Forex FOREX PRO WEEKLY, August 31 - 04, 2020

Sive Morten

Special Consultant to the FPA
Messages
13,796
Fundamentals

This week, no doubts, the central event was J. Powell speech that has provided a lot of new information and let us to judge on Fed policy for the months ahead. Of course, there are more needed to be said, as investors still hungry for details. That's why all eyes will be on Fed in September 15-16 meeting. We have all reasons to hope that coming meeting will be absolutely different compares to the previous one.

News surfing

The euro rose on Tuesday on better-than-expected German economic data, while the U.S. dollar fell after the United States and China both hailed a phone call between their senior trade officials as a success.

German business morale improved more than expected in August as both manufacturing and services picked up steam, a survey showed, boosting hopes that Europe’s largest economy is set for a strong recovery following the massive coronavirus shock.

Kit Juckes, macro strategist at Societe Generale, said Germany’s IFO Business Climate index was “just another data point that helps keep the euro at this stretched level,” adding that “U.S. confidence and home sales data are unlikely to elicit any response at all.”

Sentiment, and support for riskier currencies over the dollar, was also boosted by a Financial Times report which said that U.S. authorities were considering fast-tracking approval for a COVID-19 vaccine being developed by AstraZeneca and Oxford University.

In US/China delicate relations there was the call, which had been originally scheduled for Aug. 15, U.S. Trade Representative Robert Lighthizer and Treasury Secretary Steven Mnuchin spoke with Chinese Vice Premier Liu He. The United States said both sides “see progress” and China’s commerce ministry called the talks “constructive.”

EUR also has got support from weak US data, as U.S. consumer confidence tumbled to the lowest in more than six years due to concern about the coronavirus-induced job losses.

The U.S. dollar gained on Thursday after Federal Reserve Chairman Jerome Powell said, as was widely expected, that the U.S. central bank would roll out an aggressive new strategy to lift U.S. employment and inflation. Under the new approach, the U.S. central bank will seek to achieve inflation averaging 2% over time, offsetting below-2% periods with higher inflation “for some time,” and to ensure employment does not fall short of its maximum level.

“The market expected most of this,” said Marc Chandler, chief market strategist at Bannockburn Global Forex in New York.There are doubts about whether the Fed will be able to lift inflation, despite the new target. “The Fed hasn’t achieved its inflation targets since 2012, and so now they’re saying ‘now we’re serious about it...’ I don’t think that’s what creates inflation, or really the inflation expectations,” Chandler said.

Longer-term, if the Fed is able to increase price pressures but also leave rates near zero for longer, the policy would be negative for the dollar.

“What’s going to happen is when you have all the other central banks starting to pull back their stimulus, starting to show signs of tightening, the Fed is going to lag on that, said Edward Moya, senior market analyst at OANDA in New York. “You’re going to see that interest rate differential not be in the dollar’s favor. It’s just providing a longer-term bearish outlook for the greenback,” Moya said.

Data on Thursday showed that the number of Americans filing new claims for unemployment benefits hovered around 1 million last week, suggesting the labor market recovery was stalling as the COVID-19 pandemic drags on and financial aid from the government dries up.

In practice, market participants expect that this means the current ultra-low rates will stay lower for longer, thereby pressuring the dollar. After recovering from an initial slide on Thursday immediately after Powell’s speech, the dollar weakened once again overnight.

Both the dovish Fed policy and a sluggish U.S. economic recovery have helped to push down the dollar, said Boris Schlossberg, managing director of FX strategy at BK Asset Management in New York. Ample Treasury issuance over the next month will also likely keep the greenback lower, Schlossberg added.“The currency market is dubious about the long-term impact of the recovery in the U.S.,” Schlossberg said. “So it’s been favoring non-U.S. assets.”

Sterling rose above $1.33 for the first time in 2020 and touched an eight-month high as the dollar fell across the board in the aftermath of a speech by Federal Reserve Chairman Jerome Powell.

Speaking at the same event on Friday (BoE policy and rates), Bank of England Governor Andrew Bailey said the British central bank had more ammunition to support the economy after its coronavirus lockdown shock, and there was evidence that big, aggressive stimulus pushes were effective.

