Forex FOREX PRO WEEKLY, August 30 - 03, 2021

Sive Morten

Special Consultant to the FPA
Messages
15,329
Fundamentals

Its not a secret that market was waiting JP comments by the end of the week and results of Wyoming meeting. That's why price action through the whole week mostly was preliminary and tight. In fact it is nothing to discuss until Friday. The result was more or less predictable (at least for us) as we've spent a lot of time on analysis and come to conclusion that due multiple fundamental reasons Fed will wait. As tapering partially was priced-in, the statement has triggered upward action on dollar rivals and risky assets. All this stuff sounds good but the logical question is - what's next?

Market overview

The dollar slid on Friday after Federal Reserve Chair Jerome Powell indicated in a highly anticipated speech that the U.S. central bank could start tapering its massive support to the economy could start by year's end, which was not as fast as many in the market had assumed.

Powell said there had been clear progress toward maximum employment and he believed that if the U.S. economy improved as anticipated, "it could be appropriate to start reducing the pace of asset purchases this year."

But Powell told the Fed's annual Jackson Hole symposium the timing and pace of tapering should not be construed as a signal for when interest rates will begin to rise. The speech showed Powell has not adopted the hawkish stance of some Fed officials, said Gregory Anderson, global head of FX strategy at BMO Capital Markets.

In remarks to the annual Jackson Hole economic conference, Powell indicated the Fed will remain cautious in any eventual decision to raise interest rates as it tries to nurse the economy to full employment, saying he wants to avoid chasing “transitory” inflation and potentially discouraging job growth in the process - a defense in effect of the new approach to Fed policy he introduced a year ago.

On the separate and potentially imminent decision by the U.S. central bank to begin reducing its $120 billion in monthly purchases of U.S. Treasuries and mortgage-backed securities, Powell said he agreed with the majority of his colleagues that if job growth continues it “could be appropriate... this year.”

The weeks since the Fed’s policy meeting in July “brought more progress” towards repairing the jobs market, Powell said, with nearly a million positions added and continued progress expected. But it also coincided with “the further spread of the Delta variant” of the coronavirus, Powell noted, raising risks that would need to be evaluated as the debate over the bond-buying “taper” continues ahead of the Fed’s Sept. 21-22 policy meeting.

In the days before Powell’s speech, several Fed regional bank presidents said they were eager to get a taper underway, and to reduce the asset purchases fast, with some arguing the shift was needed to prepare for interest rate increases that may be needed sooner than expected.

Data released earlier on Friday showed inflation continuing to rise. The personal consumption expenditures (PCE) price index, a key inflation gauge watched by the Fed, was up 4.2% in the 12 months through July, the third straight month it has been at least double the central bank’s 2% target.

We will be carefully assessing incoming data and the evolving risks,” he said, signaling that Fed discussions about exactly when to reduce the bond-buying program not only remain unresolved, but must be squared against the health and economic risks posed by the highly contagious Delta variant.

Powell’s remarks offered a broad road map of where the U.S. central bank stands as it moves away from policies rolled out to counteract the pandemic’s economic shock, while also accounting for the fact that the health crisis has not passed, and that millions of Americans remain out of work as a result of it.

Expectations for continued job growth are in part based on reopened schools, eased childcare constraints, and a steady return to consumer spending on close-contact activities - developments that may be influenced by the worsening outbreak.

Fed officials “expect to see continued strong job creation. And we will be learning more about the Delta variant’s effects,” Powell said in his speech. “For now, I believe that policy is well positioned; as always, we are prepared to adjust.”

The next major decision, of when to raise the benchmark overnight interest rate from the current near-zero level, will be subject to a “substantially more stringent test,” Powell said, that satisfies Fed officials that the economy has reached maximum employment and inflation is sustainably at the 2% target.

While the current fast pace of price increases is “a cause for concern,” Powell said it would also be damaging if the Fed jumped the gun with a premature decision to hike rates.

“We have much ground to cover to reach maximum employment, and time will tell whether we have reached 2 percent inflation on a sustainable basis,” Powell said. “If a central bank tightens policy in response to factors that turn out to be temporary ... the ill-timed policy move unnecessarily slows hiring and other economic activity and pushes inflation lower than desired. Today, with substantial slack remaining in the labor market and the pandemic continuing, such a mistake could be particularly harmful.”

