Forex FOREX PRO WEEKLY, February 01 - 05, 2021

Sive Morten

Special Consultant to the FPA
Messages
14,521
Fundamentals

So, this week we've got at least some indicator of global economy performance - US and Germany GDP and a lot of other statistics from US, with the most interesting is inflation data. If it is relatively clear with Germany - negative numbers here follows to UK data two weeks ago, with the US situation is not as simple. At first glance it seems that market has got what it has counted on - 4% growth on QoQ basis, but the reaction... it is not quiet as it should be, when market gets numbers in a row with expectations. And today we try to dig the truth.

Weekly events surfing

The dollar had benefited from safety buying since the start of the week, when investors fretted that President Joe Biden’s fiscal spending package would not be as large as the proposed $1.9 trillion.

COVID-19 vaccine rollouts globally have been running into trouble, too, adding to investor jitters. Production delays have snowballed into a spat between the European Union and drugmakers over how best to direct the limited supplies available.

The dollar index -- which measures the dollar against a basket of currencies -- initially rose but was last down slightly at 90.526. It remains up for the week and is nearly 0.9% higher this month.

Concerns about a short-squeeze among hedge funds, worries about corporate earnings, and delays in coronavirus vaccinations have slammed the brakes on a heady rally in global equities, which could continue to lift the dollar in the short term.

"Risk aversion supporting the dollar is a healthy correction after a one-way rise in risk assets," said Masafumi Yamamoto, chief currency strategist at Mizuho Securities.
The base scenario of economic acceleration in the second half of the year remains intact. The Aussie will recover but the euro will struggle."


Despite the dollar’s move higher this month, most analysts believe it will weaken in 2021 as the new U.S. government implements massive fiscal spending while the Federal Reserve maintains its ultra-easy monetary policy.

ING analysts said that “the recent reiteration by the Fed of its ultra-dovish stance despite an improving outlook leaves the dollar vulnerable in the medium-term as risk sentiment stabilizes.”

Silicon Valley Bank’s Trang cited the historically elevated level of bearish bets against the greenback as part of the reason for the U.S. currency’s strength as investors rush to trim those wagers.

“Anytime you see that kind of buildup and you see a certain reversal, you will see a substantial move,” Trang said.

U.S. President Joe Biden said on Friday that Congress needs to take immediate action on his $1.9 trillion COVID-19 relief proposal, adding that most economists believe additional economic stimulus is needed.

“We have to act now,” Biden told reporters at the White House. “There is an overwhelming consensus among economists ... that this is a unique moment and the cost of inaction is high. I support passing COVID relief with support from Republicans, if we can get it. But the COVID relief has to pass with no ifs, ands or buts,” Biden said.

Biden spoke as Democrats who lead the U.S. Senate and House of Representatives prepared to take the first steps next week toward delivering fresh assistance to Americans and businesses reeling from a pandemic that has killed more than 433,000 people.

“There is no time for any delays,” Biden said on Friday. “We could end up with 4 million fewer jobs this year ... It could take a year longer to return to full employment if we don’t act and don’t act now.”

U.S. stock indexes dropped, closing out the Friday session with the biggest weekly fall since October, as investors gauged the ramifications of Johnson & Johnson’s COVID-19 vaccine trial results, while a standoff between Wall Street hedge funds and small, retail investors added to volatility.

Worries of a short squeeze that began earlier in the week resurfaced after an army of retail investors returned to trade shares in stocks such as GameStop Corp and Koss Corp, which shot higher after brokers including Robinhood eased some of the restrictions they had placed on trading.

In just a week, the ‘Reddit crowd’ trade which squeezed out seasoned hedge funds from GameStop has gone global. Herding on the other side of bearish bets proved so profitable in GameStop and other shorted American stocks that it didn’t take long for copycats to emerge across the globe.

The ‘Reddit crowd’ has impacted mainstream markets by forcing hedge funds to sell favoured stocks to cover losses. With short bets outstanding against some 5,000 U.S. companies, the action may continue.

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U.S. consumer spending fell for a second straight month in December amid renewed business restrictions to slow the spread of COVID-19 and a temporary expiration of government-funded benefits for millions of unemployed Americans. The report from the Commerce Department on Friday also showed inflation steadily rising last month. Expectations that inflation would perk up this year were supported by other data showing a solid increase in labor costs in the fourth quarter.