Traders are shying away from taking strong views on the pound, however, with most investors remaining on the sidelines in thin August trading, but analysts say things may change next week when many people return from summer holidays.

“It’s this intermediate period when everyone is waiting to see how things develop,” said Esther Maria Reichelt, a forex analyst at Commerzbank. Renewed weakness in the pound is a possibility, analysts say, as a mix of Brexit uncertainty, coronavirus fears and dismal economic data could drive it lower.

British business confidence has ticked up, but remains far below usual levels as the economy struggles to cope with social distancing and employers prepare to cut jobs, a survey showed on Friday.

“At the moment we’re concentrating a bit more on the Fed and the dollar, but it will come that there’s interest in sterling again,” said Andreas Koenig, head of global FX at Amundi, adding the pound’s fate would be determined by whether Britain managed to agree a future trade deal with the EU.

President Donald Trump is willing to sign a $1.3 trillion coronavirus relief bill, a top aide said on Friday, but Democratic House of Representatives Speaker Nancy Pelosi said the sum was not enough to meet the needs of the American people. The new figure was put forward by White House Chief of Staff Mark Meadows, marking a $300 billion increase from an initial $1 trillion offer from the White House and Senate Republicans.

Three weeks after talks on Capitol Hill broke down without a deal on legislation to help Americans suffering from the coronavirus pandemic, Meadows said the Republican president was “right now willing to sign something at $1.3 trillion.”

Hours later, Pelosi in a statement repeated her call for a $2.2 trillion bill and said Meadows’ offer would not meet the needs of American workers and families. Pelosi said, among other things, the Republicans “are rejecting the funding needed for testing and tracing to crush the virus and safely reopen schools and the economy.”
She said she hoped the Republicans would accept the Democratic offer and resume negotiations.

The Democratic-led House in May passed a $3.4 trillion coronavirus relief bill, which was not taken up by the Republican-dominated Senate.

Pelosi said on Thursday after a 25-minute phone call with Meadows that Democrats were willing to go down to $2.2 trillion and demanded that the Trump administration accept that figure before negotiations could resume.

The $1.3 trillion has been offered in private, Meadows said. Negotiations have involved Pelosi, Meadows, Treasury Secretary Steven Mnuchin and Senate Democratic leader Chuck Schumer.

Fundamental snapshot

Germany has shown and still shows best results in CV19 struggle, having one the best world/Europe healthcare system. Using necessary restrictive tools right in time, it was able to minimize pandemic effect and reduce its length. As a result, German economy has performed well, with retail sales reporting solid growth for the last two months of data. Putting this into the context of other economies, Germany performs even better. Although the government has reportedly provided less economic support, the impact on industrial production has been similar to that in its European counterparts. Retail sales in Germany have, however, reported growth in the last two months of data, May and June, from the same period last year.
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The labour market in Germany has also followed a similar path to other developing nations. As lockdown took hold, unemployment jumped 1.4%, roughly 700,000 people, in just three months. The Kurzarbeit scheme has helped lower this figure, allowing employers to reduce employees’ working hours whilst letting the government pay 60% of workers salary for hours not worked.While not picked up in the unemployment figures, this loss of working hours has been clear when looking at the falls in productivity. In April, at the height of lockdown, output per worker had fallen by 24% from one year ago.

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As the effects of COVID-19 begin to wear off, the German economy is returning to pre-pandemic normals. With policy support extended into 2021 and lockdown measures easing, consumption is expected to remain strong. Germany is a prime example of expectation of a strong recovery in economic activity in the third quarter of this year. However, the outlook beyond that point remains uncertain. Fathom’s expectation is still for a V-shaped recovery, however, there remains a substantial chance that this could be derailed by a second wave of the virus.