Here's Powell's five-point rundown on why he's not perturbed:
1) IT'S NOT BROAD-BASED
Inflation so far is coming from sharply higher prices in a limited number of sectors, particularly in goods and services hit hardest by the coronavirus pandemic and for which demand is now fast recovering as the economy reopens.

2) BIGGEST SURGES ALREADY RECEDING
Prices of cars and other durable goods are now stabilizing or dropping after skyrocketing in the summer. "It seems unlikely that durables inflation will continue to contribute importantly over time to overall inflation," Powell said.

3) NO THREAT FROM WAGES SO FAR
Wages are rising, but not faster than productivity gains or inflation in a way that could lead to an upward spiral. "We will continue to monitor this carefully," he said.

4) INFLATION EXPECTATIONS ANCHORED
The market-based and survey-based measures that the Fed looks at indicate that inflation expectations have made a "welcome" return to levels more consistent with its inflation goal but have not risen as fast as actual inflation, "suggesting households, businesses and market participants also believe that current high inflation readings are likely to prove transitory," Powell said.

5) GLOBALLY, THE PRESSURE IS DOWNWARD
Factors such as aging populations in the United States and elsewhere, along with globalization and advancements in technology, are pushing down on prices globally. "There is little reason to think that they have suddenly reversed or abated," Powell said.

"It's pretty clear that if you were worried about the timeline, that we announce in September that we're going to taper starting Oct. 1, that's not there in this speech," Anderson said. "It's not as bad as feared based on the most extreme of the hawks," he added.

I think the market liked it and they liked it because its part and parcel of this wait and see approach that Powell has adopted…I think generally speaking what he basically did is he probably pushed out the explicit announcement and commencement of tapering into November, because there is the September meeting and after that is November and I think they want to announce it at a Fed meeting, so I think basically what he did is effectively push it off to later in the fourth quarter rather than at the end of the third quarter in September.” “He also was very clear to detach tapering from “the rate liftoff” or raising rates… I think he wants to make sure to condition the market to not expect that the beginning of tapering means the onset of a Fed tightening cycle sooner rather than later, he was very clear to delineate that.” said David Petrosinelli, senior trader at Insperex in New York. "

After minutes of the Fed's policy-setting meeting in July were released last week, the dollar advanced because most market participants anticipated tapering to begin this year. The dollar began to retreat about 15 minutes before Powell spoke, after James Bullard, president of the St. Louis Fed, reiterated his hawkish view that tapering should begin soon and end by next year's first quarter.

“I think the message is clear for Treasuries -- it’s status quo and watch the data. Really, the data over the next month or two will determine the actions the Fed takes. So if we get a very strong payrolls report for example next month it could suggest that tapering could happen sooner. If the data starts to moderate, and not just the payrolls -- on inflation, on activity -- we could actually see the Fed move a little bit later. It’s more of a question of when not if. We know tapering is coming, it’s just a question of when that tapering will become appropriate, said Gennadiy Goldberg from TD Securities, NY.

“I think he gave himself maximum flexibility. When it all comes out in the wash this doesn’t really change anything in terms of expected taper. The taper will probably be flagged in September. The biggest concern I would have is if the Fed is wrong on inflation being temporary and they have to put the brakes on sooner than expected. This takes away from immediate dollar upside but the ultimate dollar upside story still focuses on interest rates, said Alan Ruskin from Deutsche Bank.

“Powell has done a very good job of not surprising us. We’ve been talking about (tapering) for a bit. Most Fed speakers have made it a part of their conversation and that’s taking out the surprise out of the tantrum. It removes the potential for a tantrum. It is a very well telegraphed move and that sort of alleviates any pressure of surprising markets.

(Tapering) will probably (be announced) in the September meeting and they’ll probably kick it off in November and it will likely be wrapped up in the first half of next year. They are likely to raise interest rates in the back half of 2022. It’ll certainly be as very well telegraphed as the taper has been. They’ll start talking about interest rate changes in the mid-year, when they would have wrapped up tapering at that juncture, said Art Hogan from National Securities, NY

According to Fed watch tool, based on FFR futures quotes market expects more or less valuable change in Fed sentiment from the summer of 2022 and first rate change in Dec 2022 or February of 2023.
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U.S. Fed Chair Jerome Powell's wait-and-see approach in a much-anticipated address on Friday gave investors and market participants some reassurance that the central bank's extraordinary efforts to prop up the economy were likely to support riskier assets a while longer. Powell offered no indication on when the central bank plans to cut its asset purchases beyond saying it could be "this year."

