Forex FOREX PRO WEEKLY, December 19 - 23, 2022

Sive Morten

Special Consultant to the FPA

So, here is the Christmas week already. It is a common habit to make a bottom lines and conclusions of the year. And probably we could say that Fed and other central banks are coming to some end point of particular stage. Epic interest rates hiking cycle is coming to an end. Yes, we could get 1-2 rates changes probably, in particular we expect 0.25% move in February, but this is not as important. We suggest that overall economy background that Fed has appeared at is more interesting. They have made strong step, but now Fed needs to look around, and it seems that Fed by the end of IQ of 2023 will appear in more difficult situation, because now they can't do anything with the interest rate any more. More or less but threshold level is reached.

Poor, poor Fed
To be honest, guys, I do not know how J. Powell cares this burden, without getting any positive shifts, without any improvements. The whole year cycle ends with nothing. Yes, CPI/PPI numbers show decreasing. But mostly because both components have statistical tails, outbreaks, such as energy prices. These tails were major reasons of outstanding high inflation levels in past months, but these tails have to be smoothed, that we see now. At the same time core inflation, that we could call as a "structural" component remains stubbornly stable. So, nominal inflation by smoothing outbreaks is converging to core, structural numbers. It has to happen. Take a look at recent CPI numbers. Total CPI stands at 7.1%, major outbreaks are Food (+10.6%) and energy (+13.0%), while other components show "structural" inflation of 6%.

And reality stands so that structural component is not affected by interest rates change, because this is purely monetary tool, it could cut only monetary component of inflation. To normalize structural inflation you have to restructure national economy to match production, goods supply and consumption, demand. This yet to be done, and could take long time. Inflation slows down naturally against the background of a decline in the raw materials market, normalization of inventories and supply chains. Thus, we could see the neutralization of the main factors of inflation that operated in 2020-2021.

However, the growth of prices for education will tend to 4% in the medium term, for medicine about 5%, the sphere of services in culture, sports and entertainment – 4-5%, other services and goods – about 5-6%. Inflation is becoming structural and about twice as high as normal – about 4-5%. The slowdown in price growth will continue and will tend to 5%-6%, where stabilization will occur due to structural deformations in the US economy.

But what Fed has to do know? They have exhaust interest rates hike margin, but are just coming to inflation stabilization, that is far above 2% desirable level. Powell said that the Fed has not yet reached a "sufficiently restrictive position" and the upward movement of the rate will continue. A continued rate hike would be appropriate. The Fed will seek to tighten financial conditions.

17 of the 19 members of the Fed recorded a peak rate of 5% or slightly higher – this is the estimate of the marginal threshold of the rate in 2023. However, Powell rightly noted that the Fed has been continuously raising the terminal rate over the past 1.5 years and there is no universal predictive tool to fix some plausible model of the future. There is no certainty that the peak level will not be pushed above 5-5.2%.

The "restrictive level" on the rate will be until the Fed is convinced that it has made progress in reducing inflation. The imbalance in the labor market is still significant and it will take quite a long time to correct it. Inflation in the service sector may be more stable and prolonged than inflation in the commodity segment. That is why the Fed is going to keep rates high for "some time" until the normalization of price imbalances.

WE alos should keep in mind that despite J.Powell said that there is no rate cut in 2023 on the table, the Fed is not isolated, it exists in a complex world, and if some "too big to fall" appears on horizon, reality could be a cold shower. Therefore, in reality, all their plans to continue raising rates and tightening financial conditions will fly into the trash as soon as someone big goes downhill, which actualizes the question of an immediate easing of monetary policy.

So the rate increase by 25 bps to 4.75% is estimated at 76% at the meeting on February 1, 2023, while an increase of 50 bps now has a probability of only 24%. Although major consensus now suggests 5-5.25% as a terminal rate, there is an opinion that 4.75% will be the final step, but why?

That's because rate was really high only when it has exceeded 2.5% level. And negative effect of the high rate has started after this level was exceeded. Hence, the total power of a negative effect is yet to be seen. Currently we see effect of 3-3.5% interest rate level only. Take a look - the average rates at the upper limit of the Fed's target range in the 1st quarter of 2022 were 0.29%, in the second quarter of 2022 – 0.93%, in the 3rd quarter of 2022 – 2.36%, in the 4th quarter of 2022 will be 3.83% and closer to 4.65% in the 1st quarter of 2023.