Another drop in January is not expected as states, including New York and California, have started easing pandemic-related restrictions. But outlays on long-lasting manufactured goods, the main driver of spending during the pandemic, fell for a second consecutive month in December. Spending on nondurable goods dropped for a third straight month. Services gained 0.1%.

“Goods spending has clearly rolled over, and we anticipate the pull-forward in demand in the second half of last year will also weigh on consumption of goods at the start of this year,” said Tim Quinlan, a senior economist at Wells Fargo Securities in Charlotte, North Carolina. “We do not anticipate spending to pick up significantly until a vaccine is widely administered.”

The data was included in Thursday’s advance gross domestic product report for the fourth quarter, which showed the economy growing at a 4% annualized rate after a record 33.4% pace in the July-September period. Consumer spending rose at a 2.5% rate last quarter following a spectacular 41.0% growth pace in the third quarter.

Separately on Friday, the University of Michigan said its measure of consumer sentiment eased in January. A third report from the National Association of Realtors showed contracts to purchase homes decreased for a fourth straight month in December, suggesting some moderation in the housing market, one of the economy’s star performers.

Growth is expected to decelerate to around a 2% rate in the first quarter as the economy works through the disruptions from a COVID-19 surge in the winter. Faster growth is expected by summer !!!. The government provided nearly $900 billion in additional relief in late December and distribution of vaccines is expected to broaden and accelerate.

Inflation crept higher. The personal consumption expenditures (PCE) price index excluding the volatile food and energy component gained 0.3% after being unchanged in November. In the 12 months through December, the so-called core PCE price index increased 1.5% after advancing 1.4% in November. The core PCE price index is the Fed’s preferred inflation measure.

Gradually firming inflation was reinforced by a fourth report from the Labor Department showing its Employment Cost Index, the broadest measure of labor costs, rose 0.7% last quarter after advancing 0.5% in the third quarter.

The ECI is widely viewed by policymakers and economists as one of the better measures of labor market slack and a predictor of core inflation, as it adjusts for composition and job quality changes. Wages jumped 0.9% last quarter.

But with employment still 10 million jobs below the pre-pandemic peak, the rise is probably unsustainable. Still, inflation is seen accelerating in the months ahead as weak readings last March and April drop from the calculation.

Strengthening economic growth is also expected to boost price pressures. Bottlenecks in the supply chain are raising costs for manufacturers, and the increases are being passed on to consumers. Recent manufacturing surveys have shown a surge in price measures for both raw materials and finished products.

ECB governing council member Klaas Knot said the central bank has room to cut its deposit rate further, should it be necessary to improve financing conditions and reach its inflation target. Knot’s comment constituted the most explicit hint to date from an ECB policymaker about the possibility of a rate cut to stem a rally in the euro - a move that seemed highly unlikely until recently.

It’s “probably one of those headlines where it’s a buy on the dip moment in euro/dollar here,” said Jordan Rochester, FX strategist at Nomura in a note to clients. He remains long on the pair with a target of $1.25 by the end of March. “Despite the heavy positioning, we continue to favour buying euro/dollar on dips as we see the pair steadying in a $1.20-$1.25 range,” he said.

The single currency was further pressured after the German government on Wednesday slashed its growth forecast for Europe’s largest economy to 3% this year, a sharp revision from last autumn’s estimate of 4.4%, caused by a second coronavirus lockdown.

Going negative on interest rates and bank profitability – the ECB case

The European Central Bank (ECB)’s January release includes data on composite lending and deposit rates for November 2020, both of which continue to fall by small margins. These rates along, with ECB’s own lending and deposit rates, reveal a challenging balancing act. Central banks reduce their official rates to partially stimulate the economy through transmission mechanisms to commercial lending rates. However, this transmission mechanism works within thresholds; if it goes over the thresholds it could erode commercial bank profitability, endangering economic recovery/stability. Commercial lending rates can be reduced up to the point they sufficiently cover costs — the deposit rates — which, in turn, could be lowered, but up to a non-negative floor (no one is willing to pay banks to keep their money).

