Forex FOREX PRO WEEKLY, December 13 - 17, 2021

Sive Morten

Special Consultant to the FPA
Messages
15,516
Fundamentals

CPI numbers that we've got recently mostly was in a row with expectations. Although we haven't got new inflation spike but numbers stand at highs, confirming previous inflation top. Market reaction was mixed as well, as EUR and gold have shown minor upward bounce, showing that it seems that investors were waiting for the worse. Numbers hardly change the Fed position and now we need to wait the degree of hawkishness from coming Fed statement next week. This should be the major driver for the markets by the end of the year as Fed position could bring surprises.

Market overview

The dollar edged higher in the beginning of the week against safe-haven currencies after reassuring news on the Omicron COVID-19 variant. U.S. Treasury yields rose and stocks gained after news that initial observations suggested Omicron patients had only mild symptoms, reversing some of Friday's heavy selloff.

While Omicron has spread to about one-third of U.S. states as of Sunday, Dr. Anthony Fauci, the top U.S. infectious disease official, told CNN that "thus far it does not look like there's a great degree of severity to it".

"The absence of negative developments surrounding Omicron over the weekend appears to be helping markets stabilize today after the dramatic moves at the end of last week," Marc Chandler, chief market strategist at Bannockburn Global Forex, said in a note.

BioNTech and Pfizer said on Wednesday a three-shot course of their COVID-19 vaccine neutralized the new Omicron variant in a laboratory test, an early signal that booster shots could be key to protection against infection from the newly identified variant.

"It's very 'virus-on', 'virus-off' in the FX market, and I think we are going to be stuck with this for a while," said Paul Mackel, global head of FX research at HSBC. "The headline risk associated with Omicron is very high, it's very confusing, and it's making the intraday moves fairly volatile."

Illustrating this, the pound dropped to a year low on Wednesday after British Prime Minister Boris Johnson imposed tougher COVID-19 restrictions in England, ordering people to work from home, wear masks in public places and use vaccine passes. The new strain is also making it harder for market participants to predict how quickly central banks will cut back pandemic-era emergency stimulus and raise interest rates.

Banks' different schedules had been the major factor shaping currency markets in recent weeks. Most importantly the U.S. Federal Reserve is expected to announce it will accelerate tapering of its bond-buying programme at its meeting next week. Expectations of U.S. tapering had helped the dollar index rise to over a year high in late November, before Omicron's emergence sent it lower.

"The risks of the Fed not announcing a faster taper on 15 December stem primarily from the Omicron variant," wrote analysts at Nomura in a note. We believe that if Omicron-related fears subside, the market would quickly reprice in U.S. Fed tightening, potentially beyond what was priced in before the Omicron news," they said.

Euro zone finance ministers remained upbeat on Monday about economic growth prospects despite the Omicron coronavirus variant, and they agreed to continue moderately supportive fiscal policy next year.

"The euro area economy is recovering from the recession faster than expected," the ministers, called the Eurogroup, said in a statement, citing the latest European Commission forecasts for GDP growth of 5% in 2021 and 4.3% in 2022. Moreover, the level of uncertainty is particularly high, risks are substantial and new headwinds to the economic outlook have emerged," they said.

The economy of the 19 countries sharing the euro is likely to return to pre-pandemic levels by the end of the year in quarterly terms, though the recovery would be uneven across countries and sectors, the ministers said.

This echoed a regular assessment of the euro zone economy by the International Monetary Fund, released on Monday. The IMF said the euro zone was recovering rapidly thanks to high vaccination levels and continued forceful policy support, but headwinds might force it to modestly revise downwards its growth prospects in the January forecast.

To counter the uncertainty, the euro zone would keep pumping cash into the economy, even though, to some extent, it has learned to adapt to the pandemic and has grown more resilient.

"The Eurogroup agrees that a moderately supportive fiscal stance in the euro area for 2022 is appropriate ... in the near term, also in light of the downside risks, which remain pronounced and some have already started to materialize," the statement said.