Speaking in general about global recovery, GDP collapsed in the first half of the year in most economies, but fiscal support meant that labour income did not collapse to the same degree. Consequently, the labour share of income has surged. By now only the UK has data for the second quarter, but that apparent spike in the labour share is likely to be in place in the US and the EU too. There are many factors in play here that account for the differences across countries, ranging from the size of government, the equilibrium unemployment rate, and trends in the prevailing real wage. But the pickup in Q2 is striking. All governments will be hoping that Q3 and beyond will see a recovery in real activity, the denominator in this ratio, as the fiscal support for labour income is gradually withdrawn. Even a rapid recovery in GDP will still probably see many of those currently furloughed or relying on government income support cheques stranded in unemployment. This is now the single biggest concern for economic policy

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This fiscal support comes at a price. For economies with a credible and independent central bank, that price is manageable, at least for now. But for countries where there are still question marks about the capacity or willingness of the central bank to support fiscal expansion, including the euro area, the price of fiscal support could be harder to manage. The fragility of the sovereign debt issuer in EA economies has picked up sharply as a result of the crisis. That has yet to show up in measures of risk attached to EA sovereign debt, and it might never do so if the credibility of the ECB continues to hold. But the risks of a re-run of 2012 are increasing.

The pressure on margins and employment globally remains elevated according to our proprietary measure pictured below. The risk of an L is still present through this channel. And there is some evidence (see the reading list below) of corporate ‘zombification’ in Germany.

That's being said, a "V" (back to pre-crisis level of global GDP by mid- to late 2021) remains our central case, supported by fiscal stimulus, but it is worth recalling that even in the V, the global economy never recovers to where it would otherwise have been without the virus. The pressing risk right now is the labour market: temporary measures are about to be withdrawn, and millions will be stranded unless aggressive new measures are introduced

CFTC Data

Recent COT report shows that net long position on EUR is coming to new all time highs, which make investors be aware of sudden pullback that could happen at any time, despite that fundamentals look good for EUR. Now, if we take a look at numbers, we could see that recent surge in EUR net position mostly stands due massive closing of short positions. I suggest that this could be very short-term speculative positions that were opened about the week ago aiming on retracement from important resistance and Powell's speech. Still, this is the fact. As a result we see minor drop in Open Interest. This is the first sign that the big flow of new buyers starts to exhaust. At the same time hedgers are still aware of upside action, taking more short positions and do not expect immediate strong drop on the market.
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Source: cftc.gov
Charting by Investing.com



Next week events

Friday’s August non-farm payrolls will be a reality check on the devastation wreaked by the coronavirus pandemic on Main Street, even as Wall Street rallies to record highs.Economists polled by Reuters forecast the U.S. economy created 1.55 million new jobs versus 1.76 million in July.

Weekly jobless claims hovered around 1 million last week, suggesting a labour market recovery may be stalling as the health crisis drags on, government support dries up and Congress remains gridlocked over potential new stimulus.

Jobs data is also in focus after Federal Reserve Chairman Jerome Powell rolled out a sweeping rewrite of its approach, saying the Fed would put more weight in bolstering labour markets. Meanwhile, the S&P 500 hit record highs, powered by Amazon, Microsoft and Apple in a rally that has accentuated the divide between the blistering stock market and a still-badly damaged U.S. economy.

Slowing U.S. job growth, rising COVID-19 raise doubts on the recovery’s strength-In landmark shift, Fed changes approach to inflation, labor market

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Fresh readings of China’s factory activity should provide a health check on the world’s second-largest economy. The vast industrial sector is steadily returning to levels seen before the pandemic paralysed huge swathes of the economy early this year. Pent-up demand, stimulus-driven infrastructure and surprisingly resilient exports have been the main drivers propelling the rebound, but private consumption is lagging as consumers remain cautious about spending. Signals point in the right direction. Industrial profits grew in July at the fastest pace since June 2018.

The official PMI, scheduled for Monday, is seen picking up moderately to 51.2 in August from July’s four-month high of 51.1 and Tuesday’s Caixin factory PMI is expected to ease to 52.7 from 52.8 in July.