That's why we don't see the effect, because in the 3rd quarter the rates were below 2.5%, and the Fed margin of safety is enough to compensate for the destructive consequences of the increase in the cost of funding and limited demand for debt instruments.

As you can see, average rates are rising rapidly, the margin of safety is being depleted, so at the beginning of 2023 there may be the first negative news from financial reports in the United States and Europe. In March-April 2023, this will be visible to the naked eye, so at the Fed meeting on March 22, the conditions will be completely different, so everyone ... finished with tightening. Soon, the Fed will be in an awkward position when inflation is significantly higher than the target level, and the financial system begins to crack at the seams.

But why we so sure with the stalemate situation that Fed is coming to? Here is time to recall the Fed's safety margin. In summer, almost in every report we were looking at US Treasury assets on Fed's account, the QT tempo and other liquidity data. And we said that nobody is going to buy US bonds because too negative yield.
Here is what we have now:

The US Treasury Department's plan for "grandiose" borrowings of $ 550 billion in the IVQ 2022, is expectedly failed. Net borrowing stands only for $131 Bln ($216 Bln borrowed and $85 Bln repaid). Obviously, this will not be closed at the end of the year.

The cash on the balance sheet of the US Treasury was expected at the end of 2022 at the level of $ 700 billion. They have missed once again. The current amount of cash on the balance sheet is 342 billion, having decreased by 190 billion from December 1 to December 14, 2022. Here is actually, guys, where stock market rally comes from. S&P bottom has been formed on October 14th, and take a look, right from this moment Fed has pumped up ~ $400 Bln:

Due to debt reduction, the buffer up to official national debt ceil has expanded to $166 billion. This is how much you can potentially borrow, i.e. even if we assume that 166 billion will be issued by the end of the year, it will still not be enough to implement the announced plans for borrowing and the amount of cash on the balance sheet.

Things have also not gone well with the Fed over the past two weeks. In October-November, the Fed came out with its plan to reduce the balance sheet, and since December there have been no sales yet (neither treasuries nor MBS).

Usually, the Fed implements sales in conditions of "favorable market conditions", as it was in October-November, when there was an increase in the markets, both stocks and bonds (a decrease in yields). Since December, the tension in the financial markets began to be felt and the Fed put on the brakes as it did in June-July.

As a result, the gap between the plan for the sale of securities and actual sales increased to 172 billion compared to 130 billion two weeks earlier. It is still the financial conditions have not started to deteriorate and the markets are in quite comfortable conditions.

The lack of sales from the Fed and the release of almost two hundred billion dollars into the system supported the system, but it can't go on like this for a long time, because the cache from the US Treasury is being depleted and will soon have to borrow again.

But not only the Fed has difficulties with borrowing. Companies are running into the banks' loans out from bond market. For the first time in 15 years, the growth rate of lending in the United States is steadily higher than the growth rate of debt in bonds. From 2009 to 2021, the proportion was opposite. On average, for every dollar of increase in liabilities in loans, debts in bonds grew by $3.5.

Commercial banks, in conditions of excess liquidity, are quite willing to issue loans, which cannot be said about the demand for bonds, which you will not find at all. Partially, it explains the interest drop to the US government debt as well - the lost of confidence and trust to the system, to the Fed's ability to control situation.

J.P. Morgan Asset Management, in a research note, has increased the odds of recession to 60% from its initial forecast of 50%.

"The Fed is raising rates at the fastest pace since 1980, the rest of the world is following its lead, quantitative tightening is in its early stages, and inflation remains painfully high," wrote Bob Michele, chief investment officer, at J.P. Morgan. It seems very aspirational to assume all this can end in a soft landing."

ECB Step

Here we could bring very similar conclusions as EU has almost the same problems but at higher degree. Speaking about terminal rate, now big banks suggest that it should be around 3-3.25%. The ECB eased the pace of its interest rate hikes on Thursday but stressed significant tightening remained ahead and laid out plans to drain cash from the financial system as part of a dogged fight against runaway inflation.

