Forex FOREX PRO WEEKLY, December 07 - 11, 2020

Sive Morten

Special Consultant to the FPA
Messages
14,354
Fundamentals

Positive sentiment on the market is spinning up as investors widely expect stimulus as from ECB on coming week as from Fed on 15-16th of December. Vaccination also is started so, everybody starts talks about global economy recovery how fast and soon it might be. Last week we've made in-depth analysis on different terms, and come to conclusion that, indeed, in perspective of 1-2 months markets should keep the positive mood and demand for riskier assets should increase. Thus, this is friendly time for any dollar rivals, stocks and other assets. The only risk, that we still keep on the table is political, as D. Trump takes more efforts to contest elections results. This topic is rather cloudy and a lot of rumors, unconfirmed information stands around it. We should use common sense with it. At the same time, it is not correct to ignore this and deny the risk. D. Trump is a President of the US, he is not stupid and if he does something, especially after elections, he has the plan but not vain efforts. So, I think that we need to keep an eye on this subject for some time more.

In the longer-term perspective we could meet additional risks that relate to vaccine efficiency and timing of first results of vaccination. In previous report we've discussed why these risks could appear. Finally, a big stimulus pack sooner or later but impacts the inflationary pressure and recovery performance. And there will be another question - how is better start to decrease stimulus and at what moment it would be better to do. But all these questions become important only in the second half of 2021.

Combination of vaccine optimism and bets on more monetary easing in the United States drove investors out of the world's reserve currency. Nervousness about a wave of new infections across Europe and the United States and fresh lockdowns have provided some support to safe-haven currencies and a slight brake on the dropping dollar. However, as the drawn-out U.S. election has distracted lawmakers from passing any sort of fiscal spending package, investors have begun to expect that the Fed will step in, probably with more bond buying, when it next meets in December.

"The dollar is gently drifting to the lows of the year as investors re-allocate portfolios to recovery trades in the rest of the world," ING strategists Chris Turner and Francesco Pesole said in a note to clients. While more lockdown restrictions may stand to curb U.S. equity markets, the prospect of the Fed being prepared to add more liquidity should limit any dollar upside. And given that the dollar index has fallen in seven of the last ten Decembers, we do favor gentle dollar downside into the end of the year."

Worries about rising coronavirus cases have not provided the dollar with much support. Speculation is growing that the Federal Reserve will act to support the economy through a tough winter before vaccinations become available. The Fed meets to set policy on Dec. 15 and 16. Before then - on Tuesday and Wednesday - Fed Chair Jerome Powell will appear before Congress, and his remarks will be closely watched for any clues as to the Fed’s next moves.

Powell and Treasury Secretary Steven Mnuchin will testify on the CARES Act, under which Congress made $2 trillion available to the Treasury as coronavirus aid, a large portion of which was aimed to support the FOMC’s lending programs. Less than two weeks ago, Mnuchin cut off the programs, requesting that the Fed return unused funds and declined any extension.

“With all that in mind, it will be interesting to see what the two officials have to say on the matter, and whether Powell will hint at other ways in stimulating the U.S, economy from a monetary policy front,” said Charalambos Pissouros, senior market analyst at JFD Group. The U.S. government has yet to agree with Congress on a new fiscal package, something that makes the case for the Fed to act in December more likely,” Pissouros said. If that happens, “the U.S. dollar and other safe havens could come under selling pressure.”

Euro zone inflation remained in negative territory for the fourth straight month in November, reinforcing European Central Bank concerns that the drop in prices may persist as deflationary forces intensify amid a deep recession.

The euro won’t go up fast,” said Kit Juckes, macro strategist at Societe Generale. It will only do so as the dollar falls more broadly. The euro zone “will likely lag other countries which aren’t standing so firmly in the way of currency appreciation. The Nokkie and the Swedish crown ought to do better than the euro next year,” Juckes said.

While U.S. legislators have failed to reach agreement on fresh relief for a pandemic-hit U.S. economy, there were early signs that a $908 billion bipartisan proposal could be gaining traction. Investors expect lawmakers to reach a deal eventually with the two parties also facing a Dec. 11 deadline to pass a $1.4 trillion budget or risk a shutdown of the government.

Britain on Wednesday approved a COVID-19 vaccine developed by Pfizer and BioNTech and said it would start vaccinating those most at risk early next week.



