Forex FOREX PRO WEEKLY, February 26 - 01, 2024

Sive Morten

Special Consultant to the FPA
Messages
18,863
Fundamentals

As previous week was very active as this week is a bit bore. We've got just few data of a big scale - Fed minutes, Nvidia report and some other minor data, that mostly have no impact on overall situation. Still, there were few events that were not widely presented in media that, still, by our opinion are important. Also we see interesting dynamic in some statistics that might become important nearest 1-2 months

Market overview
The dollar index edged lower on Wednesday after minutes from the Federal Reserve’s January meeting came in largely as expected and showed that the bulk of policymakers were concerned about the risks of cutting interest rates too soon. Traders have pushed back expectations on when the Fed will begin cutting rates to June as officials caution that they want to see more evidence that inflation will continue to decline.

"Participants highlighted the uncertainty associated with how long a restrictive monetary policy stance would need to be maintained" to return inflation to the Fed's 2% target, said the meeting minutes.

The bulk of policymakers at the Federal Reserve's last meeting were concerned about the risks of cutting interest rates too soon, with broad uncertainty about how long borrowing costs should remain at their current level, according to the minutes of the Jan. 30-31 session.

UBS’ Serebriakov notes that traders are staying in carry trades as the expected timing of rate cuts are pushed back, which has led low-yielding currencies like the yen to underperform.
“The overall message is that they’re watching the progress but they’re not quite there,” said Vassili Serebriakov, an FX strategist at UBS in New York. “As long as equities are stable or moving higher, that means risk sentiment is strong and that favors carry trades in FX,” he said.
Higher than expected consumer and producer price inflation last week has raised the possibility that the Fed could hold rates higher for longer, or even make further hikes if it continues. However, retail sales numbers and other data have also been showing some signs of weakness, which has sent the greenback lower over the past week.

“There is still enough of a question mark with respect to incoming data and as a result we’ve seen the dollar come under a bit of pressure,” said Bipan Rai, North American head of FX strategy at CIBC Capital Markets in Toronto, adding, “This is really a data driven environment.”

Richmond Fed President Thomas Barkin said Wednesday that the inflation data will complicate upcoming Fed rate decisions. Fed Vice Chair Philip Jefferson said on Thursday he will be looking across a broad set of economic indicators to convince him it is time to cut interest rates, rather than focusing on a single metric.

U.S. data on Thursday showed that jobless claims unexpectedly fell last week, while U.S. business activity cooled in February, with a measure of prices paid for inputs falling to the lowest level in nearly 3-1/2 years. While the downturn in euro zone business activity eased in February, suggesting signs of recovery, according to a survey on Thursday.

The dollar is likely to benefit from divergences with other countries as the U.S. economy looks relatively stronger, said Noel Dixon, senior macro strategist at State Street Global Markets in Boston. However, after the recent strength “there’s clearly some fatigue with some of the dollar bulls,” he said. “For the dollar to break out one way or another we would need to see more data.”

As a result, the U.S. dollar index was on track for its first weekly fall in 2024 on Friday as investors took a breather from buying the currency following an almost two-month rally built on expectations that the Federal Reserve will begin cutting rates later than previously expected. Investors have pushed back expectations for the first Fed rate cut to June, from May, and dramatically reduced how far they see the U.S. central bank cutting its benchmark rate. Fed officials have projected three 25 basis point cuts this year, while markets had priced for as many as seven.

Traders may also be pricing for the likelihood that economic data will begin to slow.
"The dollar's rally this year has been predicated on the markets converging back to the Fed," said Marc Chandler, chief market strategist at Bannockburn Global Forex in New York. "I think starting with the February jobs data, which is due March 8, we're going to begin seeing a series of weaker U.S. economic data," Chandler said.