Technicals
Monthly


EUR is coiling in tight range that keeps long term charts mostly intact.
By taking in a longer-term, our view is mostly the same. Existed driving factors should provide long lasting effect on EUR. Even rough approximation suggests that market could reach 1.20-1.23 area. The same was mentioned by other analysts as well. Besides, large grabber ultimately suggests action above 1.26 in long-term perspective, although now it seems unbelievable. I'm not an expert in EW, and lets professionals correct me, but it looks like 3rd wave up has started which should become the major swing in upside tendency. Theoretically it should be significantly in excess of "2" wave's top @ 1.25. Price stands above YPR1 as well that indicates new upside trend but not retracement to existing bearish tendency. Monthly overbought area stands far from here and provides room for more upside action.

But that is for long-term perspective. In short-term we have few technical limitations. First is and the major one - overextended net long position on EUR. Market sets the new record of ~211K contracts. Second - market meets monthly major 5/8 resistance level and something tells me that hardly it will be passed unsigned. It means that we should be prepared to the pullback, keeping long-term view intact.

The first week of August shows no big action and it seems that market indeed feels the barrier of the level. At the same time very fast action as of AB leg as current CD leg gives no doubts on upside continuation in medium-term perspective. As COP stands close - we should be aware of possible spike by some reason, but without immediate upside continuation. The end of vacation time is near, so maybe in nearest few weeks the more activity will come.

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Weekly

Weekly chart shows positive mood as neither "Stretch" setup nor reaching of major OP target were able to push price significantly lower. We do not have significant movement forward as well as price was standing in tight range during recent 4 weeks. But now, as we can see, Overbought level stands above the price and doesn't prevent it from upward continuation. So, maybe we finally will get reaching of 1.618 butterfly extension and monthly COP target as recent Fed statement was supportive for this.
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Daily

On a daily chart we still do not have any bright patterns, that is one of the reasons why GBP looks more interesting for trading purposes. Still, picture shows that daily Overbought level also lets market to proceed higher and reach targets that we've set. Inside the flag price has closed around the top of high wave pattern, which means that EUR has chosen the direction and upward action should continue. Finally, here we could recognize some sighs of bullish dynamic pressure as price is forming higher lows while trend stands bearish. It suggests appearing of new top in nearest future:
eur_d_31_08_20.png


Intraday

Exit from long-term daily consolidation might be choppy and we could not get clear patterns, pointed on breakout. But for market it is crucial to hold above major support area, if it is bullish indeed. This area stands around 1.1850 on 1H chart and includes natural support zone, accompanied by K-support area. Now market stands in upside breakout mode, trying to get out from "Powell" consolidation. Thus, it should not show any new deep drops. Otherwise, bullish setup here is doubtful.

Price is forming pennant consolidation, that is potentially bullish and price action could continue from pennant directly. In a case of deeper retracement - keep an eye on mentioned area and possible "222" Buy pattern.
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Conclusion:
Long-term driving factors for EUR stands intact and by our view the Fed statement was even more dovish than market expected. They intend to keep supportive measures until inflation hits 2% and employment returns on pre-crisis levels. But what they're gonna do if this will not happen? All this stuff promises long-term period of weakness for US Dollar. Additionally, any improvements in EU economy per se, provides more impulse to this trend. Now investors look for September meeting to get some details of Fed strategy, how they intend to achieve the targets.

Technically, more activity should come to markets in September due the end of vacation time. While long-term trend stands intact on EUR, direct rally stands under question as data shows change in the sentiment form aggressively bullish to more neutral. It means that while near stand targets could be reached, technical retracement could follow as well somewhere from 1.21-1.22 area.
 

Sive Morten

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

Today its time to update our view on GBP. Two weeks ago, in our weekly report we've come to conclusion that current stop is temporal and GBP should proceed higher, supposedly to 1.36 area. Then, this area should be decisive to GBP. Either we will get the breakthrough of all times, or, miserable collapse to 1.20 area. Currently it is absolutely impossible to suggest, what particular driving factors could stand under this action, but definitely there should be something serious.

But, market still has to reach 1.36. And on daily chart we need to consider different extension that has OP right at 1.3617. This OP stands slightly above previous top and in overbought area. It means that chances for W&R looks great and this could help us a lot, when we intend to take position.