In other words, there is a limit to how far central banks can lower official rates to stimulate the economy without hurting commercial bank profitability; that limit is governed by the lending-deposit spread. The chart indicates that ECB has probably reached that limit. Its refinancing rate has effectively been stuck at zero for more than four years, while its deposit rate has been at -0.5 per cent since late 2019. Against this backdrop, the composite lending and deposit rates have been falling since 2014, maintaining, however, a spread marginally above one basis point even during 2020. Additionally, the commercial deposit rate is so low (0.19 per cent in November 2020), that any further cuts in ECB’s deposit rate would probably not be transmitted by banks. In fact, the ECB’s official rates are probably as low as they can be without undermining the required lending-deposit spread that is necessary to avoid hurting bank profitability.

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Next Week To Watch

Heavy caveats and caution are likely to couch any Bank of England announcement next week that negative interest rates are technically possible in Britain, judging from feedback from major banks.

Alongside its decisions on rates and its bond-buying programme - which are expected to remain on hold - the BoE is due to publish on Feb. 4 the findings of a consultation with banks on what negative rates would mean for their operations.

The BoE has run short of firepower after cutting its Bank Rate to 0.1% and doubling its bond stockpile to nearly 900 billion pounds ($1.23 trillion) to combat the historic economic hit of COVID-19. So it is looking at the option of following the European Central Bank and the Bank of Japan by using sub-zero rates.

“If negative rates happened tomorrow you would see something clunky but effective from banks, but it wouldn’t be great,” a senior banker said. “Some of the systems could be adapted very quickly but not all. It is something we take very seriously. The industry view is it would take up to a year to be ready operationally,” another banker said. “It’s incredibly complicated to do and nobody has really planned or budgeted for it.”

Lenders in Britain make most of their profits from the difference between the rates they charge for their lending and what they pay for deposits. British lenders would probably charge large corporate depositors first and consumers as a last resort.

“Negative rates would absolutely hit our business models. There’s no way we could outrun negative rates,” the first banker said. “The question is: would it finally mean charging for current accounts? It would open the door for it. If someone does it, everyone else will move very quickly.”

HSBC said in October that rock-bottom and sub-zero rates in countries where it operates meant it had to consider more fees.

Most economists polled by Reuters think the BoE is unlikely to cut rates below zero this year, largely because the fast rollout of Britain’s vaccination programme has raised the prospect of an economic recovery. Bailey said last week that rates close to and below zero changed the “whole calculus of how the banking system works” and “we do not know, with any confidence, how that would work.”

The four external members sound more open to the idea.

“We had expected the BoE to reach a positive conclusion in a review to be published next week, but Bailey’s comments suggest the BoE could stall for more time - or even say ‘no for now’,” said JPMorgan economist Allan Monks.

Investors are also waiting to see if the BoE speeds up the pace of its bond-buying programme as a response to the third national coronavirus lockdown, which is likely to lead to a cut to the BoE’s forecasts for the pace of the recovery this year.

U.S. national debt ballooned 40% under Donald Trump, and President Joe Biden is expected to keep the debtpile growing.

On Monday, the Treasury announces its quarterly refunding plan, followed on Wednesday with details of anticipated auction sizes for each maturity.
It is seen keeping auction sizes steady; even after the enactment of a $900 billion stimulus package, the Treasury should be able to meet 2021 financing needs, Wells Fargo reckons. Some worry so much borrowing could tarnish the appeal of U.S. debt. Even if Biden doesn’t push through his entire $1.9 trillion spending plan, stimulus expectations were among factors that recently pushed Treasury yields to 10-month highs.

Right now markets are celebrating the additional stimulus and see it as a stronger bridge to a fully reopened economy,” said Jeff Buchbinder, equity strategist for LPL Financial. On the other side of it there’s the chance that markets will have to pay for this in the form of sharply higher interest rates or tax hikes that could cap equity valuations,” he said.

Esty Dwek, head of global market strategy at Natixis Investment Managers, said she expects the equity market to stumble later this year as investors start to price in the possibility of higher corporate and individual tax rates that the new administration may push through.