Now, however, investors are waiting on further economic indicators for fresh clues on monetary policy. BofA expects the euro to strengthen to 1.15 versus the greenback by the end of the year.
"It's not the time yet to sell the dollar, but we think it will start to weaken in the second quarter, assuming that the Fed will cut in June and continue cutting rates once a quarter," said Athanasios Vamvakidis, global head of G10 forex strategy at BofA Global Research. "If the U.S. economy remains so strong, we have to change our view, as the Fed might not be able to cut in June or not even this year," Vamvakidis added.
Personal Consumption Expenditures (PCE) due next week may also provide clues for Fed policy. Economists polled by Reuters expect a 0.3% increase for January after 0.2% in the previous month. A stronger-than-expected PCE number could further whittle away at market rate cut bets.

1708763984951.png

New York Fed President John Williams sees the U.S. central bank on track for interest-rate cuts "later this year," despite stronger-than-expected readings on inflation and the labor market in January, according to an interview published Friday by Axios.

Goldman Sachs' analysts no longer expect a U.S. interest rate cut in May and see four 25 basis point cuts this year, as policymakers' rhetoric suggests they are in no rush. GS also raised its year-end target for the benchmark S&P 500, opens new tab to 5,200, reflecting roughly a 4% upside from current levels, citing an improved earnings outlook for the index companies.
"Because there are only two rounds of inflation data and a little over two months until the May (Fed) meeting, his comments suggest to us that a rate cut as early as May, which we had previously expected, is unlikely," Goldman Sachs analysts said in a note. They now forecast an extra cut next year instead, with an unchanged terminal rate forecast of 3.25-3.5%.

UBS and Morgan Stanley also do not expect any moves from the Fed until June. A slim majority of economists polled by Reuters expect the Fed to cut the federal funds rate in June, in line with market expectations showing a near 53% chance of a cut in the month, according to CME's FedWatch, opens new tab tool.

German business morale improved in February, a survey showed on Friday, though probably not enough to prevent Europe's biggest economy from slipping into another recession. ECB President Christine Lagarde on Friday called the relatively benign fourth quarter wage growth data encouraging but not yet enough to give the European Central Bank confidence that inflation has been defeated.

On Tuesday, Deutsche Bank flagged what it now sees as a 'shallower' Fed cycle than it originally thought - 100 bps of cuts from June - and blamed inflation "persistence" with 3-month annualized core consumer price inflation still above 4%. Nuveen Chief Investment Officer Saira Malik was gloomier and said a first cut may not even arrive until the second half of the year. "The Fed isn't ready to spring forth. Don't fight the Fed, in other words.

A similar game is at play on the other side of the Atlantic. "Euro zone domestic demand has not grown to any measurable extent for almost two years - incidentally leading to the greatest gap in per capita income growth between Europe and the U.S. in decades," Nielsen opined, puzzling at the ECB stance.

It may be that all major central banks are just playing for more time. But it they may soon need to better differentiate their stances to match domestic economic realities rather than just clubbing together to corral excessive market expectations. And that's the point at which currencies rate and broader financial markets could get very frisky indeed.

EU

Deutsche Pfandbriefbank opens new tab (PBB), one of Germany's top property financiers dating back to the 1860s and bailed out by the government in 2009, is navigating what it calls "the greatest real estate crisis since the financial crisis". Allianz's opens new tab 58.4 billion euro ($63.21 billion) real estate portfolio is shrinking, becoming less devoted to offices and less German, underscoring troubles in the commercial property sector and the insurer's home market.

German homes are still overvalued despite a fall in prices last year as the cost of mortgages spiked, the country's central bank said on Monday. Prices were still 15-20% above where they should be based on Germany's current demographic and economic situation.

The European Central Bank on Thursday reported a record annual loss for 2023 and said further losses were likely as its aggressive interest rate hikes force it to pay out billions of euros to banks. Its loss before the release of provisions was 7.9 billion euros after a loss of 1.6 billion euros in 2022. Most of the losses are as a result of the ECB's decade long-stimulus programme from an era of excessively low inflation in the pre-pandemic era. The ECB printed trillions of euros worth of cash to stimulate growth and most of that excess liquidity, 3.5 trillion euros, is still sloshing around the financial system.

The European central bank must now pay lenders a 4% deposit rate when this is deposited back at the ECB, while the assets its bought, mostly government debt, yield much less.

