Forex FOREX PRO WEEKLY, February 15 - 19, 2021

Sive Morten

Special Consultant to the FPA
Messages
14,494
Fundamentals

This week we have few fundamental events - mostly CPI release and J. Powell comments. But at the same time, as we've mentioned before - situation should start to change and becoming more and more evident of shift in global economy. And there are more publications about investors' sentiment now, that it is also changing, despite weak CPI numbers. Still, as we've discussed in daily updates - CPI is lagging indicator with lag time at least 6 month. This is the reason why it is weak numbers almost have made no impact on the markets.

Overall situation review

The dollar slumped to its lowest in a week on Tuesday as investors began entertaining doubts about the scale of a recent rally driven by expectations of a faster
pandemic recovery in the United States than elsewhere. The spotlight remained on bitcoin as it reached a record above $47,000, building on a nearly 20% surge overnight that was the biggest since 2017, after Tesla Inc announced a $1.5 billion investment in the digital asset.

The U.S. currency has been in retreat since Friday, when disappointing jobs data knocked the wind out of a two-week run that had lifted it to a more than two-month high of 91.6. Investors had pushed up the greenback thanks to a faster U.S. vaccine rollout relative to most other countries, and as Democrats moved to fast-track President Joe Biden's $1.9 trillion COVID-19 relief package.

Many analysts, though, see that massive fiscal spending coupled with continued ultra-easy Federal Reserve monetary policy dragging down the dollar in the longer term.

"The bottom line is a large stimulus is highly likely to pass soon, exacerbating the widening in the U.S. current account deficit, and weighing on the USD," Commonwealth Bank of Australia currency analyst Joseph Capurso said in a client note. Europe's "lagging" vaccination program will cap the euro near-term but the continent should catch up by the summer, after which the single currency could rally to $1.28 for the first time since 2014, he said.

"Investors may be registering concerns that the fiscal stimulus will boost the U.S. current account deficit and we concur that structural imbalances remain a weakness in the longer run outlook for the U.S. dollar, especially amid reduced U.S. growth and yield differentials," said Shaun Osborne, chief foreign exchange strategist, at Scotiabank in Toronto. Osborne said dollar losses at this point were a little premature, "especially as positioning indicators suggest that active traders continue to reduce what remains a fairly significant U.S. dollar short exposure."


Elsewhere, Westpac is targeting an advance to 75 U.S. cents for New Zealand's currency, strategist Imre Speizer wrote in a client note published Tuesday.

Despite the post-Brexit deal, some 49% of British companies that export goods have run into difficulties caused by the shift in trade terms with the EU since Jan. 1, according to a British Chambers of Commerce survey, while one in five services exporters reported problems.

“Despite the market’s relief that the UK and the EU managed to strike a trade deal in December, it is becoming obvious that Brexit is casting long shadows,” said Jane Foley, Rabobank’s head of FX strategy. Looking ahead we continue to see both political and economic hurdles for GBP and anticipate a fairly rocky ride in the coming months. While we retain our medium-term target of EUR/GBP 0.87, we see scope for pullbacks into the spring before this level is held.”

Invoking post-World War II efforts to reach full employment and pledging continued loose monetary policy to help the process, Federal Reserve Chair Jerome Powell made a broad call Wednesday for a “society-wide commitment” to get Americans back to work, particularly minorities and those ousted from lower-paying jobs during the pandemic.

Federal Reserve Chairman Jerome Powell did not do the dollar any favors, as he struck an overall dovish tone on Wednesday and affirmed that the U.S. central bank will keep interest rates at current levels until the economy has reached maximum employment and inflation stays above 2% for some time.

“Given the number of people who have lost their jobs and the likelihood that some will struggle to find work in the post-pandemic economy, achieving and sustaining maximum employment will require more than supportive monetary policy,” Powell said in remarks to the Economic Club of New York. “It will require a society-wide commitment, with contributions from across government and the private sector.”

"In other words, easy policy is going to stay there for a long, long time, and that should be negative for the U.S. dollar," said Westpac currency analyst Imre Speizer. "I think it'll be something that sits in the background, as just a reminder that the U.S. dollar can't go up while it's got that easy policy relative to everybody else."

The dollar extended losses after data showed underlying U.S. inflation remained benign. Excluding the volatile food and energy components, the CPI was unchanged for a second straight month. Inflation is under the spotlight as economists expect pent-up demand and a low-base effect from last year's shocks to drive jumps in headline figures by the spring time, which some investors think could test the Fed's resolve.