"We're still going to have very easy policy for a year probably and that's good for risk assets," said Kathy Jones, chief fixed-income strategist at the Schwab Center for Financial Research.

Schwab's Jones said the Fed could announce tapering as early as its September meeting if the August employment report due out on Sept. 3 is strong, although weaker-than-expected jobs data could push the announcement to December. Jones added that she does not see any reason for investors to adjust their market positions in light of Powell's remarks and given the slow pace of policy change.

"So barring some big surprises, I think you'll still continue to see stocks perform, high-yield bonds, investment grade credits - they may all be highly priced and priced for perfection, but I don't think we're getting a signal from the Fed that they're about to pull back enough to change the trend," she said.

Rick Rieder, BlackRock’s chief investment officer of Global Fixed Income, said in a research note that while "each nuance of the chair’s speech will be parsed for further clues regarding the central bank’s plans on asset purchase tapering ... overall, we think concerns are overstated here."

For Jay Hatfield, chief executive officer of Infrastructure Capital Management, Powell's words did little to upset the cart for risk assets. Even if investors believe the Fed is making a mistake in treating inflation as transitory and could hurt riskier assets eventually when it corrects itself, it is not yet time to abandon riskier assets for safe havens.

CFTC Report

This week we could see the impact of Fed minutes but again the reaction on JP statement is not included yet. Based on last week data - EUR position stands fragile as we see massive outflow of investors from the market, despite that open interest shows nominal surplus. Speculators have closed the bulk of long positions and hedgers reduced amount of contracts against EUR appreciation. This shows bearish sentiment for the EUR, at least in the beginning of the week. Recent Wyoming statement should support market for some time, but it was not an absolute surprise and its effect can't stay for too long. Chart shows that positive jump in net position last week was a mistake as trend returns to its own:
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Source: cftc.gov, Charting by Investing. com

Next week to watch

#1 NFP Report

With almost two million new jobs created in the past two months, Friday's nonfarm payrolls data for August could prove key as investors assess just how close the Federal Reserve is to scaling back emergency stimulus. A Reuters poll forecast a 763,000 payrolls increase versus a 943,000 rise in July that gave the economy a powerful boost as it started the second half.

But the Delta COVID-19 variant has cast a shadow over the growth outlook, July retail sales fell sharply and one survey showed consumer sentiment slid in early August to its lowest in over a decade. Stocks have largely shrugged off economic worries, sticking near record highs. Another robust jobs number that renews taper talk could change that as Wall Street enters September, historically a shaky month for equities.


#2 EU Inflation data

A slew of preliminary inflation data will enliven the coming week in the euro zone. Germany and Spain kick off the series on Monday, while on Tuesday "flash" August euro zone inflation is expected to show a 2.5% year-on-year rise versus 2.2% in July.

Like many other major central banks, the European Central Bank believes rising inflation is transitory and the long-term outlook remains subdued. But with supply disruptions, exacerbated by the Delta surge, adding to upward price pressures, inflation could prove stickier than anticipated. Both markets and the ECB, which meets on Sept. 9, will pay close attention.

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# 3 Consumer sentiment

Stocks enter September near record highs, but a fast-spreading Delta variant and worries that major central banks will soon start unwinding pandemic-era stimulus means investors are reassessing so-called reflation trades. While stock markets have stubbornly marched higher, the breadth of the market gains has narrowed significantly, which means they are being driven by fewer constituents.