"The loss... reflects the role and necessary policy actions of the Eurosystem in fulfilling its primary mandate of maintaining price stability and has no impact on its ability to conduct effective monetary policy," the ECB said. "The ECB is likely to incur further losses over the next few years as a result of the materialisation of interest rate risk, before returning to making sustained profits," the bank said.

The German and Dutch central banks on Friday posted multi-billion euro losses for 2023 and predicted more financial pain ahead, suggesting that they are unlikely to pay dividends into state coffers for years to come. The Bundesbank said it lost 21.6 billion euros ($23.36 billion) last year, wiping out nearly all of its provisions while its Dutch counterpart lost 3.5 billion euros, both broadly in line with expectations.

Relatively benign fourth quarter wage growth data are encouraging but not yet enough to give the European Central Bank confidence that inflation has been defeated, ECB president Christine Lagarde said on Friday. Negotiated wage data from the first quarter, due out in May, will be especially important for the ECB, Lagarde added.

"The Q4 wage numbers are obviously encouraging numbers," Lagarde told a news conference. "The Governing Council needs to be more confident that the disinflationary process that we are observing will be sustainable and will take us to the 2% medium term target."

According to a Bank of America strategist, the European Central Bank's desire to get rid of trillions of euros in excess liquidity is already leading to higher borrowing costs in the region's financial markets. Rates for the region's lenders, both secured and unsecured, are likely to continue rising as the ECB makes further progress in reversing years of loose monetary policy , said strategist Ronald Maine.

The shift in repo rates is certainly a reflection of increased demand for funding," Meng said, referring to the 11 trillion euro European market, which is a critical source of daily liquidity for banks and other borrowers. " As the ECB shrinks its balance sheet, banks will compete more for reserves ."
1708766642979.png


This nice graph shows that while there are many headwinds for the German economy at the moment, such as lower exports to China, the energy transition and geopolitical risks, it appears that the key factor behind the fall in German house prices is the ECB rate hike. 15 years of non-stop growth have taken their toll, prices are falling by 10%. If we also take into account the fact that mortgage rates in Germany and in Europe in general are mostly floating, it is not surprising that they are already experiencing a recession. “Automatically” more income began to be spent on servicing loans.

1708766900584.png


Money supply and liquidity issues

This was really not very interesting week, in terms of data, but few very important moments have passed unsigned. First is, recent US Bonds auction. The US Treasury placed 20-year bonds , and this auction can safely be called a failure. ️The yield of 4.595% was much higher than last month's 4.423%, the bid/ask ratio fell to 2.39 from 2.53 , well below the six-auction average of 2.59 and the lowest since August 2022.

It is also interesting that Primary Dealers have to buy now around 20% of the whole supply, while the share of direct bidders (who bid on auction yield directly, indirect bidders buy on average yield of the issue) starts dropping again as it was in 2021.
1708769032920.png

Meantime, M2 starts to grow again. The US monetary base has grown significantly recently. In the last 12 months alone, the growth was $420 billion, mainly due to bank reserves:

1708769475495.png


The monetary base is growing, the money supply is growing too, and the bank reserves along with them. The most important thing is that since October, when the mini-crisis of the bank repo took place, for some reason, the "fast" components of the money supply began to grow (that is, the components are not "savings", but "expenditure"), which was not observed, for example, in 2022 at the end of the year. That is, it is not a typical seasonal factor.
1708769620357.png


In general, it is not surprising why inflation has gone up. But the surprising thing is that, apparently, the Fed still did not hold back and performed some operations that added liquidity to the system, which once again confirms the thesis that with any scam they will turn on the printing press.

The volume of bad loans in the commercial real estate sector already exceeds the sector's loss reserves at the largest US banks. The situation has deteriorated significantly over the past year following a strong rise in arrears in the sector, FT reports. Well, among other things, tension around commercial real estate continues to grow, which means a continuation of the banking crisis is not far off.
1708769760569.png


Not far off - this will most likely be after March 11, when the BTFP program will cease to operate, borrowings under which, by the way, have begun to decline, after changing the conditions for the cost of borrowing (Fed has closed arbitrage gap). But before that, we observed sudden growth after the slightest problems in the banking sector. Without such a tool it will be quite difficult.