The dollar’s gains have certainly lost momentum and the underlying trend of weakness could likely persist. Today’s action really centered around the CPI,” said Amo Sahota, executive director at Klarity FX in San Francisco. “The market expected inflation to pick up a little bit and it’s just benign at this point. The reflation trade is not quite there yet,” Sahota added.

Foreign exchange traders, meanwhile, have been waging a tug-of-war over the impact on the dollar of U.S. President Joe Biden’s planned $1.9 trillion pandemic-related fiscal stimulus package. On the one hand, the government expects to speed up a U.S. economic recovery, bolstering the currency. But on the other, it could heat up inflation, which would lift riskier assets at the dollar’s expense.

The dollar headed for its first losing week in three as new signs of weakness in the U.S. jobs market dented investor expectations about the pace of economic
recovery from the pandemic.

"The U.S. economy will outperform most thanks to fiscal stimulus and faster vaccine deployment, but ongoing reflationary fiscal and monetary policy will leave DXY on a sustained medium term bear trend," Westpac strategists wrote of the dollar index in a client note.

The outlook for the dollar remained lower, according to Marshall Gittler, head of investment research at BDSwiss Group. The dollar is “considered the safest of safe havens and tends to fall when people are not looking for safe havens,” Gittler said. “With markets rallying and the U.S. Fed on hold indefinitely, I expect the dollar to be widely used as a funding currency, pushing its value down.”

ING analysts described as a “consolidative mood” amid uncertainty about the pace of the U.S. economic recovery. Weaker-than-expected weekly U.S. jobless claims data on Thursday added to concerns the dollar’s previous rally had priced in too fast an economic rebound.

US interest rates

Benchmark U.S. Treasury yields rose to their highest levels since March on Friday as investors closed positions ahead of a long U.S. weekend, while inflation expectations edged up to a six-year high. Benchmark 10-year yields rose to 1.203%, just pipping an 11-month high of 1.20% that was set on Monday.

With no new fundamental news to drive market direction, Ben Jeffery, a strategist at BMO Capital Markets in New York, said the moves were “likely position squaring and maybe some profit taking ahead of the long weekend ... there hasn’t really been any new fundamental information.”

Yields have largely held in a range as investors wait on a new catalyst to send yields substantially higher, with U.S. fiscal spending seen as the next major focus. “Our base case view is for a $1 trillion package, but I think market expectations are gravitating towards something much larger,” said Zachary Griffiths, a macro strategist at Wells Fargo in Charlotte.

U.S. President Joe Biden will meet with a bipartisan group of mayors and governors on Friday as he continues to push for approval of a $1.9 trillion coronavirus relief plan to bolster economic growth and help millions of unemployed workers.

Data on Friday showed that U.S. consumer sentiment unexpectedly fell in early February amid growing pessimism about the economy among households with annual incomes below $75,000. Investors are expecting that new spending and faster growth as businesses reopen after COVID-19 related shutdowns will also boost inflation.

Inflation expectations rose as high as 2.23% on Friday, the highest since 2014. That means that investors are now pricing in average annual inflation of 2.23% for the next 10 years.

The closely watched yield curve between two-year and 10-year notes steepened as short-term rates remained contained by expectations that the Federal Reserve will keep rates near zero for years to come. Analysts expect the Federal Reserve to hike the interest it pays on excess reserves (IOER) if Treasury bill rates fall below zero. The one-month and three-month bills currently yield 0.03-0.04%.

As a result of these brutal (though, on this occasion anyway, necessary) policy interventions, many of the old nostrums of monetary economics have been shattered. ‘Inflation is always and everywhere a monetary phenomenon.’ Is it? When? Where? Despite these record-breaking monetary injections, there is no sign of rising inflation in core prices across the developed world as yet. In fact, core inflation has fallen in most countries thanks to the steepest global recession of all time.
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Fathom’s view from the beginning was that the medium-term impact of the crisis would be, if anything, inflationary. That is because, eventually, aggregate demand would come all the way back to where it otherwise would have been, while aggregate supply would remain persistently lower thanks to the impact of the disease on investment and on global supply chains. Early on, bond markets disagreed with that assessment, with even the thirty-year inflation expectation embedded in bond markets falling sharply. But those expectations have since recovered and now stand slightly higher than they were, at all maturities, ahead of the crisis. Bond markets see inflation coming, if only modestly for now. Fathom would agree.