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Conclusion:
So, even when we're going through all these numbers and opinions it is already clear that situation becomes hotter. The most important thing today is a dry numbers. Let's just take a look over them - to make it simple I put all of them in the table below, just to not make you search them through the text:
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Now, we easily to interpret them, using just the common sense. First is, we see that people spends less but have a greater income. This combination means rising of the public saving and second - this combination should lead to drop in inflation as people do not buy the goods, consumption is decreasing, right? But - all inflation indicators shows growth - PCE, ECI, also I remind you hourly earnings that jumped for 5.1% on YoY basis. Take a look - monthly inflation changes are 0.3 - it is more than 3% on annual basis. What's going on?

As always there are only two options - either everything is good, or the second - everything is bad. Actually the latter option dominates in recent 3-4 months. It suggests that economy stands flat and shows no sign of growth, which depresses inflation and supposes long-term dovish Fed policy and a lot of stimulus. So, if we suppose that 4% GDP market treats as "bad" scenario - please explain me rising of US interest rates, collapse on US stocks and optimistic PMI and Consumer Sentiment data. Everything should be quite different. If everything is "bad" people should run into safe haven, buying bonds and pushing rates lower, while stocks should set new ATH on expectations of new stimulus. Inflation data should be near zero points, while sentiment indicators below 50, right?

And now take a look again on the table - it seems that this is "good" scenario. Not in a full power of course, this is just first hints, but the log jam has broken. We do not know what happens further, but currently it confirms our view that near the summer we could get the breakpoint in global economy and in the US in particular. The same things we've read above from Mizuho - The base scenario of economic acceleration in the second half of the year remains intact, and Unversity of Michigan - Growth is expected to decelerate to around a 2% rate in the first quarter as the economy works through the disruptions from a COVID-19 surge in the winter. Faster growth is expected by summer !!!. That totally matches to what we said in December 2020.

Even technical reaction on the markets was curious for "Bad" scenario - interest jumped, stocks dropped, dollar has not dropped, mostly stand flat. So our next test of "the hypothesis" stands on next week when we will get new NFP data and revision of December numbers. As previously we said - keep an eye on hourly earnings. They drive the markets right now, not NFP numbers per se. NFP are important when it is big difference with expectations, but all eyes now are on inflation. And we see what will happen.

In two words, what the "Good" scenario means: we suggest that currently the breaking of previous trend is still hidden and not obvious yet. In 1Q of 2021 hardly we get major reversal, but markets could turn to wide trading ranges as they do not have power to push former trends higher, while there are no conditions yet for breakeven point. Once changes become more evident - "Good" scenario spins up. It suggests Fed policy review to more hawkish closer to the end of 2021, rising of inflationary pressure and increasing demand for US dollar. Stocks market also will under pressure but a bit later, since it has inner dividend yield that is relatively high, around 2-3% tax free of average. If ECB and EU turns the policy as well, then EUR/USD trend could be less predictable, although we treat this chance as low. US stands in leading group on vaccination performance, while EU has problems with vaccine delivery from A. Zeneca. As US do not apply any lockdowns and stands ahead with inoculation - EUR has double negative impact as from vaccination performance as from lockdowns.

What makes "Good" scenario works. Big money, injected in the economy should stimulate economical activity in small business in particular. People should start spending of huge savings that they have accumulated, as situation is improving. This boost consumption (70% of US GDP), production and inflation as well. As in one time the amount of money for spending jumps in multiple times. Also it might be some employment boom as demand for labour force increases. Some wage competition also could take place.

Technicals
Monthly

Monthly picture stands without any changes by far. Overall upside momentum looks nice, MACD trend is bullish. It is obvious from the chart that 1.25 resistance is critical for EUR, that it has to break to proceed higher. Most reasonable targets now stand around 1.28-1.30 area.

Technical picture suggests that we could accept any pullback with no problems to bullish context while it stands above 1.16 lows. The invalidation point, by the way, agrees with Yearly Pivot point that has special meaning to us. Although it is preferable to the market to stay above 1.20, just to keep short-term bullish context either.