The ministers brushed off as temporary the sharp acceleration in euro zone inflation, which hit 4.9% year-on-year in November, echoing the European Central Bank, the Commission and the IMF, which all said there were so far been no second round effects of inflation on wages.

"The Eurogroup acknowledges the view of the institutions that heightened inflation is expected to be transitory and inflation expectations appear well-anchored," the ministers' statement said.

At the same time IMF suggests that central banks do not have the space to keep monetary policy loose and interest rates low, the International Monetary Fund's chief economist said on Thursday, also warning that the pandemic could turn out far more costly than estimated.

Gita Gopinath, IMF chief economist, said that it had estimated that a more transmissible SARS-CoV-2 variant such as Omicron could cost the global economy a further $5.3 trillion, in addition to the current projected loss of $12.5 trillion.

"We are now in the phase where countries around the world just don't have the space to keep monetary policy very loose, to kind of keep interest rates extremely low. We are seeing inflationary pressures building up around the world," she said. And so think of a situation where you could have this pandemic last longer, you have longer supply disruptions that are putting inflationary pressures, and then we have the real risk of something we have avoided so far, which is stagflationary concerns," Gopinath added. "Our projections are that it would add another loss of around $5.3 trillion to the global economy. So that is in addition to the current projected $12.5 trillion lost," she said.

The dollar shed early gains and turned lower on Friday after U.S. consumer prices increased further in November, posting their largest annual rise in 39 years as investors took profits before a Federal Reserve meeting next week. The data, along expected lines, puts added pressure on policymakers to withdraw pandemic-era stimulus at a faster pace in coming months.

The consumer price index rose 0.8% last month after surging 0.9% in October, the Labor Department said on Friday. In the 12 months through November, CPI accelerated 6.8%. That was the biggest year-on-year rise since June 1982 and followed a 6.2% advance in October.

"There is some relief that we did not get a 7 (percent) handle on headline inflation and the dollar response is partially because there is a lot priced into the markets already in terms of rate expectations next year," said Kenneth Broux, an FX strategist at Société Générale in London.

"I'd characterize the CPI reading as right on expectations but the Forex market had positioned for a higher reading," said Greg Anderson, global head of foreign exchange strategy at BMO Capital Markets. The FX market has been extremely long US dollars for several months so with this number coming in benign we're almost out of events that could push the dollar materially higher before year-end," he said, noting that next week's FOMC meeting and Powell's speech following the meeting are likely the last dollar catalyst events this year. Normally FX investors scale back positions for year end ... today's price action where the dollar fell on neutral news is probably a prelude to that," Anderson said.

Bets on earlier rate increases have also grown. Traders late on Friday saw a more than 50% chance of a rate hike by May 2022, up from a roughly 30% chance a month ago, according to the CME Group's FedWatch program. Investors are also keen to learn the central bank's view on the Omicron variant's potential impact on economic growth or inflation.

One possible scenario outlined by UBS Global Wealth Management in a report sees the virus complicating supply-chain issues that have helped stoke inflation in recent months, bringing concerns the Fed may need to tighten monetary policy faster. The bank’s base case scenario, however, assumes the Omicron variant will not derail the recovery.

Mona Mahajan, senior investment strategist at Edward Jones, said the Fed meeting could bring more clarity to investors after an upsurge of volatility in recent weeks.

“It feels like the market has climbed two walls of worry already: Omicron and the path of the Fed," she said. "I do think over the next couple of weeks we will get a little bit more certainty on both fronts.”

So jittery are Americans about inflation that President Joe Biden -- facing mid-term elections next year -- released a statement saying the data would not "reflect today's reality" and price rises would soon subside. In any case, the Federal Reserve looks almost sure to speed up stimulus unwinding when it meets next week -- all the data indicates a robust economy and tightening labour markets, with Thursday's weekly jobless claims sharply below predictions.

On the surface wages are rising as employers struggle to fill open jobs in a pandemic era where the unemployed are reluctant to rejoin jobs for health or other reasons, and those who are in jobs have gained leverage to job-hop for higher pay.