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Bonds have a track record of getting it right on the economy, so pay attention to what they say. U.S., German and UK 30-year yields are up 20 to 30 basis points this year. Even Swiss 30-year yields have risen toward 0%, up 21 bps in 2021 so far. Okay, yields remain super low and not a sign of any inflation surge. But if the moves are a signal that extreme pessimism on the economy is abating, it will be a relief for policymakers. The reflation focus may increase bond markets’ sensitivity to economic data. Flash PMIs, due on Feb. 19 across major economies, have taken a back seat lately. That may change.

-Euro area 30-year sovereign borrowing costs back above 0%

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Improving the market's sentiment

The U.S. economy is expected to reach pre-COVID-19 levels within a year as President Joe Biden’s planned fiscal package helps boost economic activity, but it’s likely to take over a year for unemployment to fall to early 2020 levels, a Reuters poll showed. After a pandemic-led 2020, confidence in this year’s recovery has soared with the growth outlook upgraded in the Feb. 8-11 poll of nearly 120 economists, driven by the proposed $1.9 trillion fiscal stimulus package.

Over 90%, or 51 of 56 economists in response to an additional question said the U.S. economy would reach pre-COVID-19 levels within a year, including 23 respondents expecting it within six months.

“Optimism towards the economic recovery has raised expectations for future growth and inflation. The success of the vaccine deployment and its efficacy will be huge in determining whether the economic forecasts become reality,” said Beata Caranci, chief economist at TD Bank Group. Over the last few months, the changes to the forecast have favored a more rapid economic recovery. For the sake of the economy, we hope it continues to surpass our expectations.”

The U.S. economy, which recovered at an annualized pace of 33.4% in the third quarter from a record slump of 31.4% in the second quarter, grew 4.0% in the fourth quarter, the poll found. While the economy was forecast to slow and grow 2.8% this quarter, it was better than 2.3% predicted in January.

The economy was then expected to accelerate and grow 6.0%, 6.3% and 4.6% in the next three quarters, an upgrade from 4.3%, 5.1% and 4.0% predicted for those periods last month. For the full year, growth was forecast to average 4.7% in 2021 and 3.5% next year, an upgrade from 4.0% and 3.3% expected previously.

“While there are obvious risks that virus mutations deliver setbacks or problems arise with the vaccination program, we think the positives outweigh the negative risks,” said James Knightley, chief international economist at ING. Consequently 5% growth looks achievable this year and this is before we consider the potential boost from President Biden’s Build Back Better infrastructure and energy plan. The recovery in jobs may take a little more time due to uncertainty over potential structural changes in the economy - home working meaning less people in major cities and perhaps less need for bars, restaurants, retail workers as a result,” said ING’s Knightley. Conversely, maybe more workers are needed outside of these areas. Getting a good understanding will take time.”

COT Report

This week we have minimum changes to net position in EUR. Although some long positions have been re-established - the open interest has contracted again. It means that new demand for EUR is not massive and can't be treated as some strong trend. It cares retracement features and probably is triggered by short-term speculative positions. Hedgers were closing positions in both direction. Still, it might be just a preparation to long President's day holidays.

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So, we're totally satisfied how overall situation stands as it puts no shadow on our long-term view by far. There is no contradiction among poor CPI and NFP data, rally on interest rates and recent US Dollar weakness. As we've mentioned, CPI is lagging indicator, and as PCE index and mostly hourly earnings are much better indicators of inflationary expectations. Besides - you could see everything on the dynamic of interest rates directly. They are rising.

But, as any breakeven point - direction couldn't be changed just in a blink of an eye. It needs time to re-group and break existent momentum. That's what we see currently. Although previously we've mentioned some contradiction among two groups of economists, where first one suppose USD weakness due massive stimulus current account deficit and low economy growth, while second suggests the opposite - but this contradiction is only in long-term. In shorter-term, market could achieve both scenarios. First, while markets still stand on the old road - dollar drops (as we suggest to 87.3) and this lets EUR to climb to 1.26 or even 1.28, but downside trend starts after that, so both scenarios could happen, because they follow to each other. We should be patient, follow short-term (bullish) scenarios that we have and keep an eye on how statistics will change in nearest 1-2 months. Keeping in mind that reversal might start as soon as in April. Actually, above you already could see the same opinion about interest rates' jump - it could start in Spring.