Drop below 1.16 breaks the normal market mechanics as major retracement and reaction to COP is done. Thus, another deep retracement here is not logical and should not happen. Besides, action below 1.16 means appearing of bearish reversal swing. It is not necessary leads to bearish collapse and drop below 1.02 but deeper downside action happens and we would have to forget about bullish positions on lower time frames.

eur_m_01_02_21.png


Weekly

Here EUR also forms two inside weeks that brings no clarity on perspective yet. Trend has turned bearish, we have divergence in place here, but price still holds above nearest 3/8 support. 1.19 area looks interesting for taking long-term positions as it is accompanied with oversold level. Our XOP target has not been hit which stands at 1.2440 area. In case of upside continuation - this is the first one that we look at.

eur_w_01_02_21.png


Daily

We track daily picture everyday, and Friday has not given us something really new as EUR spent the whole week in the same range. Just another bearish grabber has been formed. Technical picture suggests some upside reaction on 1.20 K-area, but market has to test it first. Thus, combining few grabbers, bearish trend makes us think that we could get another swing down before the pullback starts here. Besides, grabbers' target also has not been reached yet:

eur_d_01_02_21.png


Intraday

Here, guys, we need to re-shape our butterfly a git, on 4H chart, as new swings have appeared, but the target of the pattern stands the same. If everything goes well, butterfly becomes perfect pattern to trigger upside reaction on daily support and finalize AB-CD pattern here. At the same time the conditions of failure are also clear - price has to rise above 1.22, erasing pattern and all the grabbers on daily chart:
eur_4h_01_02_21.png


If we are correct on butterfly suggestion and downside continuation - EUR should turn down somewhere around 1.2150 level. Take a look that price completes upside AB-CD, making agreement with 5/8 Fib level, forming as "222" Sell" as 3-Drive "Sell" inside. So, if market is indeed bearish in short-term, this is enough context. If price keep going higher, approaching to 1.22 - it doesn't erase butterfly totally yet, but this becomes worse background for position taking.

eur_1h_01_02_21.png
 

RahmanSL

Major
Messages
2,768
Hi Sive, and thank you again foresight & analysis.
I still like your butterfly pattern, but I believe might only materialize after price action has hit the 1.22xxx level which, in my opinion, is upon releases of Germany, France & Italy PMI and the figures exceeded expectation.
The butterfly entrancement pattern might start with the Eurozone GDP releases on Tuesday but probably not by that much until the US NFP releases on Friday...i.e. if the figure come out better than forecast.

That's my fundamental thinking for next trading week which I hope will be more profitable than last week.

Cheers and all the best!
 

Sive Morten

Special Consultant to the FPA
Messages
14,521
The butterfly entrancement pattern might start with the Eurozone GDP releases on Tuesday but probably not by that much until the US NFP releases on Friday...i.e. if the figure come out better than forecast.

Hi mate,
well as France and Germany GDP already released - hardly EU numbers make any impact. NFP - yes, especially hourly earnings...
 

RahmanSL

Major
Messages
2,768
Hi mate,
well as France and Germany GDP already released - hardly EU numbers make any impact. NFP - yes, especially hourly earnings...
Yes, no massive moves from the 3 economic news releases.
Hopefully more action from NFP and hourly earnings.

Cheers & all the best!
 

Sive Morten

Special Consultant to the FPA
Messages
14,521
Greetings everybody,

So everything is going well to us, as week has started right from the plunge that we've discussed in weekly report. It is wide perspective might be open, I mean bearish one. Currently we're focused on nearest 1.19-1.20 target, but potentially we could get greater AB-CD daily pattern with 1.1880 OP area. Another scale increase could give us huge daily H&S pattern with 1.16 neckline. All these stuff seems possible as our fundamental view suggests historical break of background in favor of US Dollar.

eur_d_02_02_21.png


Meantime we're following to the butterfly and AB-CD pattern here, to 1.20 target:
eur_4h_02_02_21.png


On 1H chart sell-off has started accurately, here we also have minor local AB-CD pattern with approx. the same destination point. Obviously we do not have bullish setups by far. For additional short position it is possible to consider two options - upside minor ab-cd pullback to some Fib resistance, as we do usually, or - using Stop "Sell" order near the lows to jump in with breakout moment. Once stops will be triggered - market gets downside acceleration and it is possible to put s/l to b/e - but this is very short-term trade, mostly for 1H chart time frame only.
eur_1h_02_02_21.png
 

RahmanSL

Major
Messages
2,768
Needless to say, your analysis has been superbly fabulous. Thank you my friend.