Since the start of the US dollar inflation surge, the Federal Reserve has reduced assets on its balance sheet by just over 5%! This was the most hawkish regulatory cycle in 15 years. The banking system is already shaking, so the market is paving the way for a new rate easing, and the Fed is looking for a reason to turn on the printing press. Without it, the US budget cannot be reduced.
1708770172066.png


The Fed's stimulating policy requires increasingly large injections. Thus, since the crisis of 2008, three 5-6 year cycles of liquidity injections into the US financial system can be distinguished, in each of which the Fed’s balance sheet approximately doubled: a drug addict requires an ever-increasing dose.

The topic of the Fed balance is becoming really hot. As data above shows, US financial authorities seems provide some liquidity keeping it off public sphere and do not advertising it in media. For example, in the first 20 days of February US Treasury cash account with the Fed has dropped for ~ 80 Bln:
1708770535589.png

Raised interest rates in recent two weeks stops the decreasing of Reverse Repo facility, keeping around $550 Bln, making US Treasury to search other sources. As we've mentioned earlier these two components are reserves for US Treasury of last resort. They have nothing more to provide tactical support to the market and finance government spending.

All this stuff is happening on a background of possible new shutdown. On February 15, the Chamber went on recess, which will last until next Wednesday, February 28.
Congress is either close to reaching a deal on the budget bill, or it's about to fall apart. People predict US government shutdown even if it lasts just a few days - Axios sources. A partial government shutdown will occur if a budget or cost-cutting measures are not passed by March 1. If they are not approved by March 8, then from that day a complete shutdown of the government will begin. US Republicans are secretly preparing for a shutdown

Indirect confirmation that this topic is really becoming hot comes from recent minutes publication. The Federal Reserve’s internal debate over the fate of its balance sheet reduction effort is set to quicken at its March policy meeting, with policymakers first setting the stage for how they'll likely slow the drawdown, likely deferring a decision on when to stop the process altogether to a later date. Minutes showed that "many participants" were eager to kick off "in-depth discussions" at their March 19-20 meeting on how they will conclude what has been a steady reduction in the Fed’s bond holdings. The minutes also echo views of policymakers who have started debating how the Fed can complete QT smoothly.

Officials reckoned with cash draining steadily out of a key central bank tool known as the overnight reverse repo facility -it's viewed as a proxy for excess financial sector liquidity -the time is close at hand for managing an endgame that will keep financial markets unruffled. To get there, officials are ready for a full-scope debate over how to eventually slow the process commonly referred to as quantitative tightening, or QT, at their March FOMC meeting, opens new tab.
1708771175977.png

While there's uncertainty whether all the cash will drain out of the reverse repo facility, wherever it stabilizes means bank reserves will start falling quickly. This overall tightening in liquidity means the Fed must be prepared to shift the QT process.

"March is the first time they'll do a deep dive into how to taper," said Derek Tang, an analyst at forecasting firm LH Meyer. "The end point will take a lot more work to suss out since it hinges on things outside of their control like market sentiment and regulatory reform."

"We believe the Fed does not want to repeat its past errors with quantitative tightening, which led to a disruption in the repo market," which makes the case for starting the process with a taper, said Ryan Sweet, U.S. economist with Oxford Economics. "Ending QT does not appear on the horizon and tapering soon would allow the process to last longer."
 
In the moment of the March FOMC meeting, the BTFP programme will be closed already, which is also "-1" source of liquidity for mid and small sized banks. All these moments let us to make very important conclusion. With the early signs of any problems - the Fed is turning the tap, and open some "hidden" liquidity flow. It means that whatever will happen - they will not go on the way of strict inflationary fight and sharp recession. They will go on a way of postponing collapse on later time as far as possible, adding liquidity. It means that they even do not need to cut rate in this circumstances.

