Forex FOREX PRO WEEKLY, August 28 - 01, 2023

Sive Morten

Special Consultant to the FPA
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Fundamentals

This week, beyond some statistics, such as PMI's across the Globe, there were two major events - BRICS summit and Jackson Hole meeting in Wyoming. At first glance these events are totally independent. Because BRICS is political organisation, while Central banks meeting in Wyoming have discussed financial questions and interest rates policy. But this is only on the surface. In fact they have relation to each other. The topic of BRICS currency has triggered big resonance in media, although we've said that hardly any decisive steps will be taken right now in this direction, and they didn't, but still, some foundation has been put for next summit in Russia, in 2024.

So, I think it makes sense to split these two topics, by two reasons. First is - to not overload FX report and keep BRICS summit discussion for tomorrow. Second - because it has more relation to global finance, rather than just EUR/USD and mutual EU and the US economies balance. Finally, BRICS currency is also a geopolitical tool, so it would be better to talk about it in context of Gold market tomorrow. And today we have a lot of things to discuss even without it.

Market overview

The U.S. dollar held steady on Friday, on pace to finish the week strong, after Federal Reserve Chair Jerome Powell said the central bank may need to raise interest rates further to ensure inflation is contained, but promised to move "carefully" at upcoming meetings. Powell, in a speech at an economic summit in Jackson Hole, Wyoming, said policymakers would "proceed carefully as we decide whether to tighten further," but also made clear that the central bank has not yet concluded that its benchmark interest rate is high enough to be sure that inflation returns to the 2% target.

While not as hawkish a message as he delivered this time a year ago at the annual Jackson Hole Economic Policy Symposium, Powell's remarks still delivered a punch, with investors now seeing one more rate hike by year-end more likely than not. Although the decline was a "welcome development," Powell said, inflation "remains too high."

"We will proceed carefully as we decide whether to tighten further or, instead, to hold the policy rate constant and await further data," Powell said in a keynote address. "It is the Fed’s job to bring inflation down to our 2% goal, and we will do so."

In interviews on the sidelines of the conference, other Fed policymakers expressed a range of views. "We probably have some work to do," Cleveland Fed President Loretta Mester said. Chicago Fed President Austan Goolsbee felt the focus may turn to figuring out how long to keep rates high, rather than on how much higher they should go.

The index, up 0.6% for the week, was on course for its sixth straight week of gains, aided by signs of resilience in the U.S. economy that has bolstered the case for rates staying higher for longer.

"On balance, this is a modestly less hawkish speech than markets had feared," said Karl Schamotta, chief market strategist at Corpay in Toronto. "Powell's words lacked the drama associated with previous speeches from (Former Fed Chair Ben) Bernanke and (former European Central Bank President Mario) Draghi, and even fell short of the directness found in his own appearances, but we would argue this is a good thing - conditions remain too uncertain for black-and-white messaging, and markets should welcome a more gradualist and incremental approach at this point in the tightening cycle," Schamotta said.

At day's end, futures contracts tied to the Fed policy rate were pricing in just less than a 20% chance of a rate hike in September, but a better-than-50% chance of the policy rate ending the year in a 5.5%-5.75% range, a quarter-point higher than the current range. Fed policymakers will also meet in November and December.

"We remain comfortable with our call for one more 25 bp hike in November and 75 bp of cuts next year, starting in June and proceeding at a quarterly cadence," BofA Global Research strategists said in a note.

Both the euro and sterling have been hit this week by weak business activity data that has prompted investors to scale back bets on further rate hikes in the euro area and Britain. The common currency has come under pressure as ECB policymakers are increasingly worried about weakening growth prospects and, while the debate is still open, momentum for a pause in its interest rate increases is building, Reuters reported, citing eight sources with direct knowledge of the discussion.

The mood among German businesses deteriorated more than expected in August, data showed, falling for the fourth month in a row and adding to fears that the economy may be heading for its second recession inside a year.

The British pound dropped to a 10-week low on Friday as investors reined in expectations of where they think the Bank of England's interest rate might peak after recent soft activity data.

At lunch in Wyoming, Lagarde was asked about the idea of "moving the goalposts" to accommodate that new reality. Like Powell, she said no.

"We are playing a game; there are rules; don't change the rules of the game halfway through -- I'm not saying that we are halfway through, probably a bit more than that," Lagarde said. Increasing the target could undermine efforts to anchor inflation expectations, she said, and anchored expectations are key to keeping inflation constrained.

Traders on Wednesday scaled back bets for a September interest rate hike in the euro area following much weaker-than-expected business activity data from Germany, Europe's biggest economy.

