Forex FOREX PRO WEEKLY, January 03 - 07, 2022

Sive Morten

Special Consultant to the FPA
Messages
16,103
Fundamentals
So, here we are in 2022, guys. The recent week was not full of data and important events. As usual, it was a bit "mixed" time between Christmas and New Year's Day, when 2021 is passed but 2022 is not started yet. Next week it should be a different situation as investors will get an NFP release, the first one in 2022. Although we've got more or less positive PMI and Initial claims data, investors mostly were digging information about Omicron, its spreading across the Globe, and its impact on different countries. We're not occasionally have dedicated the previous report to the Omicron. It seems that it is becoming one of the major driving factors along with the Fed policy, and not only for common markets but to the cryptocurrencies as well. Our new fundamental Bitcoin report just confirms it. It seems that the nearest 6 months will be the tricky game around Fed policy.

Market overview

The Omicron coronavirus variant dampened New Year festivities around much of the world, with Paris canceling its fireworks show, London relegating its to television, and New York City scaling down its famous ball drop celebration in Times Square. The illuminated ball made of Waterford crystal panels slid down its poll at the midnight hour in Times Square, but only 15,000 spectators were allowed into the official viewing area instead of the usual 58,000.

A year ago, the newly available vaccine offered hope that the COVID-19 pandemic may be under control by the start of 2022. Instead, the sudden arrival of Omicron has brought a surge in coronavirus cases across the globe.


Worldwide infections hit a record high over the past seven-day period, with an average of just over a million cases detected a day between Dec. 24 and 30, up some 100,000 on the previous peak posted on Wednesday, according to Reuters data. Deaths, however, have not risen in kind, bringing hope the new variant is less lethal.
New York City reported a record 44,000 cases on Wednesday and another 43,000 on Thursday, leading some critics to question whether the celebrations should go ahead at all.



But officials decided an outdoor party of vaccinated, masked, and socially distant revelers were safe, and a better option than the virtually vacant celebration that rung in 2021.

Midnight passed in Paris without a planned fireworks display or DJ sets, as city officials cancelled events planned on the Champs-Elysees following the advice of a scientific panel that declared mass gatherings would be too risky.

In the Netherlands, where outside groupings of more than four people are banned, police dispersed several thousand people who had defiantly gathered at Amsterdam's central Dam Square, ANP news agency reported.

Earlier, Britain published a study of a million cases that found those with Omicron were around a third as likely to need hospitalisation as those with the previously dominant Delta variant. The results were "in keeping with the encouraging signs we have already seen," said Susan Hopkins, chief medical adviser at the UK Health Security Agency.

People in Madrid queued for hours to get into the main Puerta del Sol square where celebrations went ahead with multiple security checkpoints, mandatory masks and capacity at 60% of normal levels.

China ended its final week of 2021 with its biggest tally of local coronavirus cases for any seven-day period since subduing the country's first epidemic nearly two years ago, despite an arsenal of some of the world's toughest COVID-19 measures. The National Health Commission reported on Saturday 175 new community infections with confirmed clinical symptoms for Dec. 31, bringing the total number of local symptomatic cases in mainland China in the past week to 1,151.

The surge has been driven mostly by an outbreak in the northwestern industrial and tech hub of Xian, a city of 13 million. The deepening outbreak in Xian will likely firm authorities' resolve to curb transmissions quicklyas and when cases emerge. The city, under lockdown for 10 days as of Saturday, has reported 1,451 local symptomatic cases since Dec. 9, the highest tally for any Chinese city in 2021.



While China's case count is tiny compared to many outbreaks elsewhere in the world, forestalling major flare-ups in 2022 will be important. Beijing will be hosting the Winter Olympic Games in February, and the ruling Communist Party will hold a once-every-five-years congress, expected in the fall, where President Xi Jinping will likely secure a third term as party secretary.

An early December Reuters survey of over 60 fixed-income experts showed the yield on the benchmark U.S. 10-year note rising to 2.08% in the next 12 months. On Friday, the yield on the 10-year note was at 1.50%. The Fed has signaled a faster tapering of its asset purchases and three rate hikes for 2022.

U.S. equity funds received robust inflows for a second week in the seven days to Dec. 29 as investors welcomed signs that the Omicron coronavirus variant won't bring a big setback to the economy. According to Refinitiv Lipper data, U.S. equity funds lured net purchases of $19.43 billion, compared with their average weekly inflow of $2.3 billion, received this year.

U.S. retail sales rose 8.5% during this year's holiday shopping season from Nov. 1 to Dec. 24, powered by soaring ecommerce sales, a report by Mastercard Inc said on Sunday. U.S. ecommerce sales jumped 11% in this year's holiday shopping season, according to Mastercard SpendingPulse report, yet again underscoring the COVID-19 pandemic's role in transforming customers' shopping habits.