Hence, we could make two conclusions - new inflation spiral is becoming more evident, but should come later in the year. Second EU will loose the fight of "who first will cut the rate" to the Fed. And it is difficult to agree with BofA forecast of USD drop in the IIH of 2024. The major market misprising now - it doesn't consider the ability of the Fed to stop QT, add liquidity but not cut the rate. Market things that this two mutually related things - if QT stopped, rate has to be cut. This is the foundation of weaker dollar expectations. But they are not - liquidity could be added, but rates could remain at the same level or even could be raised higher. If liquidity is providing - the rate level doesn't matter in a period of 6-8 months. Correspondingly, we keep our long-term view on downside tendency in EUR/USD, although some pullbacks are definitely keep happening in short-term periods

Technicals

Monthly

February is very quiet month, nothing interesting. Market keeps nominal bullish trend but stands under YPP. Here we could start speaking on direction only after breakout - either above 1.13 or below 1.05. Until market stands inside this range - only lower time frame setups might be considered. The only intriguing thing on long-term charts is quarterly bearish grabber that we've shown you last week.

eur_m_26_02_24.png


Weekly

The same we have on weekly chart - no clear direction as market stands in wide consolidation. Nominal trend remains bearish, but it provides no clear patterns. Thus, it seems that next week we again will trade on daily and intraday basis:
eur_w_26_02_24.png


Daily

In fact we already have the trading plan, although it is rather short-term. It is based on market response to strong daily resistance. Second question is how strong this reaction will be - either continues drop or just mild pullback. For now we could say that this plan is still valid. Only jump above 1.09 area will destroy it:
eur_d_26_02_24.png


Intraday

Based on these thoughts, it seems logical to focus first on nearest target, which is 1.0770-1.0780 level by few reasons. First is, because this is most common pullback, when market formed bullish reversal swing, as we have it here. Second - if pullback will be just temporal, we could get large reverse H&S pattern, and 1.0770 is well harmonized with potential left arm. This is also the level to consider for those who would like to take long position on EUR.
eur_4h_26_02_24.png


On 1H chart we have scalp bearish setup, that is based on 4H engulfing pattern. We haven't got any upside jump on Friday as on Gold market, so setup stands well by far. The look is a bit wierd for H&S pattern, but we have AB-CD here with OP around 1.0750, which is a bit lower than our 1.0770 level.
It is also COP has to be considered, because it agrees with 4H K-support level and its lower border of 1.0791 Fib level.
eur_1h_26_02_24.png


That's being said, for those who keep shorts, 1.0790 seems like high probability target if setup will keep working. And area between 1.0750-1.0790 seems unstable, there market could change direction at any moment and demands more strict money management rules. Bulls now have nothing to do - either wait when bearish setup will be destroyed or when EUR hits 1.0750-1.0770 area.
 
Last edited:
Morning guys,

Situation changes slowly on EUR by far, it seems that everybody waits for PCE on Thursday. Still, there are couple of moments that we need to consider. On daily chart market is re-testing K-area. And very soon we will know, whether EUR just keeps going higher, or we still get a bit deeper retracement to 1.08 area:
eur_d_27_02_24.png


This subject we already have discussed in weekend - whether right arm already stands in place of we still get downside AB-CD to make reverse H&S pattern looking more harmonic:
eur_4h_27_02_24.png


Our suggestion of possible "222' Sell has been realised, now we get it. And price stands at 5/8 resistance level. This is the key to next direction. Upside breakout, action back to 1.09 top means coming upside continuation with "small shoulder that already in place" on 4H chart. Downside action could give us still AB-CD pattern. In this case 1.0790-1.08 right arm bottom should be formed:
eur_1h_27_02_24.png


How we could trade it? For the bears I would say is nothing to do. Only if you're ready to take more risk, you could try to go short with "222" Sell pattern. Because, theoretically we have bullish context and should not take any shorts. That's why this setup cares additional risk, not for everybody. Advantage again is very close potential stop, because market is at culmination point - either pain or gain situation.

For the bulls we suggest to wait either AB-CD drop to ~1.08 area, or signs that "222" is erased, if market will come closer to 1.09 top. In this case Stop "buy" entry order could be considered as well around 1.0885 area. Choose what you do like more, decide...
 