Yet once adjusted for inflation wages have fallen for nine of the past 11 months, with growth in "real" wages moving little beyond the pre-pandemic trend.

That fact has hit home in the Oval Office, with President Joe Biden's Democratic Party facing a potentially difficult mid-term election map next year and his approval ratings taking a hit in part because of rising prices.

With supply bottlenecks showing little sign of easing and companies raising wages as they compete for scarce workers, high inflation could persist well into 2022. The increased cost of living, the result of shortages caused by the relentless COVID-19 pandemic, is hurting Biden's approval rating. The White House and the Fed have characterized high inflation this year as transitory.

"There's not much room to explain away this inflation from pandemic or reopening anomalies," said Will Compernolle, a senior economist at FHN Financial in New York. "Inflation is a tax, gas and food are among the most regressive aspects of it. Lower-income Americans spend disproportionately on both."

Biden acknowledged the increased burden on household budgets from the high inflation, while trying to reassure Americans that the country was pushing ahead with efforts to ease supply bottlenecks.

"We are making progress on pandemic-related challenges to our supply chain which make it more expensive to get goods on shelves, and I expect more progress on that in the weeks ahead," Biden said in a statement.

The government reported last week that the unemployment rate fell to a 21-month low of 4.2% in November. Tightening labor market conditions were underscored by a report on Thursday showing new applications for unemployment benefits dropped to the lowest level in more than 52 years last week.

Other data this week showed there were 11 million job openings at the end of October and Americans quit jobs at near-record rates. Fed Chair Jerome Powell has said the U.S. central bank should consider hastening the tapering of its bond purchases at its policy meeting next week.

"The Fed has little choice but to accelerate tapering and prepare for the possibility of much earlier rate hikes than it was planning just a few months ago," said Sal Guatieri, a senior economist at BMO Capital Markets in Toronto.

Inflation-watchers were greeted on Friday by news that Japan's wholesale inflation had hit a record 9.0% in November, rising for the ninth straight month. Even the Bank of Japan will discuss at next week's meeting paring pandemic-time emergency funding, Reuters reported on Friday.

Unsurprisingly, economists polled by Reuters predict higher bond volatility ahead, though they also see 10-year U.S. yields ending 2022 around 2% - barely 50 basis points higher than now. U.S. Treasury yields are on track for their biggest weekly rise since March, following three weeks of decline.

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Economists expect the year-on-year CPI could top 7% before falling back and the core CPI rate could rise above 6%.

"The recent strength in CPI and PCE inflation reflects both factors that are temporary and should fade over time and factors that could be more persistent," said Daniel Silver, an economist at JPMorgan in New York. "But the tightening in the labor market likely will continue over time and this should keep upward pressure on inflation."

The central bank is counting on finding a sweet spot this time that has been elusive, a "soft landing" that brings inflation down from higher-than-desired levels while allowing the labor market to continue to heal.

Spells of unemployment this low have not, so far, tended to end so well.

The Fed's new approach hoped to drive an array of labor market indicators like the participation rate back to pre-pandemic levels, but Hubbard said "running the economy hot...is a risky bet" if it aims to offset structural economic forces like demographics that aren't responsive, at least not quickly, to central bank policy.

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Tightening of the labour market
(By Fathom Consulting)

The COVID-induced rigidities in the US labour market are easing, but the labour market remains extremely tight, implying potential upwards pressure on inflation from wages.

The Beveridge curve shows the relationship between job vacancies and unemployment. When jobs are plentiful (i.e. when vacancies are high) unemployment tends to be low (i.e. workers are scarce), and labour markets are said to be tight. In this world, wage inflation tends to be higher. When vacancies are low, unemployment tends to be high, and the labour market is said to be operating with spare capacity: in these circumstances, the upward pressure on wages is limited. The curve therefore tends to have a downward slope.