The dollar edged higher in thin trading on Tuesday, helped by safe-haven flows as worries over the spread of COVID-19 sapped a multi-day rally in equity markets, and on expectations, the Federal Reserve could raise interest rates as early as March. The greenback is up nearly 7% in 2021, helped by growing expectations that the Fed will raise interest rates sooner than other central banks.

"What we're really dealing with is inflation and what we're really dealing with is the Fed," said Joseph Trevisani, senior analyst at FXStreet.com. Fed funds futures are pricing better than 50% odds for a first quarter-point rate hike by March, odds that were "unheard of just two weeks ago," Trevisani said.

The dollar inched up on Wednesday as a recent rally in shares showed signs of petering out, but holiday-thinned trading meant markets were showing little real direction.
But with many traders having taken time off for Christmas or the end of the year, analysts said it was hard to read too much into the moves.



"Things are mostly noise right now, though we are probably seeing a soft risk-on/risk-off dynamic going on with stocks down slightly, and the dollar has caught a bid on the inverse of that," said Kyle Rodda, an analyst at IG Markets. He said longer-term, however, he was bullish on the greenback due to approaching rate hikes by the Federal Reserve and the apparently reduced chance of future lockdowns in the United States.

The Fed is widely expected to begin hiking rates before several other major central banks such as the European Central Bank, and this has helped the dollar index to have its best year in 2021 since 2015.

"There's definitely cautious optimism around, though the dollar is mostly just recovering the ground it lost yesterday afternoon (after the trade data) rather than anything more substantial," said Kit Juckes, head of FX strategy at Societe Generale in London.

The U.S. trade deficit in goods mushroomed to the widest ever in November as imports of consumer goods shot to a record ahead of the second straight COVID-distorted holiday shopping season, while exports slipped after a historic gain a month earlier. The goods trade gap reported Wednesday by the Commerce Department is likely to remain historically high as long as the coronavirus pandemic continues, economists said. The emergence of the fast-spreading Omicron variant of COVID-19 that has driven U.S. and global caseloads to a record this week may exacerbate it further in the near term if it limits American consumers' spending on services and restokes demand for imported goods.

The goods trade deficit widened last month by 17.5% to $97.8 billion from $83.2 billion in October, Census Bureau data showed. That exceeds the previous record deficit set in September of $97 billion and may dampen optimism that trade might finally add to U.S. economic growth this quarter for the first time in more than a year. Imports rose by 4.7% with industrial supplies leading the way with an increase of $5.7 billion to $63.2 billion, followed by consumer goods rising by $2.9 billion to just shy of $67 billion as retailers rushed to fill store shelves ahead of Christmas. Both were record highs.

Omicron also stands as a downside risk in the housing market. A reading of pending home sales also out Wednesday showed an unexpected drop in November, and while that data largely predated Omicron's ascendance in the United States, the highly contagious new variant could further limit home sales in the near term, the National Association of Realtors (NAR) said.

"The emergence of the Omicron variant may further ignite demand for imported goods if services activity is restricted" in the first quarter of 2022, Nancy Vanden Houten, lead economist at Oxford Economics, wrote after Wednesday's report.



Goods exports, meanwhile, declined 2.1%, with weakness across the board outside of a 4.3% increase in food exports. The drop was led by declines of $1.4 billion in industrial supplies and $1.3 billion in capital goods.

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The so-called Advance Indicators report also showed wholesale inventories climbed 1.2% last month, while retail inventories increased 2.0%.

Earlier this month, the Commerce Department reported a sharp reduction in the overall trade deficit - including services - for October, which had generated some optimism that trade may contribute to the improvement in output in the final quarter of the year. The big reversal to a record goods trade gap in November may prompt a rethinking of that.

Economists at Action Economics have dialed back their fourth-quarter GDP growth estimate to 6.5% from 7.0%, with exports now seen subtracting from growth rather than adding to it as had been previously expected. Economists at JPMorgan and Goldman Sachs, meanwhile, left their estimates intact at 7%.

Looking at the potential hit the latest wave of infections could inflict to European economies, Berenberg economists said in a note that a slowdown in economic activity would likely be shortlived.

"A potential decline in GDP in early 2022 would likely be offset by a bounce in activity shortly thereafter, leaving the outlook for GDP in 2023 unchanged," they wrote.
"We view Omicron as a risk to the time profile but not the overall pace of growth," they stated.

Despite concerns, investors cheered a U.S. Labor Department report that the number of Americans filing for new unemployment claims dropped to a seasonally adjusted 198,000 in the week leading up to Christmas, from a revised 206,000 a week earlier. Economists polled by Reuters had forecast weekly applications would rise to 208,000

"The fact that nonseasonally adjusted claims were unchanged - at a time when they typically tend to deteriorate - suggests that there has been no impact from Omicron as of yet," economists Thomas Simons and Aneta Markowska at Jefferies wrote.