Morning guys,

So, despite some uncertainty, but intraday bearish scenario is working nice by far. It is handy for bulls as well, because they could get better entry point later. Meantime on daily chart context remains bullish:

eur_d_28_02_24.png


On 4H chart the most dramatic events has happened. The point is, that retail brokers very often shows wrong charts. For example, if you take a look at FXCM chart - you could see on on 4H chart we have bullish grabber. Thus you could make absolutely wrong trade, suggesting, for example, that it could be upside butterfly. In reality we've got bearish grabber that was a great confirmation and perfect entry with our "222" Sell bearish scenario. Always check such tricky moments on CME futures...

eur_4h_28_02_24.png


Now, the riddle with right arm of H&S pattern is resolved, and we're watching for ~1.0790 area. On 1H chart bearish scenario behaves perfect, we see solid acceleration down. So, if you have shorts - just move stops to b/e and see what will happen. OP stands around 1.0780:
eur_1h_28_02_24.png


Keep monitoring price action in a moment of lows breakout. Risks are small, but theoretically market could start forming upside butterfly. Just keep your eyes open and react correspondingly. I think that hardly this happen with this kind of price shape, but be on guard anyway.
 
Morning everybody,

So, yesterday we've got mixed results, EUR has moved lower, but not quite reached the 1.0780 target. Still, we should not be surprised with this too much as we have bullish context. Any downside action now is a pullback that could be interrupted. Based on current action I would say, we should be ready for upside continuation - but, if we wouldn't have PCE today:
eur_d_29_02_24.png


On 4H chart now we could say that it seems right arm's low stands in place and it was formed precisely around 1.0790 that we've mentioned, which is also ~50% Fib support (not shown here). Reaction was fast, in a way of bullish engulfing pattern. All these moments create healthy background for upward continuation...
eur_4h_29_02_24.png


The problem now stands only with PCE... and uncompleted OP on 1H chart at1.0780 area. That's why, although we have phantom chances for that, but still have to foresee possible scenario of strong PCE numbers and possible drop to OP. Say, in a shape of butterfly, why not?
eur_1h_29_02_24.png


That's the tricky moment that we have. Despite bullish context looks nice, PCE could bring a big mess. As usual few options to deal with it - wait, split or just place initial stop below OP (which seems a bit overextended), maybe you will find other options, such as use Stop "Buy" order above the "A" point or something of this kind.

We do not consider bearish positions, context is still bullish, but entry process might be difficult...
 
My thoughts:
Just before the German's and other EU data are published, the EUR/USD will probably go up to around 1.085xx... then those who took long positions will review, study and analyze the figures and decides (as a lot of us feel too) the data are really nothing much to cheer. Then they will close their Long positions, take whatever profits they have, sit back, twiddle their thumbs and wait for the USA PCE figures which are due in around 4 hours after.
Cheers and all the best!
 
Morning everybody,

So, recent EUR action was very special, because it is the first time in long period when EUR shows reaction on EU own stats, rather than just replicating US Dollar dynamics. With poor inflation data in France and Germany, EUR almost totally ignored weakness in PCE numbers. As a result, downside action continues.

For now we still treat it as retracement, but EUR is coming to vital 1.0780-1.0790 area where tendency could change:
eur_d_01_03_24.png


On 4H chart drop, that we've discussed has happened, but it was prepared by bearish grabber and should not been caught you off guard. The problem only in bad Retail broker data - check your 4H chart, have you got there the grabber? Mine FXCM shows wrong pattern, it is up. While CME Futures shows everything correctly - it was bearish grabber right on top. Anyway market now is returning back to potential right arm's low and our H&S trading here is turning to active stage. It seems that on Monday we will have to make some decision:
eur_4h_01_03_24.png


On 1H chart, despite that EUR has reversed down, it has shown two nice attempts to go higher after few grabbers. Thus, long entry was not too risky as well - a lot of time to move stops on breakeven. Now (with bullish grabbers on DXY), EUR should try to complete finally the OP target here. Right now we do not consider any longs yet. Short position theoretically is possible, but check first risk/reward ratio, whether it will be attractive.
eur_1h_01_03_24.png
 
Back
Top