“Britain is starting vaccination and the U.S. is also expected to do so in coming weeks while coronavirus infections appeared to have peaked in Europe and the same could be said for the U.S. as well,” said Yujiro Goto, chief strategist at Nomura Securities. All of these are easing worries about the economic recovery losing steam.”

That optimism more than offset disappointing U.S. jobs numbers for November and helped boost the euro despite widespread expectations the European Central Bank will enhance its quantitative easing next week.

“On the whole, the new U.S. economic team under President Biden will be dovish, if not directly pursing a weaker dollar per se,” said Daisuke Uno, chief strategist at Sumitomo Mitsui Bank. The next target for the euro should be its February 2018 peak of $1.2555. When the ECB eases its policy next week as expected, I bet the euro will gain rather than fall,” he added.

The British pound held near a three-month high, after a choppy Wednesday trade as markets looked to whether Britain and the European Union can clinch a trade deal. The negotiators may have enough progress to agree on a deal in the next few days, the BBC’s political editor said, giving the pound a slight lift.

The EU’s chief Brexit negotiator told member states’ envoys on Wednesday negotiations were reaching “a make-or-break moment”, and they urged him not to be rushed into an unsatisfactory agreement. Four diplomats told Reuters after a briefing by Michel Barnier the talks remained snagged on fishing rights in British waters, ensuring fair competition guarantees and ways to solve future disputes.

After failing to agree the basis for a deal, Britain’s David Frost and the EU’s Michel Barnier said they would brief leaders to seek new impetus for the talks, which stumbled on Thursday when London accused Brussels of making new demands.

On Saturday, Prime Minister Boris Johnson and European Commission President Ursula von der Leyen will speak to try to break the impasse, which sources said was centred on French demands over fishing rights in British waters.

It is the latest twist in what has been months of negotiations which have barely moved on the three thorniest issues - fisheries, ensuring fair competition guarantees and ways to solve future disputes.

Friday's data showed that U.S. non-farm payrolls increased by 245,000 jobs last month after rising by 610,000 in October. That was the smallest gain since the jobs recovery started in May.

Despite the weak jobs data, Don Curren, market strategist at Cambridge Global Payments, said "the key drivers in foreign exchange are likely to remain the two narratives that have dominated trading in recent sessions - excitement over the renewed possibility that Congress might forge another fiscal stimulus package in the U.S., and enthusiasm about the rapid progress being made on the development of vaccines for COVID-19."

U.S. House Speaker Nancy Pelosi said on Friday there was momentum behind talks on a coronavirus relief bill and that a bipartisan proposal could be the basis for relief negotiations. That should keep risk appetite higher.

President-elect Joe Biden said Friday’s “grim” jobs report shows the economic recovery is stalling and warned the “dark winter” ahead would exacerbate the pain unless the U.S. Congress passes a coronavirus relief bill immediately.

The bad news of the weakening jobs picture is potentially good news for investors because it means that the stimulus bill is much more likely to take place in a fairly short time frame,” said Ryan Detrick, senior market strategist at LPL Financial in North Carolina.


Long-term driving factors

Among major risks that could rise in perspective of 6+ months are inflation, vaccine efficiency and early stimulus close. As Fathom Consulting reports -

Policymakers across developed economies have responded to the economic impact of COVID, which triggered the steepest recession of all time, with correspondingly massive policy stimulus. With monetary policy already extremely stimulative, the bulk of the new stimulus had to come from fiscal loosening, as the chart illustrates. That fiscal loosening was vital in mitigating the worst economic impact of the disease, and it will continue to provide much-needed support for growth even after effective vaccines become widely available in the New Year. The middle of next year is likely to see extremely strong growth across the developed world as a result – the risk is that policymakers are too cautious and withdraw the stimulus before the economy has fully recovered. Without an effective vaccine, they would have to be thinking about long-term strategies for managing the virus and its impact on the economy. With one, it is just a question of navigating safely through the next few months.

1607158609295.png


The huge stimulus from macro policy is essential to support the economy in the absence of a vaccine – but it will continue to provide that boost once the vaccine arrives: and, again, that is entirely appropriate in the short term. The global economy has just experienced the steepest recession of all time, and it remains substantially below its long-run equilibrium. That lost ground will be recovered in large part from the second quarter of next year onwards: the second quarter is likely to be an exceptionally strong quarter, presuming the vaccines are rolled out early in the New Year.