"We have these headwinds from the pandemic, we had headwinds from energy prices and sky-high inflation rates... but there is a fair chance that many of these factors if not all of these factors will ease in Q1 next year," said Jussi Hiljanen, strategist at SEB. "But for a few months to come it will be very volatile and markets will be tested."

"The front end of the U.S. rates market is pricing more rate hikes back into the curve now so FX may be a battle, once again, between optimism about the global recovery and expectations about the Fed," said Kit Juckes, a strategist at Societe Generale.

The dollar index dipped on Friday in quiet holiday trading but was set to end 2021 with a gain of nearly 7% as investors bet the U.S. Federal Reserve will raise rates earlier than most other major economies amid surging inflation driven by COVID-19 stimulus initiatives. Set for its best year since 2015, the dollar has been supported by an improving U.S. economy and persistent inflation that led to a hawkish turn by the Fed, which is now expected to begin raising interest rates as early as March.

The euro, which makes up the biggest weighting in the dollar index, was down a little more than 7% in 2021, with the European Central Bank (ECB) "sticking to ultra-dovish monetary policy settings while the Fed accelerates its taper and looks to hiking," analysts at Scotiabank said in a note to clients. "We see continued weakening in the shared currency next year to the 1.10 mark and likely beyond as headwinds remain firmly in place, where only the (highly unlikely) chance that the ECB hikes in late-2022/early-2023 possibly providing some support," they said.

The euro was down around 6% on the year versus sterling, as easing concerns in Britain about the economic impact of the pandemic boosted the British currency, with analysts expecting more rate rises from the Bank of England in 2022.

Is the Dollar overpriced?

The U.S. dollar is trading at a high premium relative to its fundamentals as investors fret over the spread of the Omicron COVID-19 variant and high inflation. But that is unlikely to last, with risks to the currency rising next year, according to The Leuthold Group.

The greenback typically trades with a strong positive correlation to consumer sentiment, however, this relationship reverses when confidence is replaced by fear and then panic, as is currently the case, James Paulsen, chief investment strategist said in a report.

In fact, the safe-haven premium currently priced into the U.S. currency is nearly 40%, the second-highest level since 1988. “This strongly suggests the U.S. dollar is poised to decline next year,” Paulsen said.

Heading into 2022 investors are concerned about COVID and high inflation but “there is a decent chance some semblance of victory will be declared over both, which would likely boost confidence and cause the safe-haven premium to evaporate.”

The Omicron variant so far appears to be far less virulent than Delta, and there are more tools and treatments now that can address the virus. The pandemic is also likely to morph into an epidemic, which should help ease supply chain problems, reduce inflation pressures and improve confidence, Paulsen said.

That may mean that the dollar will see a year of renewed weakness, which would boost commodity prices and possibly keep inflation above the Federal Reserve’s 2% target, with 10-year Treasury yields possibly rising above 2%, Leuthold said.

In the scary inflation days of yore, let's call it the 1980s, runaway prices and wages were accompanied by ballooning money supply and turnover of money. But in this inflation cycle that is proving less transitory than the Federal Reserve predicted, velocity of money has scarcely budged from the lowest levels since at least the 1960s, according to the St Louis Fed.

That could change in 2022, according to Jim Caron, portfolio manager and head of global macro strategies for the global fixed income team at Morgan Stanley Investment Management. If it does, because, monetarists hold, inflation is a function of money supply times velocity, inflation could stay elevated even as some of the temporary influences now lifting prices wear off.

"We are in a position where we have very, very high money supply, so if velocity picks up even a little bit it can have an exaggerated impact on inflation," Caron said, adding that inflation measures should come down next year, but stay relatively elevated.

The Commerce Department on Thursday said that in the 12 months through November, the so-called core PCE price index favored by the Fed accelerated 4.7%. That was the largest increase since February 1989 and followed a 4.2% year-on-year advance in October.

"The Fed has a goal for this time next year of core PCE at 2.6%. I've got the over on that," Caron said on Monday. "Not over by a lot, but I'd say 3-3.5%."

His reasoning is that the growth in money supply has been a product of pandemic stimulus, more than of demand for dollars to spend. Lots of the stimulus funds have gone into paying down debt and saving accounts instead of creating economic activity.

If government largess ebbs in the new year, especially if the Biden administration's Build Back Better program fails to make it through Congress, any growth in money supply could transition to banks making loans for specific spending purposes by individuals and companies.

"You probably took out that loan for reason, to go out and do something with that, and that is where the velocity comes in. Whereas if the government just gave you a check, you got a check."