The sources said this was the result of a difficult compromise after Philip Lane's proposal to raise rates by half a percentage point on Thursday met with significant opposition from policymakers insisting on a 75-basis-point increase. The stalemate ended when Lagarde offered to signal more 50-basis-point rises and a hawkish message on inflation during her press conference, convincing enough policymakers to back the proposal.

Two of the sources said this could even mean three back-to-back 50-basis-point moves if the inflation outlook failed to improve, though there was no explicit commitment to such a policy path. At a press conference after the decision, Lagarde said that, based on current data, she anticipated another 50 basis-point rise at the ECB's next meeting on Feb 2 "and possibly at the one after that, and possibly thereafter".


The ECB also laid out plans to stop replacing maturing bonds from its 5 trillion euro ($5.31 trillion) portfolio, reversing years of asset purchases that have turned the central bank into the biggest creditor of many euro zone governments. Under the plan, it will reduce monthly reinvestments from its Asset Purchase Programme by 15 billion euros starting in March and revise the pace of balance-sheet reduction from July.

The move, which mops up liquidity from the financial system, is designed to let long-term borrowing costs rise and follows a similar step by the Fed earlier this year.
The impact was immediately felt by the euro zone's weakest borrowers, such as the Italian government, which have come to rely on the ECB as a major buyer.

Investment bank JPMorgan ramped up its forecast on Thursday for how high euro zone interest rates will go to 3.25% from 2.50%, after the European Central Bank vowed to keep raising them at a meeting earlier.

"Today’s ECB meeting marked an abrupt hawkish shift, even if some aspects feel odd," JPMorgan's analyst Greg Fuzesi said in a note. "We therefore make a huge adjustment to our terminal rate, raising it 75 basis points to 3.25%".

Societe Generale hiked on Thursday its forecast for how high euro zone interest rates will go to 3.75% from 3% previously, after the European Central Bank vowed to keep raising them at a meeting earlier.

"The ECB today was commendably clear: there is no pivot even if the pace of rate hikes slows," the bank's analysts said in a note. We expect the ECB to keep hiking (interest rates) in 1H 2023, with two further 50 basis point hikes followed by three 25 bps hikes".


Well, guys, it would be prominent to add some additional data on claims, Retail sales etc, but I'm afraid to overload the research. So, we put them tomorrow in the gold market update. Take a look how fast the public sentiment changes. Just after CPI numbers everybody were ultimately dovish - inflation is defeated, Fed is pivoting etc., and what we have now - new higher terminal rates are widely expected, as in the US as in EU. Plans, plans... I would ask you, when the Fed plans ever have been fulfilled? I tell you - never. Just recall that we should have "temporal" inflation now, guys. Take a look at this - two Fed projections with 1 year gap:

The point of comparing the two meetings is to show the zero predictive ability of the Fed – they are not able to build realistic development trajectories, not just for several years ahead, but even for 6-12 months they cannot predict. Therefore, in terms of content, the value of the Fed's forecasts is close to zero. Based on their projects, it is impossible to build investment strategies, because the percentage of errors is incredibly high, and delays are prohibitive.

What's the point? As recently as yesterday, Powell stated that the Fed will continue its restrictive policy for as long as it takes to bring inflation under control, and in 2023 there is not even a question of lowering rates. But this is bluff and stupidity. The system will begin to shake to the borderline levels in the spring of 2023, so the refusal to tighten financial conditions will be quite rapid – you should not bet on the determination of the Fed in the matter of tightening.

And another moment. The Fed does not forecast a recession in 2023, expecting growth of 0.5% (!!!). Forecast statistics are presented in the tables, but as it is shown - the Fed always misses. Recession is inevitable, the margin of safety is running out.

Fed stands in situation now when it can't borrow sufficient funds on the market. First is because nobody's buying, second - because it is just 166 Bln until debt ceil, and Reps with big pleasure do the dirt to Dems in discussion of rising of national debt ceil, as usual. Based on US Treasury balance dynamic, 340 Bln of existed reserves should be enough until summer, to keep system on a surface. And this is most positive scenario. If somebody really big will default, it will be much worse. Finally, Fed has reached a threshold rate level and scares to rise it more, because as we've explained the effect is lagging a bit for 4-6 month. With no ability to rise rates more, high inflation of 5-6%, high interest rates of ~5% and exhausting reserves to support system Fed probably will start easing. Maybe we're wrong but currently we do not see any other scenarios.