1607158748330.png


Concerning inflation - opinions are differ right now. Still interest rates are rising and inflows to inflationary-protected ETF's have increased. The yield on the U.S. 30-year Treasury bond , which is sensitive to inflation expectations, recently stood at 1.749%, approaching levels last seen in June.

Investors at the Reuters Global Investment Outlook Summit said they are favoring Treasury Inflation-Protected Securities (TIPS) and commodities, whose prices rise with inflation.

“It is worth considering more inflation protection in portfolios now,” said Jim Leaviss, chief investment officer for public fixed income at M&G Investments in London.
The unwinding of the disastrous economic performance of 2020 will help to some degree” in boosting inflation, said Leaviss, although it was not clear whether it would be a one-off increase or permanent.


The 5-year and 10-year breakeven inflation rates closed on Thursday at their highest since May 2019, and the 30-year closed on Wednesday at its highest since April 2019. The 5-year breakeven was last at 1.829% and the 10-year at 1.904%. The 30-year rose to 1.995% - just under the Fed’s 2% target.

Citigroup
’s Scott Chronert said in a research note on Tuesday that an early sign of a reflation rotation could possibly be seen in ETF flows last month, which showed stronger moves into U.S. equities versus fixed income. PIMCO Chief Investment Officer Dan Ivascyn sees inflation trending higher in 2021, approaching 2%, but does not believe it will become a meaningful problem in the next few years.

“We do like areas of the market that can benefit from ongoing reflation. So we remain fairly constructive on commodities,” he said.



Ivascyn said other inflation-protected fixed income areas of the market with relatively low breakeven rates “look mildly to moderately attractive. We think clients should think about inflation protection.”

The iShares TIPS Bond ETF rose this week to its highest since late September. The SPDR Portfolio TIPS ETF on Monday reached its highest since mid-October. This week has seen the second largest weekly inflow ever into TIPS - approximately $2 billion - according to Bank of America.

Inflation expectations in Europe have also pushed higher in recent days, a good sign for the European Central Bank, which has undershot its near 2% inflation target for more than seven years.

Pascal Blanqué, chief investment officer at asset manager Amundi, said the world was entering a new macroeconomic regime and that stagflation - a period of poor economic growth and high inflation, as seen during the 1970s - beckoned.

“Many people think we are in the 1930s... I think we will wake up somewhere in the 1970s,” he said. “The consequences for financial stability are being challenged. All in all we are transitioning toward a regime shift in the macro financial world.”

Alternatively Rick Rieder, BlackRock’s chief investment officer of global fixed income, said he likes TIPS in case of a moderate rise in inflation, but is not expecting a surge in prices.

“You hear some crazy stories about how inflation is going to burst higher but it’s just not. People don’t pay more for goods because money supply is higher,” Rieder said. “If the price of food and energy and apparel and transportation is lower, then they pay down their debt.”

CFTC Report

EUR shows positive sentiment this week as open interest has jumped for significant 24K+ contracts. As speculators as hedgers have increased positions against US Dollar:
1607160570521.png


So, guys - short-term perspective looks almost cloudless for EUR and other riskier assets with only concern about D. Trump activity. Colleagues will vote on 14th of December, this is Monday. So it means that Trump has just one week to do something. All legal cases that now are in courts hardly will be resolved within a week. It means that on coming week D. Trump could involve Supreme Court or use his constitutional rights as a President. Somehow he has to pause or postpone voting until everything becomes clear around fraud. But he can do this using only ultimate measures. Anyway, whatever could happen - this probably should be on coming week. Because if colleagues will vote and J. Biden becomes a president - all efforts after this moment will loose the efficiency and mostly will be in vain. This is the only issue that we're worry about on next week. Keep it aside, all other stuff looks positive for the EUR. We think that ECB stimulus will trigger rally rather than downside reversal. Because at current moment ECB needs to struggle deflation and stimulus should be treated not as currency value dilution but as the tool that increases its value. Thus, the sequence of our 1.22-1.25-1.28 targets could be reached within 1-2 months.
The longer-term perspective, as you can see, is not as cloudless as near standing one. A lot of concerns stand around vaccine efficiency, stimulus and inflation. Currently we have almost no information on what could happen in 2nd half of 2021. But investors, with growing demand for TIP's ETFs apply more diversification and still buying some protection against inflation. I would suggest that it will depend on who first will start rate rising and what economy performance will be at those moment. It could be poor situation if economy grows with just 1-2% but inflation is high and needs rate hike. The side that longer will stay aside of this situation wins the run, who could extend domestic economy growth without inflation rising.