Money market futures now price just a 40% chance of a quarter point rate hike from the European Central Bank next month, compared with roughly a 60% chance priced in ahead of the data . German business activity contracted at the fastest pace for more than three years in August, a preliminary survey showed on Wednesday. We will show you charts below. Not only Germany IFO, but PMI data across EU shows poor numbers.

The rate of contraction in business activity in the euro area accelerated in August. The decline in production dragged the service sector along with it. In Europe, PMI reached the reduction zone of the crisis years of 2012-2013. The three largest economies are falling - Germany, France, Britain.

Meantime, German property developer Gerch said on Thursday it had filed an application for restructuring proceedings with a local court, the latest real estate firm to run into financial trouble as the sector suffers its biggest crisis in decades. Duesseldorf-based Gerch, founded in 2016 and with a current project volume valued at 4 billion euros ($4.3 billion), said in a statement the move was "due to imminent inability to pay".

WHAT J. POWELL's SPEECH MEANS

Here we could start from our own analysis, but some most clever analysts do it for us. Once Wyoming official part was over, some interest articles have appeared in media. We just want to point on another thing that J. Powell said, but somehow this point was not widely announced. We've specified it in our Telegram channel - Falling inflation is likely to require a cooling in labor markets. Signs that the labor market is not cooling down may require additional action from the Fed.
And we think that this is probably most important phrase in all statement. Taking it in consideration together with wage growth expectations makes us think that market underestimates the hawkishness the Fed's future interest rates policy.

Second moment, which is actually the major one and that perfectly describes the Fed's problems, why they are trapped in the corner - they have absolutely opposite dynamic in manufacturing sector and services. We see strong deflation in production, which means industry destruction and contraction, and simultaneously inflation in service sector. Whatever tools the Fed will use - they will have the opposite impact on these two spheres and can't resolve the problem. But let's go step by step.

Powell's remarks and indecision showed the Fed wrestling with conflicting signals from an economy where inflation has by some readings slowed a lot without much cost to the economy - a good outcome, but one that has raised the possibility that Fed policy is not restrictive enough to complete the job. But longer term restrictive policy is a big hazard for manufacturing sector which already shows clear signs of contraction that are evident to everybody.

We talked about it for a long time, but now other analysts start talking about the same - Central bank efforts to slow inflation, by raising borrowing costs and cooling demand for goods and services, may also undermine investments in innovative technologies that could make the economy stronger in the long-run, according to research presented on Friday at a Federal Reserve economic symposium.

Yueran Ma, an economist at the University of Chicago Booth School of Business, and Kaspar Zimmermann, an economist at Germany's Leibniz Institute for Financial Research SAFE, found that an unanticipated 1-percentage-point tightening of monetary policy cut company research and development spending by up to 3%, reduced venture capital spending by an even deeper 25%, and reduced patents in what were considered "important" technologies by 9%.
They said correctly, but let's try to explain it a bit further - what is the real problem for the Fed. Despite that BRICS haven't announced any currency yet, but all Global economy society understands that this is just a question of time. BRICS's GDP, population, resource base are larger than G7, and with including S. Arabia, Iran and UAE now they de-facto could control 80% of crude oil market. taking into account the expansion of the number of participants, there is no doubt that in the fairly near future the issue of at least the settlement system will arise again. And this, of course, will be a very serious blow to the Bretton Woods system.

So, the US petrodollar system stands at the edge. And it is logical that western politicians, investors would like to hear from the leader what will be in the dollar world, and with the Bretton-Wood system. Powell did not say any clear explanations of what and how will happen in the dollar world, which cannot cause nothing but alarm among all economic entities.

Roughly speaking, since the situation in the US and other centers of western economy is clearly deteriorating and everyone can already see it, despite attempts to introduce optimism on the part of the US monetary authorities, the latter should say something. And their evasion of the answer creates high nervousness, especially on a background of the activity of the BRICS countries (of which there are already more than ten). And although these countries cannot have a single economic policy, but a single settlement system based on an alternative currency is quite can be.

Moreover, as the problems with the dollar increase, including due to the destruction of the Bretton Woods rules through the introduction of sanctions against Russia, the desire to create such a system is growing all the time. And a year later, at the summit in Kazan, this issue may arise in an absolutely constructive way. That, as it is clear, the stability of the dollar system will significantly shake.