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So, analysis of recent events and market society reaction on them bring us important information that let us to make judgement on Fed behavior. First is, the one thing we could say definitely and we also mentioned it previously. The importance of coming September NFP report is magnified right now and probably October one as well. But, even with good numbers on 3rd of September hardly we hear tapering announcement on September meeting. FOMC has no meeting in October, so the earliest month to get some changes is November. Poor NFP numbers or signs that inflation and employment are slowing down, ceiling and coming on plateau suggest that the journey postpones on 2022.
Second - we suggest that J. Powell's remarks is a key to forecasting now. He said - "We have much ground to cover to reach maximum employment, and time will tell whether we have reached 2 percent inflation on a sustainable basis". It means that inflation has no dominant role right now. They care only about employment. So, if inflation even jumps to 5% they make no policy adjustments. J. Powell splits tapering from rate change, which means that tapering announcement makes no link to starting of a rate hike cycle. And now just think what tapering is. $120 Bln monthly bond purchasing from the open market. How do you think so-called tapering announcement for $10 Bln off-purchasing makes any difference? De-facto is no, but only psychologically is. It means that market reaction follows just for the first announcement of tapering but it fades very fast and next time announcement of another $10 Bln makes no effect. It will be priced-in already. 120 Bln per month is nothing for $20 Trln bond market and only rate change expectation could make this whale move. Rate change now is expected at 2023. So we have approximately 2 years of relative prosperity for risky assets and dollar rivals. Ok, maybe not 2 cloudless years but 1 year at least - "We're still going to have very easy policy for a year probably and that's good for risk assets," said Kathy Jones, chief fixed-income strategist at the Schwab Center for Financial Research."
And at least 5-6 months of pure happiness until tapering announcement, that should be unlocked by coming NFP report. Finally, I wouldn't overestimate it, guys. Yes it is very valuable and definitely triggers strong market reaction whatever numbers we get. But - Fed sees things wider. They see slowdown in China and drop of sentiment in US as well. Delta now takes higher role for Fed. So, my suggestion that if even we get superb NFP on 3rd of September, chances on tapering announcement on September meeting still will be minimal. I suspect that everything points on November still...


Technicals
Monthly

So, by the end of the month price returns back in triangle body. As we have just two days till August close - EUR has good chances to stay there and add points to bullish background. So, our task on coming week is to find out how reliable this upward tendency. Because JP statement was not an absolute surprises and mostly was expected. This puts the shadow on durability of the rally.

Despite important shifts in sentiment and fundamental background, we do not have any of this kind on a technical side. MACD stands bearish, but fake triangle breakout could let market to start upward action, at least inside of it.

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_30_08_21.png


Weekly

Here market starts upward bounce from K-area, forming bullish engulfing pattern. And if we wouldn't have uncompleted 1.1621 OP target on daily chart - I would say we could consider long entry. Now it is unclear what will happen with this target.

In longer-term picture - overall trend still stands bearish on weekly. Here we have two major patterns to consider that we've discussed last week.

"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, as we've said, and potentially another postponing of tapering announcement later. 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_30_08_21.png


Daily

On Friday we've got bullish reversal candle and in general trend stands bullish here with MACD direction and its divergence. Upward action could continue for some time. At the same time, it is not quite clear what to do with untouched OP. The one thought that I have is volatility on NFP day. With this event in mind hardly investors will be too active on coming week and mostly will wait for the numbers. Extreme volatility on next Friday could let EUR to spike OP target. This is just one of the possible scenarios...
Another interesting moment is EUR chart looks a bit different to Dollar Index, where 3-Drive pattern seems possible as ratios between recent peaks are accurate to 3-Drive. On EUR currency the picture is more blur. Anyway, currently here we do not consider short entry and will look at intraday price performance to understand the strength of recent reaction:

eur_d_30_08_21.png


Intraday

Market comes to resistance on 4H chart and here we could recognize only potential H&S pattern. It means that for position taking we need the pullback. And we could check the strength of upward action at once, depending on whether H&S pattern works or not:

eur_4h_30_08_21.png


1H chart shows that some reaction could follow from 1.18-1.1825 area. Here we have two different extension targets. Reaction on COP might be small, hardly deeper than 1.1750 K-area because of strong upward momentum. But as EUR enters deeper in 4H K-resistance and hits OP target - major pullback could start. We watch for H&S pattern and drop to 5/8 Fib support area.
In a case of direct upward breakout we suggest action to 1.19 area and larger H&S pattern on 4H chart.
eur_1h_30_08_21.png


Thus, on Monday we not consider any long position taking and wait for reaction on resistance. We also do not consider short positions on daily chart by far. On intraday charts theoretically it is possible once we get some bearish signs around 1.18-1.1840 area.
 