Next week

An EU official likened the current state of Brexit negotiations to a marathon where runners are “past kilometre 40” of the just over 42-km race. But four weeks before the transition period expires, a no-deal outcome is clearly a risk. Britain is also about to irk the EU further; on Monday, its parliament will press ahead with draft laws that breach an earlier divorce treaty with the bloc. It also plans new legislation, potentially with more provisions overruling parts of an earlier EU withdrawal agreement.

- Britain to press ahead with Brexit treaty-breaking laws next week
- EU-UK trade deal hangs in the balance with four weeks to go


A big week for the euro area. A two-day EU meeting from Dec. 11 will try to break a stalemate over a 1.8 trillion-euro spending package to aid COVID-hit economies, currently being blocked by Poland and Hungary.

Poland now suggests it may compromise. And the ECB, which has long urged more fiscal stimulus, will be hoping a compromise is reached. It meets on Thursday and is expected to ramp up monetary support for the economy. Some reckon it may be tempted to hold back some firepower to encourage EU leaders to end their deadlock. But that move carries the risk of a market setback. The euro at 2-1/2-year highs is another complication for inflation and economic growth. That might well encourage the ECB to do more rather than less.

The clock is ticking on the Dec. 11 deadline for the U.S. Congress to approve an omnibus spending bill to prevent a government shutdown. The raging pandemic gives lawmakers an added incentive to avoid a shutdown that could hurt the nascent economic recovery. Investors will also keep an eye on stimulus proposals, given as Republicans and Democrats in Congress remain unable to reach agreement on economic relief measures.

Technicals
Monthly

So, EUR has shown upside action this week, but it needs some external support to pass through 1.22-1.25 resistance area. We hope that ECB stimulus will become the one. Although EUR has no Fib level resistance until 1.25, it has former lows barrier. It is not strict price level and works more like a range, but it starts somewhere around 1.22 and EUR should feel its pressure as it comes closer. Still, as 1.25 already has been challenged previously, we suppose that EUR has chances to reach it with ECB stimulus support. The next target above 1.25 stands around 1.2850-1.30, that is OP and extension of BC retracement swing:

eur_m_07_12_20.png


Weekly

This time frame is the major one that represents our trading scenario as we follow it within recent 2-3 weeks. So upside breakout has happened, trend has turned bullish and market is coming to nearest standing target. Here we see that EUR is not at overbought and still has ability to move higher. In general, minimum requirements for this setup is done already as price hints engulfing pattern's target (OP on daily chart) and sets the new top, making bullish dynamic pressure completed.
eur_w_07_12_20.png


Daily

Next week we consider reaching of XOP from the same AB-CD pattern and 1.618 extension. Classic target which is rectangle height also has to be reached. At the same time, market might go faster and through this destination point, if ECB statement encourage investors for more active EUR buying. Thus, let's call 1.2260 target as minimum required one.

In the beginning of the week we also will be watching for pullback as daily Overbought, tweezer and 1.27 extension resistance could become sufficient reason for small, tactical pullback.

eur_d_07_12_20.png


Intraday

So, as pullback already is started we intend to watch it. As last week as this week we consider the same support levels as they supposedly suitable for long entry. If EUR shows harmonic swing, we should get 1.20-1.2030 area for entry. Otherwise, it might be just minor pullback to 1.2080 as investors still aimed on ECB rumors.

eur_4h_07_12_20.png
 

soul rebel

Sergeant
Messages
129
Thank you Sive
for your research and analysis posted in this forum, always fascinating to read and combined with your daily video updates makes an excellent learning platform for any aspiring trader to follow
have a great weekend!
Viresh
 

