economic growth. Policymakers’ latest assessment of that rate was around 2.9 percent, roughly 1 percentage point above the current level of between 1.75 and 2.00 percent.
Indeed, if we take a look at probability distribution of rate change, then we will see that investors expectations on rate increase in Dec have decreased slightly. Still, it seems that Powell's words doesn't make too much effect on expectations by far:
Source: cmegroup.com
Still, according to traders opinion, Powell said nothing new, because his statement mostly follows to recent Fed minutes.
“The dollar’s reaction is a part of a narrative that was established earlier this week, one that we saw in the minutes, with respect to the Fed making progress toward neutral,” Issa said.
“Specifically, the reference there was that some members had become more uncomfortable with the narrative in the Fed policy statements that policy is still accommodative,” Issa said.
Speaking on EU situation recent Fathom consulting report shows that overall sentiment mostly was not harmed by tariffs turmoil.
After peaking at 1.4% in January 2018, our euro area Economic Sentiment Indicator (ESI) has fluctuated around 1.3%, while remaining consistently above quarterly GDP growth over the same period. Looking at the country breakdown, France, Italy and Portugal saw their ESIs decline slightly in July, while Germany and Spain’s were unchanged. Growth in Q2 across the currency bloc, though a little below our forecast at 0.4%, remained well above our estimate of its post-crisis trend. Although the ECB is tightening its monetary policy, Italy is proposing to loosen fiscal policy, which might give the Italian economy a short-term boost.
COT Report
Recent COT data shows that speculative short position has increased again. Open interest has dropped slightly, for 6.3K contracts. Another important moment - hedgers have closed significant short positions. As they usually open opposite positions, closing of the shorts could mean that hedgers do not expect big EUR rally and mostly suggest downside continuation. Taking it all together lets us to suggest that bearish sentiment is still here, but may be it is not as strong as it was couple weeks ago:
So, it seems that bearish trend takes the pause right now and major events yet to happen. Activity sooner or later should return, and probably it will happen within a month or so.
Technicals
Monthly
So price still stands at yearly Pivot and we said that this is more the range rather than precise number. Now we see that price feels some gravitation around it and it will be particular interesting and important what reaction price will show on it. This is major 50% Support area as well.
This week reaction was not bad and it seems that our expectations are started to realize by price action. This level is important not just because of YPP. Take a look - this is upper border of former 1.05-1.14 consolidation. If price will drop back inside it - it will open road to the bottom of 1.05 area. Price has problems with breaking borders of any consolidation, but it has no barriers inside and could freely move from up to bottom.
Another important moment here - our pennant. In fact, EUR shows right now failure breakout, "bearish trap". Usually it least to opposite breakout, which corresponds to our view on weekly chart.
But in longer term perspective situation is more thrilling and somewhere scaring may be. In fact, guys, Dollar Index has completed our minimum target - requirement of deep retracement up after reversal swing. And its done - 5/8 bounce:
Usually, in most cases any market continues action down in this circumstances. The only exception exists if diamond pattern will be formed. In this case USD should skyrocket above previous top. Previously I didn't treat this hazard too serious, but today I've read Fathom expectations till 2020 based on Crude Oil prices, and they expect drop to 20$ and world global recession. It means that demand for USD will jump again.
This is definitely the scenario that we should keep an eye on...
Weekly
So, here EUR starts to show more bullish signs. Once bearish reversal swing has been formed - market turned to reasonable upside bounce from major 50% Fib support, weekly Oversold. As three weeks has passed, now we have clear morning star candlestick pattern here. It suggests upside action at least to 1.18-1.19 area.
In fact, here we have the same situation as on dollar index chart, mentioned above - after reversal swing market tends to show deep retracement. Here is again, our anticipated 1.20-1.21 area is 5/8 Fib resistance level:
Daily
Market struggles here with cluster of 5/8 Fib levels and daily OB. Retracement that we've discussed within a week was smaller than we expected, or - maybe it still stands ahead. On Friday market has hit major 5/8 Fib level that is based on thrusting black candle.
Since we have Morning star pattern on weekly - there is more than 50% probability of retracement back in the body of this pattern. Morning star has the same nature as bullish engulfing. Thus, despite recent rally, we still should get our chance to go long.
In general thrusting action looks good and confirms our long-term scenario.
Intraday
So, our Friday suggestion was correct - as soon as market has moved above 1.1585 (C-point of our AB-CD pattern) on hourly chart, upside action has continued. Now we know that it was triggered mostly by Powell's comments.
Anyway, as probability mostly stands in favor of retracement, and market at resistance, we treat 1.15 area as suitable target of possible bounce, just because this is K-support area:
4H shows hint on possible MACD divergence. Thus, in the beginning of the week we need to keep an eye on two levels - extensions of recent retracement. We do not exclude appearing of H&S pattern. Strong break above 1.1680 will open road directly to 1.18 area:
Conclusion:
Today we've made important discovery - world could meet global recession in 2020. Currently we're following with our major scenario still - upside retracement to 1.20-1.21 and then drop to 1.08, but this new fundamental vision could change situation drastically.
On coming week, odds suggest some retracement still. Thus, we should be patient and wait for proper entry level, do not try to jump in running train.
The technical portion of Sive's analysis owes a great deal to Joe DiNapoli's methods, and uses a number of Joe's proprietary indicators. Please note that Sive's analysis is his own view of the market and is not endorsed by Joe DiNapoli or any related companies.