At the same time, we also have closer standing tactic target around 1.3460-1.3480. this is minor XOP targets. One stands on daily (not shown), while another one on 4H chart:
gbp_d_01_09_20.png


On 4H chart, our divergence is done, and XOP, based on former "222" Buy pattern points on 1.3480 target:
gbp_4h_01_09_20.png


On 1H chart price is forming 3-Drive "Sell", but we do not call to use it for short position taking. It is useful just because of possible retracement to 1.3330 area. Market now is tending to major targets. Thus, it is very risky to sell prior these targets will be reached.
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Thus, overall context stands bullish, until market hits major target we mostly consider only long entries if some acceptable pullback happens, say, based on current 3-Drive here...
 

Sive Morten

Special Consultant to the FPA
Messages
13,796
Morning everybody,
So our GBP setup is done well, as market has hit accurately XOP target and turned down. the same story we have on the EUR. Our monthly COP finally has been hit and market is forming short-term bearish setup.

On daily chart bullish dynamic pressure has worked nice, as indeed, we've got the new top. Now bearish grabber has been formed there, that suggests drop below recent lows. It means, that on daily chart we could count on retracement at least to 1.1670-1.1680 - 3/8 Fib level:
eur_d_02_09_20.png


On 4H chart we also see Reversal bar on the top. Divergence is still valid here, and it suggests the same stuff as the grabber - drop below recent lows, at least:
eur_4h_02_09_20.png


Thus, if you're interested with this stuff - you could sell rally to Fib resistance levels against the top. Similar setup on GBP, but there we have excellent bearish engulfing pattern on 4H chart, instead of grabber.
eur_1h_02_09_20.png
 

Sive Morten

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

Yesterday, we've talked on EUR, overall setup there is the same and price still creeps to destination point. Today, let's take a look at GBP. Here situation is very similar, but not quit. Overall price action stands slower and it confirms our suggestion that this is still temporal pullback. That's why we mostly focus only on the area that stands above the trend line support on daily chart and interested in only intraday Fib levels by far.

Daily chart shows divergence that, at least theoretically, suggests the same thing as on EUR - possible drop below recent lows.
gbp_d_03_09_20.png


On 1H chart market hits K-suport area and within few ours upside pullback supposedly happens. Most probable destination is 1.3355 K-resistance level . If market keeps short-term bullish direction, price should not break it up. Anyway, it should relatively safe to sell around it at the first touch of this level. And, as soon as possible move stops to breakeven.
Because on daily chart, bullish grabber could be formed. In this case, it would be better to not have any shorts, or have them with b/e stops. In general, as EUR as Gold market hint that price should proceed lower a bit more, but tomorrow NFP release could bring surprises and volatility.
gbp_1h_03_09_20.png
 

Sive Morten

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

so EUR completes first reaction on patterns and levels that we have. Now it needs new push, that supposedly should come from NFP release. Technical context suggests that some downside continuation should follow- market stands in reaction to monthly COP and daily grabber is not completed yet. Based on yesterday's collapse on stock market and BTC - NFP might be better than expected. Thus, if indeed NFP will be dollar friendly, we could get drop to 1.1650 area - first daily fib support and oversold level:
eur_d_04_09_20.png


Those who would like to go short already did it, I suppose. Still, on 4H chart price stands in technical reaction on trend line support, and here we have something like B&B "Sell" pattern. It doesn't match perfectly to DiNapoli conditions, but the core is the same. It could be used by those who would like to go short. Opposite divergence exists, but it is too few to build the scenario of bullish reversal by far.
eur_4h_04_09_20.png


On 1H chart reaction take the shape of classic H&S pattern that suggests upside retracement to 1.19 area. You could use it together with B&B setup and consider bearish entry once H&S target will be completed. But be aware of NFP and control the numbers before pull the trigger. You need better than expected values to sell.
Additionally, H&S might start failing, if price start dropping below right arm bottom, tending to the head. This also could be the signal of downside continuation.
eur_1h_04_09_20.png
 
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