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The COVID-19 pandemic led to an unprecedented shake-up in US labour markets with the whole Beveridge curve shifting to the right. This implies (all else equal) that the US was experiencing a higher level of unemployment for any given level of vacancies. That shift reflects an increase in labour market ‘rigidities’, probably, in this case, caused by a mismatch between the type and/or location of vacancies that have arisen and the labour force available to fill those opportunities: a laid-off barista in a coffee shop in Detroit cannot readily take up a position as a software engineer in San Francisco, for example. The greater the labour market mismatch, the higher the structural rate of unemployment, and the greater the potential impact on inflation arising from running the economy hot.

The risk that this structural deterioration in the labour market might persist is one of the main sources of upside risk to the inflation. Fortunately, that risk appears to be fading, with the Beveridge curve beginning to shift back to the left as government support schemes are reduced. This is not only true in the US (shown in the chart) but elsewhere too, including in the UK (once the impact of the furlough scheme is taken into account). So, it looks as though the structural unemployment rate may not have increased: but the labour market remains extremely tight nevertheless.

COT Report

Speculators' net long positioning on the U.S. dollar fell in the latest week, according to calculations by Reuters and U.S. Commodity Futures Trading Commission data released on Friday. The value of the net long dollar position slid to $19.46 billion for the week ended Dec. 7, from $23.99 billion the previous week. That number from the previous week was the largest net long since mid-June 2019. U.S. dollar net long positions dropped for the first time in two weeks.

Analysts said there were bouts of short covering that hit the U.S. currency against the euro and yen, especially after the dollar index hit its highest level since July 2020 two weeks ago. The dollar has been supported the last few weeks by a hawkish Federal Reserve Chair Jerome Powell who said, in remarks before Congress, that the risk of inflation has increased, as he pushed to accelerate the tapering of the central bank's asset purchases.

The dollar's rally seemed to have run its course for now, analysts said, ahead of a Fed policy meeting next week in which the U.S. central bank will likely announce that it will wrap up bond purchases sooner than expected.

"We think the bar for a hawkish surprise from the Fed next week is set highmoney markets already discount roughly three 25 basis-point hikes next year," said Jonathan Petersen, markets economist at Capital Economics. "With that in mind we think that unless the FOMC delivers a major revision to its forward guidance, the dollar rally looks due for a pause," he added.

That said, Petersen noted there is scope for the greenback to resume appreciation over the course of next year as he believes other major central banks are likely to raise rates more gradually than the Fed.

In general, this week numbers show reaction on CPI release as big bets against the EUR have been contracted, open interest has dropped as well. Still, the net short position has increased slightly. Mostly we're dealing with temporal, technical reaction rather than with sentiment changing and should not overvalue recent changes.

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NEXT WEEK TO WATCH

It's a bumper week for central banks in the United States, the euro zone, Japan, Britain, Mexico and Russia. The China Evergrande Group saga moves into the next stage after ratings agency Fitch calls a default.

#1 Fed meeting

How much Federal Reserve hawkishness are markets willing to tolerate? We may get the answer on Wednesday when the Fed concludes its last meeting of 2021. Signs the Fed is growing more worried about inflation – even after suggesting it was time to retire "transitory" from its description of U.S. price rises – could roil markets. So could suggestions of a more aggressive rate hike path in the "dot plot" projection of rates.
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#2 BoE, ECB and BoJ

Across the pond, the Bank of England and European Central Bank unveil policy decisions within 45 minutes of each other on Thursday. Both are potentially market-moving. Uncertainty fuelled by the Omicron COVID-19 variant has dented expectations for a near-term BoE rate hike, but markets are not entirely ruling out a 15 bps move either.

The ECB should confirm its 1.85 trillion euro PEPP pandemic stimulus scheme will end in March. Its hawks and doves now go to battle over how much support to leave in place once PEPP ends -Omicron and sticky inflation complicate the debate.

Meanwhile the Bank of Japan concludes a two-day meeting on Friday. A decision to phase out some pandemic-stimulus programmes when they expire in March could be made. Then again, they may be extended due to Omicron.