Technicals

Monthly

Although on a fundamental side we see the boiling pot - here, on long term charts major changes are yet to happen. Monthly picture stands quiet. 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. Still, as we've discussed above - this should not happen yet.
eur_m_15_02_21.png


Weekly

Here we do not have clear patterns but fast recovery this week gives good advance for the next one as it might be upside continuation to XOP target. Despite that we have bearish divergence in place and, to be honest, aimed to 1.19 K-area as it looks sweet - EUR has completed harmonic retracement and turned up again. With 87.3 DXY target in mind - chances on upward continuation next week are definitely above zero. Still, volatility is relatively small, so we have nothing to do on weekly chart and most action stands on daily and intraday time frames.

eur_w_15_02_21.png



Daily

Here we follow the same strategy as on previous week. Overall performance stands bullish - MACD trend is up, market shows healthy response to strong support area, as it was able to stay above previous top of 1.20 level and daily K-support. Finally, it shows anticipated action on retracement that has happened yesterday. Next week we're aimed on the same 1.2185-1.22 area, watching for reverse H&S pattern here.
eur_d_15_02_21.png


Intraday

This is theoretically, how this pattern should look like. As we've suggested - EUR has re-tested previously broken K-resitance area:
eur_4h_15_02_21.png


So, on 1H chart retracement was perfect to predefined levels. Short-term bullish context stands intact until price is above K-area of 1.2065. There are different patterns could be formed to lead price to XOP target, which is Agreement with 5/8 Fib level and the neckline of our 4H pattern. Here I draw the butterfly, but reverse H&S and even 3-Drive are also possible. What constant is - the invalidation point of "A" lows. And, finally, as a hint for future - take a look that we could get direct H&S as well that could become a starting point of future reversal out from the neckline of big pattern in a direction of right arm's low:
eur_1h_15_02_21.png
 

RahmanSL

Major
Messages
2,761
Hi Sive....that's a lot to digest but I think nothing spectacular will happen next week.
I like your "butterfly, but reverse H&S" on the 1H chart which, in my opinion, is the most probable scenario for next trading week.

Cheers and all the best and, as always, thank you very much for your invaluable insight & foresight.
 

Synchronicity

Sergeant
Messages
178
Hi Sive and all

I've not been around for a while, and catching up with this weeks analysis reminded me about your posts in May last year when you discussed Stop Grabbers on the EURUSD monthly chart. There were also SGs on the quarterly chart for EURUSD and the dollar index.
https://www.forexpeacearmy.com/community/threads/forex-pro-weekly-may-04-08-2020.65212

This is the updated charts which still fit with your current analysis.

All the best

Michael

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Sive Morten

Special Consultant to the FPA
Messages
14,494
've not been around for a while, and catching up with this weeks analysis reminded me about your posts in May last year when you discussed Stop Grabbers on the EURUSD monthly chart. There were also SGs on the quarterly chart for EURUSD and the dollar index.
Yes, Mike, indeed. I also remember these ones, and recalled once again last week, when we've set 87.30 DXY target that fits well with the grabber
 

Joshnix

Corporal
Messages
102
I would like to present a technical view of the Quarterly chart Bearish butterfly where we are in CD leg currently. Long term because of the BC being 88.6 retracement of AB it should have a target of 1.4219. Purely Technical look however based on current trend and fundamentals, something soon will be the catalyst. Probably the policies of the new president will push dollar down. So maybe 3 years it will get us to the 1.618 extension.
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Sive Morten

Special Consultant to the FPA
Messages
14,494
I would like to present a technical view of the Quarterly chart Bearish butterfly where we are in CD leg currently. Long term because of the BC being 88.6 retracement of AB it should have a target of 1.4219. Purely Technical look however based on current trend and fundamentals, something soon will be the catalyst. Probably the policies of the new president will push dollar down. So maybe 3 years it will get us to the 1.618 extension.
Yep, Josh, it reflects the DXY chart accurately. We have similar AB-CD there with 87.30 target
 

Sive Morten

Special Consultant to the FPA
Messages
14,494
Greetings folks,

So, as US was in a long holidays, we do not have a lot of things to comment by far, just a few moments, maybe.