Sive Morten

Special Consultant to the FPA
Messages
14,354
Morning everybody,

EUR mostly stands in a row with our weekly scenario, starting pullback yesterday. Currently as EUR as GBP show a bit smaller reaction on US news as they are driven by Brexit progress and coming ECB meeting. Still, on daily chart we do not have any reasons to change our scenario by far and keep watching for retracement to 1.2080 and 1.2030 K-area. Daily target stands around XOP of 1.2260 level:
eur_d_08_12_20.png


On 4H chart our first support has been reached, but, as reaction on US stimulus news was limited, the 2nd leg of retracement still could happen. Thus, we keep watching for 1.2030 area as well:
eur_4h_08_12_20.png


Potentially, it could take the shape of AB=CD pattern with the butterfly on the bottom. Extensions of these patterns create support cluster around K-area on 4H chart:
eur_1h_08_12_20.png


If market shows nasty black candle straight down - stay on hold and do not take the long position. Retracement should stay gradual for our purposes.
 

Sive Morten

Special Consultant to the FPA
Messages
14,354
Morning everybody,

Market moves nowhere by far, sitting on the hands and waiting for ECB meeting. Positive news from the US had mixed effect as Congress stimulus are stuck in discussion while chances on help pack from Fed also is becoming phantom.

Despite this, we think that ECB news should be enough to let EUR hit our 1.2260 target this week. Now EUR stands tight and forming bullish flag pattern on daily chart:
eur_d_09_12_20.png


On 4H chart price is taking the clear shape of triangle with potential bearish grabber right at top. It tells that chances on 2nd leg down are still hold:
eur_4h_09_12_20.png


On 1H chart we need to re-shape the butterfly a bit, while its target doesn't change. In general everything stands the same - if you have position at 1.1980 - you should have stops at breakeven. Those who do not have any position - keep an eye on 1.1240 OP area, in case if 4H grabber indeed will be formed. Current action is just a retracement by far and we're mostly watching for upside continuation till the end of the week:
eur_1h_09_12_20.png
 

Sive Morten

Special Consultant to the FPA
Messages
14,354
Morning guys,

So, EUR accurately is completed our retracement. Now market keeps an eyes on ECB meeting later in the session. Odds suggest that upward continuation has more chances to happen than collapse, because it was widely announced that it has to be new stimulus from the ECB in December. Even ECB economists and representatives have talked about it.
Technically picture also looks bullish - good acceleration, EUR is above broken top, tight retracement in a shape of bullish flag pattern and take a look - potential bullish grabber that we could get today:
eur_d_10_12_20.png



on 4H chart harmonic swing is almost done, invalidation area for this setup is 1.20-1.2030 K-support and former top. EUR has to stay above it to keep positive mood. And this depends on ECB now:
eur_4h_10_12_20.png


On 1H chart as OP target as 1.27 butterfly extension is done. Occasionally, we do not exclude chances that it might be some spike down to XOP and 1.618 when C. Lagarde starts to speak. And this makes us to think on how we would like to take position.
eur_1h_10_12_20.png


We suggest that most simple way is to take 50% right now and place Limit Buy around 1.2035 for another 50% with stops below 1.20 support area. Alternatively you could possess only around 1.2035 or do nothing and wait for market reaction on ECB speech. Then take position on minor retracement when action begins. This is a bit personal as different traders feels comfort differently on the way to take the position.
 

Sive Morten

Special Consultant to the FPA
Messages
14,354
Morning guys,
So, as you can see everything goes well. ECB hasn't brought a lot of volatility but statement is enough positive to push EUR higher and give us bullish grabber. Now we have only one thing left - reaching of XOP 1.2260 target.
eur_d_11_12_20.png


On 4H chart again, you can see that position split when you're sure with direction is very good choice as yesterday we haven't got drop to 1.2230 support and price action turned north right at ECB meeting and from 1.2280 area - first fib support level:
eur_4h_11_12_20.png


On 1H chart we have to keep an eye on two moments. First is, possible reverse H&S shape. This is common thing for modern markets and EUR in particular. So, we could get some pullback to 1.21-1.2125 area that could become a kind of right shoulder. If you want to join this scenario - this could be the chance to enter the market.
Second thing - move stops to b/e. Because EUR has to stay above 1.2060 lows. Technically current swing up is continuation after retracement. If no continuation follows - it tells us that something is wrong and it could mean break of bullish context here:
eur_1h_11_12_20.png
 
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