The same things we could say about EU, where situation will be even worse due total destruction of national industry sector, big financial fragmentation among different countries. 5% vs potential 3.25% looks not in favor of EUR. Besides, ECB could meet the same problem of urgent stop rate hike, if system will start falling apart. Especially on a background of coming QT in 2023. I wouldn't rely on forecasts as of ECB as of Fed. Still, as they mostly go in the same direction, and now both suggest stay hawkish, the EUR/USD balance should be re-established, and demand for the USD should start rising again, which is also suggested by our DXY monthly B&B "Buy" setup. Let's see. Also we do not see any clear signs yet to cancel 0.9 target. Although the way might be more bendy now.

Everything is beautiful on this chart, but unfortunately today is not 31st of December. It means that we have to wait until grabber will be confirmed. ;)

So, the major pattern that we're watching is potential B&B "Sell" that could start from 1.058-1.075 area. Similar patterns we have on Gold, JPY, DXY, GBP markets. Market has completed minimum requirement conditions to become a B&B - price has closed above 3x3 DMA (not shown) and touched major 3/8 Fib resistance level.

As we already said, theoretically B&B starting point is not limited by only 3/8 Fib level. It could be any Fib level if it has been reached within 1-3 closes above 3x3 DMA. So, if EUR hits 5/8 level of 1.12 within next two months - B&B could be still valid. But...

EUR is overbought on weekly chart. So, chances stand in favor of sooner start of B&B trade here. ECB also hardly will bring any surprises with rate decision.

Possible appearing of the bearish grabber here and uncompleted 0.9 target, could extend B&B to new lows but not only to 5/8 Fib support, which is a minimal target. It might become good setup for taking mid term bearish position.



As last week, here we do not have many things to comment. Market is stuck inside of wide K-resistance area, touching overbought level. This is a bearish "Stretch" directional pattern. Also we have a kind of "shooting star" on top. Hopefully this is the beginning of our B&B trade:


EUR daily chart is not as representative as Dollar Index one. So, I would rely mostly on the latter. Hopefully patterns that have been formed here will reach targets. As bullish grabber as 3-Drive Buy suggest further upward action (i.e. downside action EUR), that agrees with our view.


Thus, we have bearish direction pattern on weekly chart (that overrules trend), bearish daily trend and 4H trend is also bearish. One of the pattern that we could wait for is extended H&S here. The top of right arm supposedly should be around the same 1.0570-1.0580 levels:

EUR very early has shown weakness on Friday, showing just minor bounce that we've discussed. If you have missed chances for short entry - wait for another pullback, that could start from 1.0570 area, that is combination of COP target and butterfly extension.
Morning everybody,

So, markets are gradually taking back seat as people now are more busy with coming Christmas and New Year's Day. As markets become thinner, performance is becoming more choppy. In recent few sessions it is obviously on EUR. But not only by this reason. Bad background comes from JPY. We already warned that BoJ policy leads them to catastrophe and first bells are heard already. Yesterday there were massive margin calls on JGB when yield has jumped above 0.42%, that has triggered high demand for cash (to close positions). This is the reason why JPY yesterday was moving against market. And this nervousness spreads over other currencies as well.

For daily analysis, we prefer to use Dollar Index, as we did in our report above. Since JPY takes very small part of DXY - the JPY tragedy mostly was unsigned here. I would say that recent sessions was bullish, because market has made the new low and close near the top of previous session:

Based on DXY targets, EUR supposedly should reach at least of 1.0445 lows, but I still hope that it becomes the starting point of big monthly trade.