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Conclusion

So, guys, speaking on Friday's performance - we've found the answer. Reaction was "sell on fact" when speculators unwound longs on US dollar when inflation was in a row with expectations. This time we probably should talk on perspective of the coming week and what to expect from the Fed. The major intrigue stands on the US Dollar - could it continue rising? First thing that is obvious - Fed hardly changes the new tapering pace that already has been announced. So, in official statement we do not expect any surprises. The tricks could come from press conference and Fed forecasts, expectations and opinion on current economy background. That's where it could express more hawkish view.
We think that chances for that are significant because of two reasons. First is - job market is recovering obviously and this is big relief for the Fed, which lets it to feel a bit more free with inflation controlling. Now tightening steps will not hurt employment as much as it could when job market was weak. Second reason - Omicron overreaction last week. We agree with Nomura analysts, that markets expectations on rate increase have dropped last week, with Omicron appearing. So, this was partially priced-off the Dollar value. Now, with new information, it could be priced-in again. Especially if Fed will tell that, for example, "Omicron should not hurt economy recovery" or something of this kind. These two factors by our view could provide some fuel for the US Dollar next week. Besides, ECB statement probably will be anemic as well. As we saw above - EU ministers and IMF confirms temporal inflation and moderate EU economy growth, so nothing need to be changed by far.
With nothing new from the Fed and just expected tapering acceleration EUR probably gets the chance to climb slightly higher and show deeper upside bounce.
 

Sive Morten

Special Consultant to the FPA
Messages
15,516

Technicals

Monthly

Weekly


This time we could start directly from the daily chart as monthly and weekly analysis stands the same compares to the next week. In fact, EUR is coiling for the 4th week in a row around major support, with "anticipation of the bounce". Weekly performance mostly could be called as "indecision". Strong support area doesn't let price to fall, while EUR has no inner drivers to start rising. This leads to stagnation around this level. Trend remains bearish:

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Daily

The indecision sentiment stands on daily time frame as well. Price is forming triangle consolidation that keeps door open for both directions as we've discussed on Friday. Few reasons that we've mentioned increase chances for downside action, but intraday bullish context has not failed yet. We have bullish trend here and no bearish directional patterns. So formally, we have no reasons to go short yet. But we do not exclude appearing of the butterfly pattern, if Fed turns to more hawkish rhetoric. If you're conservative trader - it would be better to not stay aside for awhile. Appearing of the butterfly and maybe H&S later with MACD divergence - is the one that you might be interested in here...

eur_d_13_12_21.png


Intraday

For those who still intends to take long position, and play EUR through Triple Central Banks meeting next week, we have the pattern on 4H chart. With recent upside reaction it seems that right wing's bottom is formed and EUR stands close to the invalidation point of the butterfly. We've discussed a lot of tricky moments around this pattern on Friday, such as COP reaction, deep retracement, unnatural H&S shape etc... But pattern has not failed and you could decide to deal with it or not:

eur_4h_13_12_21.png


Hourly trend has turned bullish right from major 5/8 Fib support area, forming upside reversal swing:
eur_1h_13_12_21.png


That's being said - no shorts by far, those who're ready to take the risk could consider 4H Butterfly.
 

Sive Morten

Special Consultant to the FPA
Messages
15,516
Morning guys,

So, markets stand quiet, waiting for quadruple central banks meeting this week. It seems, as usual, everybody hopes for the best but prepares to the worst. On EUR market is moving down slowly, but bullish pattern on 4H chart is still valid. Although risks are high around it, mostly because of Fed uncertainty, but you still could take part with it, if you want. this will be a kind of "pain or gain" situation.

At the same time, based on different reasons mentioned earlier, we do not exclude the downside scenario on daily chart as well:
eur_d_14_12_21.png


On 4H chart another thing that I do not like is the new low yesterday. It shows how short-term upside reaction was, and it was used immediately for taking the new bearish positions. It tells that odds are above zero that Fed will tell something hawkish.
eur_4h_14_12_21.png


On 1H chart price action takes the wedge shape. As it is falling - classic approach suggests that it should be bullish. But - Fed will decide.
eur_1h_14_12_21.png

Among other currencies - we could get DRPO "Buy" on daily NZD. But the driver is the same as for NZD as for the EUR and any other currency.