Sive Morten

Special Consultant to the FPA
Messages
15,329
Morning guys,

So, EUR currently follows to our plan rather accurately. Still, all this stuff is a preliminary action before NFP and everything is still could change in a blink of an eye. So, I wouldn't overestimate the importance of this upward motion.
In fact, EUR has to have solid fundamental reasons to leave major OP target behind and break existent tendency. These reasons should be realized and plotted in some clear bullish dynamic, for instance reverse H&S pattern with the neckline around 1.19. If tendency is changing - we should get extended and clear reversal action. Thus, I wouldn't hurry up right now on daily chart and wait for the clarity and NFP in particular.
Short-term upward action continues indeed, based on Friday's momentum and reversal session that we've mentioned in weekend.
eur_d_31_08_21.png


Now market enters in 4H K-resistance, completing intraday targets. For short-term position taking we need to wait some bounce. Potential upside target that EUR could try to reach before NFP release is 1.19 area:
eur_4h_31_08_21.png


As we've suggested after COP, on Monday, retracement indeed was minimal and price was creeping higher to OP that has been hit recently. EUR also has formed minor butterfly pattern:
eur_1h_31_08_21.png


Since price stands now at 4H K-area and completed some targets - it would be better to wait for pullback to consider new position taking with 1.19 target. But this relates only to intraday trading. On daily chart, as I said - it would be better to do nothing this week.
 

Sive Morten

Special Consultant to the FPA
Messages
15,329
Morning everybody,

So, everything is going well, but today we get ADP report - first serious test for coming NFP numbers on Friday. ADP could change everything from top to bottom, that's why for daily chart we still think that it would be better to wait a bit longer.
Besides, although it is not visible on EUR but on Dollar Index we could recognize accurate 3-Drive "Sell" pattern that suggests completion of major OP and this pattern stands at vital point. Obviously ADP report either confirms it or erase it later...
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Other things mostly stand the same - on 4H chart EUR starts reaction on resistance that we've discussed yesterday:
eur_4h_01_09_21.png


Retracement is gradual and slow (maybe because of coming ADP...), so, by current look, it seems that 1.1770-1.1775 K-area is suitable for long entry. Just be aware of strong black candles and ADP numbers. If you still decide to buy - move stops to breakeven as soon as possible. Strong ADP could push US Dollar higher. Next upside target is 1.1890 - XOP of the same AB-CD pattern.
But, guys, if you're no event trader - think twice whether you really want to trade in current environment.
eur_1h_01_09_21.png
 

Sive Morten

Special Consultant to the FPA
Messages
15,329
Morning everybody,

So, recent ADP was two times lower than market expects, but it is interesting that we do not see an inspiration on the market. Just take a look not only on EUR, but GBP, JPY, aussie etc. - everything behaves quiet. On EUR we see some minor upward action, but not of a big scale.

It means that ADP makes no different to Dollar Index daily chart and there 3-Drive pattern stands valid, as price mostly stands in the same area.
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Second conclusion that we could make from current situation - investors aware something that limits their activity. This makes us think that our decision is correct - to wait for clear bullish signs on daily chart before considering any long entry. We could recognize already that it might be reverse H&S but NFP could change everything still.

On 4H chart price moves slightly higher and now is forming flag consolidation, which is potentially bullish:
eur_4h_02_09_21.png


On 1H chart as short-term sentiment is positive and EUR has almost two sessions to NFP release - we could follow the same strategy as yesterday. Watching for minor pullback. Today it might be 1.1830 or 1.1815 K-area and upward continuation. EUR should try to complete hourly XOP around 1.1890 before payrolls release.
eur_1h_02_09_21.png


That's being said - on daily chart we do nothing, while on intraday charts it is possible to follow with current tendency as it is based on positive sentiment from Friday and recent ADP report.
 

Sive Morten

Special Consultant to the FPA
Messages
15,329
Morning folks,

EUR is creeping higher, so our count on reaching 1.19 prior NFP thunder looks achievable. Anyway, on daily chart market is coming to an area of 1.19-1.1920 that has special meaning for weekly chart. Depending on what we see on NFP, background could change in a blink of an eye. I'll show you in weekly report. Our position is the same - whatever numbers we get, no tapering announcement will be in September, because there are other, global reasons exists to not hurry up with this decision. So, NFP has important value but reaction mostly should be short term, or at least not longer than coming Fed meeting.
eur_d_03_09_21.png


4H chart shows that 1.19 area is solid resistance cluster - 2 Fib levels, previous top and few extensions. Technically it is not good point for new long position, except you would like to bet on NFP negative degree:
eur_4h_03_09_21.png


Hourly chart shows the first XOP extension around 1.1890 - the starting point of resistance cluster, where market is coming to. We have few hours, so - first target could be reached, others might be triggered by volatility around payrolls release.
eur_1h_03_09_21.png


If you keep longs here and would like to keep them through NFP moment, move stops to b/e at least. As for new shorts as for new longs - we do not see sufficient context right now, expect gambling on NFP result.
 
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