But this is only half of the story. This challenge happens on evident worsening of global macroeconomics data, especially in production and manufacturing sector. Take a look:

1693040857525.png


And a few more:
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Also you could take a look some data on the US domestic market - total households card loans hits 1 Trln level, Home price to households earnings ratio exceeds 2008 level, consumers interest rates payments and many more - just watch posts for the Friday. Our european colleagues make correct conclusion - inflation has finished its dirt job in production now turns to service sector. Hiring stumbles and despite output drop in real sector - the wage growth expectations (i.e. wage inflation) is growing:
1693041781466.png


Taking in consideration major Fed's points on Wyoming press conference, we wonder why J. Powell so indecisive and scared? By economists opinion, this is because of strong contraction of money supply that has led to huge degradation of real economy sector - production and manufacturing. The pace of contraction has never seen before. This is M1 supply (cash). And with QT and massive new bond issues from the US Treasury - this contraction is not over yet.
1693042166694.png


And this is M2:
1693042190352.png


The decline in consumer inflation is evident, although it is higher than the indicators desired by the Fed leadership. But another trouble came out, the industrial downturn, which we have been describing for several months. And a natural question arises: if even now consumer inflation is higher than normal, then what will happen to it if Fed will start actions to stimulate production?

It is not just "the industry is falling". It means that the general level of wages is falling, that is, the standard of living (let me remind you, elections are coming!). And we see the results, including in real estate sales and mortgage demand. So, and What they gonna do with all this stuff? And if the BRICS countries (whose GDP is already significantly higher than the G7 countries) start real actions about creating an alternative currency system, what should they do?

It should be noted that all this is happening on a background of a structural recession, which has clearly manifested itself in recent weeks, especially in the European Union. So it's understandable why Powell is nervous. It can't start stimulating production and manufacturing, because it will trigger another inflation spiral. And it can't not stimulate it, otherwise, the country will drop in poverty. People already hope for higher wages, but where they could come from, if productivity is falling? Households' savings are melting, delinquencies on consumer credits are raising, as well as total interest payments burden. This brings real hazard to mid and small size banks.

With the big budget problems in US, we suggest that inflation will be stubborn and stays for longer. This is the paradox of our times, but as worse the US feels as more demand comes for the USD. Due to global USD domination investors need more cash to plug holes in dropping value of the assets and maintain the margin. That is what going to happen soon again. And now we're not along in anticipation of further USD growth. Indirectly Fidelity tells the same, pointing on Fixed income instruments, which now offer a yield premium of 180 basis points over stock dividend yields. This is the biggest figure in 15 years and the gap is likely to remain or even widen as traders bet low rates won't be around for a very long time.

In EU situation is much more complex, economy space is too fractional and economy already sends signs of exhausting. They can't lead rate to 5% definitely. Which means that the gap between EUR and USD should keep widening by two factors. First - interest rates differential, second - accelerating of fiscal US problems, which sould trigger more demand for safe haven assets and currencies. JPY now stands in jeopardy and goes out from safe haven list while CHF market is too small, which means that SNB once again will have to start massive interventions, as it was in 2008. So, keep it short - it seems that we could be at the eve of next extension stage of USD dollar strength.
 
Technicals
Monthly

Here nothing to add - EUR shows another downside week, moving under July lows. Trend remains bullish, but short-term performance looks bearish with "Shooting star" pattern on top, forming W&R of previous top. It means that market could show deeper downside action, even within upside trend, which has breakeven around parity right now (based on MACD Predictor):

1693049987509.png


Weekly

Here we see that price is coming to solid support area of 1.06-1.0750. Here we have weekly oversold, two near standing Fib levels and channel lower border. MACD Divergence suggests the challenge of 1.0610 lows. Trend remains bearish here:
1693050154312.png


Daily

Based on weekly picture, it seems that daily OP comes right in time. With 1.07 level it creates Agreement support area with weekly Fib levels. Besides, this is also an oversold on daily chart:
1693050244111.png

Intraday

As we update intraday picture day by day, it is not many things to say. Mostly, with no clear patterns, breaking all near standing support levels market should proceed to major daily target, which is, actually, the only one that stands around. Thus, our plan here is the same - keep short positions that we have and consider minor intraday pullbacks to sell them.

Thus, on Friday we've got one, which gives us bearish grabber, suggesting that downside action should continue:
1693050407496.png


The same is on 1H chart. Market stands too close to major OP to ignore it. Downside action is slowing a bit, which means that we could count on pullback from ~1.07 level. In fact, we're moving with the momentum until 1.07 target. Then we should get some more active performance, and supposedly more trading setups:
1693050540925.png
 
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Technicals
Monthly

Here nothing to add - EUR shows another downside week, moving under July lows. Trend remains bullish, but short-term performance looks bearish with "Shooting star" pattern on top, forming W&R of previous top. It means that market could show deeper downside action, even within upside trend, which has breakeven around parity right now (based on MACD Predictor):

View attachment 86169

Weekly

Here we see that price is coming to solid support area of 1.06-1.0750. Here we have weekly oversold, two near standing Fib levels and channel lower border. MACD Divergence suggests the challenge of 1.0610 lows. Trend remains bearish here:
View attachment 86170

Daily

Based on weekly picture, it seems that daily OP comes right in time. With 1.07 level it creates Agreement support area with weekly Fib levels. Besides, this is also an oversold on daily chart:
View attachment 86171
Intraday

As we update intraday picture day by day, it is not many things to say. Mostly, with no clear patterns, breaking all near standing support levels market should proceed to major daily target, which is, actually, the only one that stands around. Thus, our plan here is the same - keep short positions that we have and consider minor intraday pullbacks to sell them.