That's being said - for conservatives traders we suggest to sit on the hand and wait for Fed results. Others, could try to deal with 4H butterfly, but unfortunately technical tools now takes the 2nd place.
 

Sive Morten

Special Consultant to the FPA
Messages
15,516
Morning guys,

As Central Banks meetings loom, market is becoming more wobbling. As we've said, EUR still cares the bearish signs, and we just confirm our former suggestion - if you're not sure, it would be better to stay aside. Others could try to use patterns that stand in place.

On daily chart we've got bearish reversal session yesterday, that lets us keep daily butterfly scenario valid. With higher than expected PPI numbers, more hawkish notes could sound from Fed.
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Still, our 4H butterfly is not cancelled as well and we once again could adjust the bottom of the right wing. If you're possessed with it - invalidation point is still intact, which is below the "C" lows. So, based on this point of view - there are no reasons yet for closing existed longs. Although we have daily reversal bar and here - huge evening star pattern, all in all - only Fed will set the final direction. That's why right now, the bearish signs have secondary meaning.

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Finally, 1H chart could be used if you consider short entry. We've got failed upside wedge breakout, that could be interpreted as "bullish trap" (by classic approach). So, theoretically it is possible to watch for pullback for short entry. For this scenario invalidation point is the recent top around 1.1325:
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It seems, guys that's all. Now just lets wait for Fed results. Also don't forget that we also get the shake from UK CPI, and US Retail Sales until we reach the Fed...
 

Sive Morten

Special Consultant to the FPA
Messages
15,516
Morning everybody,

So, yesterday action was tricky as usual around the Fed. In general our suggestion in weekly report was correct and Fed has said the same - job market is improving, economy is growing. Economy doesn't need any more stimulus and we should fight with the inflation. Statement was moderately hawkish and now expectations stand for 3 interest rate changes in 2022.
Despite this moment, EUR still has shown upside bounce. Since the reaction on other markets stands weak, we suggest that this is mostly speculators' profit booking and "Closing on the fact" action rather than change in the sentiment. Today, if BoE change the rate, while ECB remains flat - it could have negative impact to EUR, as ECB appears far behind closest rivals.

On the daily chart - price return back inside the triangle looks bullish, but it is not sufficient context for long entry by far. So, we do not see anything valuable on this time frame here. It would be better to keep an eye on potential DRPO "Buy" (or its failure) on NZD, rather than on daily EUR chart....
eur_d_16_12_21.png


On intraday charts, EUR has technical background for slightly higher upward action, as we've got bullish reversal and relatively strong momentum here. It means that some upside continuation could happen:
eur_4h_16_12_21.png


So, if you would like to participate - watch for Fib retracements here and decide on long entry. As this is short-term setup, Invalidation point is right under the recent lows. And set the near standing targets as upward action could be short-term
eur_1h_16_12_21.png
 

Sive Morten

Special Consultant to the FPA
Messages
15,516
Morning guys,

Today we take a look at the GBP, as BoE decision was most brave among all other central banks :)
Those who wants EUR analysis - please watch today's video, there we have as EUR as GBP view...

On GBP finally we've got technical reaction on daily support area. Rate decision was needed for this, but anyway... Since overall reaction looks not too fast, it seems that everybody understands that single rate change hardly make serious impact on GBP to USD balance. Besides, Fed could accelerate at any moment. Thus, we do either and suggest that GBP could climb a bit more, because of short term momentum and sentiment, but hardly we get real long-term reversal now:
GBP_d_17_12_21.png


On 4H chart it seems that market is forming classic round bottom (i.e. cap), so, we need to wait for the handle retracement. If you're searching chances to buy - that might become the scenario to consider:
GBP_4h_17_12_21.png


On 1H chart "handle" could happen either around COP Agreement + K-area (primary level to watch for), or around OP target. If price drops out of the upside channel, breaking major 5/8 Fib support - no upside continuation happens.
GBP_1h_17_12_21.png


This is approximately what we should looking for.
 
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