On daily chart picture stands the same, and EUR is coiling in the same range. Thus, we keep our short-term plan and aimed on 1.2185-1.22 area as we've discussed in weekly report, supposedly to get reverse H&S pattern:
eur_d_16_02_21.png


But on 4H chart we've got the bearish grabber and could get another one within few hours. Thankfully, their min. target stands just below 1.2115 lows:
eur_4h_16_02_21.png


That's why, today we're mostly watching for an 1H chart. To keep context bullish market has to stay inside recent upside swing. Since we can't get the butterfly here, as Monday's top is above Friday's one, we could get reverse H&S. And it is vital to see that grabbers stop at minimum target, and EUR holds above 1.21-1.2107 K-area. If price drops below it, downside action could last till 1.2030-1.2050 area. In fact, here we also watching for minor reverse H&S and aiming on XOP at 1.2183:
eur_1h_16_02_21.png

So, we could consider long entry around 1.2110-1.2115 with stops below K-area and move them to b/e at first upside reaction out of it. 1.21 and then 1.2080 downside breakout means that short-term context is broken.
 

Sive Morten

Special Consultant to the FPA
Messages
14,494
Morning everybody,

So, it seems that evidence that we were talking about in recent month comes earlier, I would say much earlier. J Bullard yesterday has made a deadly hit on "old" sentiment background, saying that interest rates probably heat up this year already. That has become revelation for many traders. For us it means that situation becomes clear not in the March-April, but in Feb-March. In short-term it means that bullish background becomes more fragile.

In fact, bulls have just one option right now - try to stay above 1.2050 area and launch reverse H&S pattern on 4H chart. Inability to do this leads market to 1.1950 first and below 1.19 after some time. But currently, as you could see on the chart - pattern is still possible:
eur_d_17_02_21.png


But for the truth sake - we have to say that few moments are not good. On 4H chart we have to adjust the neckline as well. The most unpleasant thing is too fast downside action, that is destructive for H&S pattern on the stage when it is forming the right arm:
eur_4h_17_02_21.png


Second - external impact has broken normal market mechanics - EUR has ignored XOP target and dropped back in consolidation forming false upside breakout. In most cases it means downside breakout of the same consolidation with the target, equals to its height. Thus - accurately to 1.2035-1.2050 support.
eur_1h_17_02_21.png


Thus, the final answer we will get from market response on 1.2035-1.2050 support area. Chances exist on positive outcome, hardly single comment turns markets immediately. But it would be better to get some bullish patterns around on lower time frame before position taking. Also do not take any long position if market drops directly to the level. We want to see slower and more gradual action.
 

Sive Morten

Special Consultant to the FPA
Messages
14,494
Morning folks,

So EUR accurately has dropped to 1.2035 level that we've discussed recently and now it is the moment of truth for short-term perspective. EUR has no choice but to start upward action to keep bullish context. Otherwise it drops below 1.1950. But this is not all yet...
On daily chart bullish grabber might be formed today - this is the first thing that we keep an eye on here:
eur_d_18_02_21.png


On 1H chart we have nothing by far, but bearish flag. It means that despite EUR at support and we could get the grabber, it is not good moment to take long position as we do not have any signs of recovery and no bullish patterns around.
eur_1h_18_02_21.png


It means that our trading plan is twofold. If, for instance, today, while grabber is not there yet, EUR jumps to 1.2085 resistance - it might be good setup for scalp short trade, as it has the same nature as B&B, although it doesn't match to B&S strict conditions. Still, as downside momentum here looks strong and we have strong resistance - it has good chances to work.
If no upside bounce happens - we just sit on the hands and watch what we will get, and grabber in particular. Then, tomorrow we decide what to do next.
 

Sive Morten

Special Consultant to the FPA
Messages
14,494
Morning guys&gals,

So, EUR keeps positive mood and completes all conditions that we've set yesterday - grabber is formed, price returns back in 1H trading range, breaking K-resistance of 1.2085 area:
eur_d_19_02_21.png



It means that on 4H chart we keep the journey with reverse H&S pattern that has minimum target of 1.2240 now. EUR has no Fib barriers until 1.22 level, while natural barriers is neckline actually:
eur_4h_19_02_21.png


As market already did the major work here - we do not expect any deep pullback and for position taking nearest two levels should be suitable, 1.2205 looks even more probable in current situation:

eur_1h_19_02_21.png
 
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