On 4H chart you could see this choppy performance. Still, any attempt of upside action was immediately sold. Overall performance looks too gradual to call it purely bearish, still, it goes down. And yesterday we also have got the grabber:

So, for daily traders nothing has changed - you could keep watching, say, for H&S here, on 4H chart. For those who trade on 1H and lower time frames, it is possible to think about grabber, maybe we could trade it directly. For, example, consider two Fib levels from the grabber. Potential risk is very small, just around 25-30 pips. This is another way. For long entry we do not see yet any good background:
Morning everybody,

So, Japan is major news maker now, probably because they do not celebrate Xmas, while all the others just prepare for Holidays. ;)

Today, guys, we've prepared the special video, where we explain fundamental background and take the in-depth view on technical situation. Just briefly - stubborn QE has led to collapse on Government Bonds market, the same like in UK. Japan Government artificially was holding 10-year rate at 0.25%, but on Monday uncontrolled breakout has happened and yield has jumped twice to 0.42%. This is was total shock and triggered massive margin calls on bond market. To either close positions or cover the margin shortage the cash is needed. And this has led to big demand for JPY. It means two things - we have no change in fundamentals on EUR, Dollar, Gold etc. Recent stronger upside action is mostly technical, and by-product of Dollar Index pullback (which includes JPY). As a result, Gold, EUR and other have shown stronger upside action that was supposed by technical background.

At the same time, this demand for JPY is technical. It means that it should exhaust relatively soon. Second, as BoJ was stubborn with its QE, hardly rate changes is a new cycle, probably some single measure. Thus, reaction supposedly should not last too long.

Besides, dont' forget that markets are thin now and any event, even minor, triggers stronger than usual action.

On a technical side, JPY stands around 103 major monthly support and Monthly oversold level. MACDP line also comes in touch and price at oversold, so this is perfect combination for B&B "Buy". I hope that we will get it:

On weekly chart JPY is oversold, and here we could get the same pattern as on EUR, Gold and others - H&S:

Daily chart also shows oversold and completion of downside AB-CD. But action was strong, market needs time to calm down, so it could slide slightly lower, to major OP around 128 (if "A" point stands right at ATH). Market is oversold here as well:

On 4H chart market carefully follows the pattern - downside action is 1.618 of upside bounce. The bounce, it turn, is limited by previous lows inside the channel. Hence, here we need to watch for two moments, as longer-term technical background is ready for the pullback. We need just to get the start.

First is, the pattern's break. Market has to break 134.40 previous lows and keep going higher. Second, if this happens - watch for the pattern. Since we have 1.618 ratio here, the most obvious pattern is H&S. Market has to reach the neckline around 138 to form it.

That's being, said, it is no room for short now, at least by technical conditions. For the long position, market mostly has completed major background on monthly chart, but we need to get clear bullish context on daily/intraday charts before position taking.
Morning everybody,

Another currency that shows a bit unique action is GBP. If some currencies show too strong reaction, GBP shows no reaction at all on recent DXY weakness. It suggests that GBP has its own inner weakness as well.

Previously we already talked about B&B "Sell" here, and we hope that it is starting, although some doubts still exist:

Weekly chart shows bearish "Stretch" - GBP is overbought at 5/8 Fib resistance level:

On daily chart market turns down precisely at OP target and Agreement with 1.2450 area - level that we've discussed ~month ago. Pay attention - no upside bounce due DXY weakness and JPY performance.

On intraday chart downside reversal swing has happened, but now price action looks choppy, as well as on other markets. Also we have here small 3-Drive "Buy" pattern, suggesting a bit higher pullback. It seems logical as upside action was long term. We suggest to watch for 1.2240-1.2290 resistance cluster as potential area for short entry. And let's see what will happen...
Morning guys,

Hardly somebody will read this, as we're coming to Christmas, and the Eve is tomorrow already. Anyway, of FX markets changes are minimal but still few moments I would like to mention. Although we do not see any downside action yet on EUR, but on daily DXY we've got bullish reversal session yesterday:

On EUR 4H within few hours we could get bearish grabber, so downside action still could start.

At least on Gold market we've got great downside action yesterday, confirming our analysis. Finally, recall the 3-Drive Buy pattern on GBP that we've discussed yesterday - it has failed, and this is also bearish sign:

It seems that some bearish activity is rising. EUR by far stands in sideways consolidation, so its downside breakout also could put the background for stronger action. Let's see. For aggressive trading style you could think about Stop "sell" open orders below the bottom of consolidation, or trading with 4H grabber. Otherwise, just celebrate Christmas and we return to this subject on Monday.