Thus, on Friday we've got one, which gives us bearish grabber, suggesting that downside action should continue:
View attachment 86172

The same is on 1H chart. Market stands too close to major OP to ignore it. Downside action is slowing a bit, which means that we could count on pullback from ~1.07 level. In fact, we're moving with the momentum until 1.07 target. Then we should get some more active performance, and supposedly more trading setups:
View attachment 86173
Hi Sive, thank you for your consistent guide.
 
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Morning everybody,

So, we return back to MT4 charts as some of our forum members feel a bit not comfortable with TradingView ones. Well, EUR is still quiet, but activity should return back tomorrow, when we start getting first important statistics of this week.

On daily chart everything stands the same, we're still watching for 1.07 target. The only update is 1.0640 lows. They are important, because this is upside AB-CD pattern, and CD leg was rather fast. EUR drop below this will erase the pattern, but what is more important - it will finalize the shift in long-term market sentiment, putting foundation for deeper downside action:
eur_d_29_08_23.png


On 4H chart we have local XOP target around 1.0735. Market is forming narrowing consolidation. So, we could tell the same - no longs by far, keep shorts. If you want to take short-term bearish position - no problem, keep an eye on K-resistance area of 1.0865 to hide the stop:
eur_4h_29_08_23.png


On 1H chart we have "222" Sell pattern. Market theoretically could climb slightly higher to reach OP, but action is too heavy. So, keep an eye on possible bearish grabber that could help with the decision making:
eur_1h_29_08_23.png
 
Morning everybody,

So, JOLT report once again has broken the technical picture. We've got moderate downside action before it has been released, but later situation has changed drastically. Even daily trend has turned bullish, so we can't consider any new shorts by far.

Still, OP target here is still valid and should be completed some time later as fundamental background stands the same and current rally is just a speculative reaction on rising unemployment.
eur_d_30_08_23.png


On 4H chart market shows upside action and now is coming to 1.0912 Fib resistance level. Potentially, we could get reverse H&S pattern and higher upward action - if, of course, coming GDP and other data will not change the trend back:
eur_4h_30_08_23.png


On 1H chart we've got moderate retracement, based on our "222" Sell, but then JOLT comes in. Now market is coming to 1.09 XOP. If H&S indeed will be formed, then, 1.0840 level seems the one where right arm might be formed.
eur_1h_30_08_23.png


That's being said, now we do not consider any shorts, wait when market hits 1.09 area and pulls back to ~1.0840, where we will make a decision on long entry.
 
Morning everybody,

So, as we've said yesterday - EUR, or better to say, released statistics has broken short-term trend and turned it bullish. We treat it as temporal moment, as neither JOLT (and even poor NFP) nor drop in GDP do not make any change for inflation and Fed policy, but markets will understand it later. Despite what the pullback we will get, supposedly it might be to ~1.1030 area, take a look - on EUR we have big bearish reversal swing. Common action when you have deep retracement after reversal swing. It happens because of strong previous upside momentum.
Second moment - uncompleted OP. This is always the risk factor for any bullish pattern on intraday charts:
eur_d_31_08_23.png


As we've agreed yesterday, we're watching for reverse H&S pattern, and market already starts forming the right arm:
eur_4h_31_08_23.png


Supposedly, it should be completed around 1.0840-1.0850 area, at least based on harmony with the left one. Despite that this is potentially bullish pattern - we have uncompleted OP and XOP on 4H chart. And it also makes sense for bears to keep an eye on the same level, because of possible H&S failure.
eur_1h_31_08_23.png


That's being said we will be watching for 1.0840-1.0855 area as for potential long entry as for potential failure.
 
Morning everybody,

So, our downside target is touched, market is flirting around 1.0840 area that we've specified yesterday. On daily chart we do not see any big shifts by far. But now bulls have to make a decision, whether to enter or not, because market stands at culmination point:
eur_d_01_09_23.png


On 4H chart downside action seems a bit strong. Untouched daily OP and 4H XOP gives additional reason to bears to watch for the same level as well:
eur_4h_01_09_23.png


EUR now stands in the area where H&S either starts working or fail. The attractiveness of this point is due lowest potential risk. Stop could be placed just under the lows. There are still few options - wait until NFP release, postpone on Monday or, take position after upward action starts, on some minor pullback.

Bears, in turn, have to wait the opposite - drop through the lows. If this happen and price remains there, this increases chances of H&S failure
eur_1h_01_09_23.png
 
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