"Currently we're focused on nearest 1.19-1.20 target, but potentially we could get greater AB-CD daily pattern with 1.1880 OP area. Another scale increase could give us huge daily H&S pattern with 1.16 neckline. All these stuff seems possible as our fundamental view suggests historical break of background in favor of US Dollar."

I would love to see the pair revisit the 1.17xxx levels coz I have a couple short positions sitting there since 4-Nov-2020 :p , no doubt scrapping daily positive swaps, BUT nonetheless would love to close them out with any profit.

Cheers & all the best!
 

Sive Morten

Special Consultant to the FPA
Messages
14,521
Morning guys,

So, EUR is flirting with our first destination point - 1.20 support area. Strategically 1.1870-1.19 is more important but here price also should show some respect, at least some minimal bounce, supposedly to 1.21 area. All grabbers are completed.

eur_d_03_02_21.png



On 4H chart price hits butterfly target but has not reached the OP yet. It means that on 1H and lower time frames we should watch for patterns that suggests the new low first- butterfly or H&S are most common. Then, theoretically pullback could start. Minimum target is 30% Fib level of butterfly swing. Initially stop could be hidden below 1.618 butterfly extension - 1.1970
eur_4h_03_02_21.png


We have nothing yet on the 1H chart, but on 15 min it might be something like this. We already have reverse H&S in place here, but it doesn't suit as we expect new low before reversal. Thus, something of greater scale should be formed. Of course, this is just a suggestion as a lot of other patterns are also possible, but you've got the idea, hopefully.
Since the scale is very small - you could take position few times, based on different patterns (if you're not a perfectionist ;))
eur_1h_03_02_21.png
 

Sive Morten

Special Consultant to the FPA
Messages
14,521
Morning everybody,

So, on daily chart everything mostly stands the same. Changes could come tomorrow on NFP data release, especially in a case of jump in hourly earnings. But, meantime price is trying to hold around 1.20:
eur_d_04_02_21.png


On 4H chart we also do not see yet anything criminal - price stands at the same area of OP target and butterfly 1.27 extension:
eur_4h_04_02_21.png


The most interesting stuff is on our 15- min chart, that we've discussed yesterday. Everything has started good - and EUR turns to upside action as we've suggested. Hopefully, you've moved stops to b/e as we every time call for that. But take a look what is going on right now - downside action seems stronger that we would like it to see and overall H&S shape is turning to the bearish flag gradually.
It makes less attractive idea to open the new long position. In current situation, I would say, the choice is up to you. Theoretically, EUR still could show the bounce, but it stepped out from our "perfect" shape, which means that bullish context has become weaker. And now I would treat equal chances of downside breakout and upward bounce.

eur_1h_04_02_21.png
 

Sive Morten

Special Consultant to the FPA
Messages
14,521
Morning everybody,

So, EUR confirms our concern once it was not able to jump out from 1.20 support area. In general, with 30% appreciation of interest rates this week - this is not a surprise. Now technical picture stands bearish, but we need to keep an eye on NFP data.
In short-term we're aimed on 1.1885-1.19 K-support area and weekly oversold, where is daily OP stand as well:
eur_d_05_02_21.png


On 4H chart we see almost no reaction on 1.20 support that actually was not weak. It seems that overall situation is more bearish that it seemed at first glance. Downside acceleration to butterfly 1.618 target brings nothing good to bulls. Here, as OP is passed - XOP stands in focus. It is in the same area of 1.1885:
eur_4h_05_02_21.png


On 1H chart we do not see yet anything special, maybe just minor DRPO "Buy" for scalp trading. But we have no intention to go long now. Although price could get some relief as investors are booking profit before NFP - EUR stands not at the support, which makes any bullish pattern tricky as it has no foundation.
Thus, it would be better to keep an eye on the same 1.20 but now as a resistance. Bearish context holds if price remains below it. For position taking we have to avoid any explosive white candles to this level. Who knows what NFP brings us.
eur_1h_05_02_21.png
 
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