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COT Report

This week's report shows just minor changes with no participation of the hedgers. Speculators have increased both positions a bit, so open interest has increased slightly but the overall balance mostly remains the same. We do have any assistance from this indicator this time:

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So, it seems that investors have the consensus on long-term EUR performance as it should be weaker than the USD because of too big difference on economic conditions and central banks' performance, meaning ECB and Fed. Thus, our suggestion of 1.09 area as possible next destination point stands not too far from Scotia Bank expectations, as well as other ones - around 1.10
The major difference could come through the short-term performance. Starting from dollar overvaluation for 40%, which means it should cost around 1.6 that hasn't been seen since the 2008 crisis or more reasonable levels, suggesting that EUR/USD should price out only recent excess demand on Omicron fears spreading, pointing on 1.15-1.16 status quo. Indeed, with recent Consumption and PMI data, job statistics, it seems that economic conditions look not bad, or the Omicron effect has made no impact yet on it. Anyway, as data stands more or less positive, the initial Omicron reaction looks overextended, showing too much fear. In earlier reports, we already have made the suggestion that EUR should get some relief as it was scared too much initially. Despite bad things that stand around this new variant - it is possible to live with it as well as with the Delta one. So, it seems that more and more understanding of this fact comes to the market society as well. Thus, in the short term, we keep an eye on the upward bounce on the daily chart that is already started last week. But this suggestion works only on a period of fear compensation. In the longer run, strong economic data stands in favor of the USD strength as it keeps Fed's hands free to apply stronger tightening. So, this is a temporal effect, until statistics remains solid.
 

Sive Morten

Special Consultant to the FPA
Messages
16,103
Technicals
Monthly

First of all - let's update Yearly Pivots. As EUR had less volatility in 2021 the pivots stand tighter, with YPR1 now inside the recent downside swing, while YPP and YPS1 mostly stand at the same areas as in 2021. Pivots now envelop and coincide with triangle borders. YPP around 1.1634, in turn, takes a special meaning as it might be the first approximation of medium-term upside retracement, as a reaction on COP target.

All other things mostly stand the same. The trend is bearish here, downside CD leg speed is faster than AB, which doesn't let us count on upside reversal. Besides EUR has broken all meaningful support levels here and YPP of 2021. December becomes the inside month, showing the consolidation after reaching of major COP target. . Monthly chart suggests the next destination point around the 1.09-1.10 area - the combination of YPS1 and the trend line. The market is not oversold, the key rules of financial strategy are set, and with no strong support areas below - the reaching of 1.10 seems to be a question of time.
eur_m_03_01_22.png


Weekly

The major achievement of last week, that bulls could enter on the credit side is the cancelation of the bearish grabber. Just on Friday morning, it seemed that it is unavoidable but the sharp rally to the close of the year has changed the situation drastically. The weekly trend has turned bullish, and although the situation still stands tricky as EUR just has made first feeble attempts to go higher - this is meaningful achievement still, compares to the performance of the previous 3-4 weeks. So, EUR is trying to out of the pennant range and open the way for a higher pullback. If this is not the effect of a thin pre-holiday market and this action will not reverse back next week (which should not happen, as we think) - this price performance, in general, agrees with our short-term view that also has the fundamental background.
eur_w_03_01_22.png


Daily

So, sometimes, when you do not know what to do with existed position - it makes sense to play it to the end. As we've said on Friday - it is a too small result with it, so maybe to keep it and see what will happen? And it did not take long to see the result. But - this is not our achievement. This happens sometimes. Anyway...

The daily trend stands bullish. As price finally has started upward action - the risk of bearish dynamic pressure is melting out. Still, as the overall price shape looks choppy, let's not set too extended targets and focus on the nearest one. This is OP target Agreement @1.1420 with two different Fib levels, accompanied by a daily overbought area.
eur_d_03_01_22.png


Intraday

On the 4H time frame trend has turned bullish as well. Price hits 1.27 butterfly target slightly washing out the previous top here. As we've said earlier - as the butterfly is formed already, EUR in no way should drop below the right wing's lows. Now the logic stands the same - as the price has started upside action, it has to keep it. It means that EUR should keep forming higher lows and higher highs and remain above 1.13 area. Otherwise, a bearish reversal swing will be formed.
Acceleration to 1.27 target looks nice, so, it let us count on 1.618 continuation that agrees daily OP after technical pullback:

eur_4h_03_01_22.png

On the 1H chart, we could see that an area between 1.1315-1.1340 is full of Fib levels of different scales and holds few K-support areas. It seems that 1.1335-1.1340 is the primary area for entry consideration. Also, we wouldn't discount the nearest 1.1354 level as it might be the B&B "Buy". In general, it makes sense to consider not too deep retracement, because upward action just has started and few deep retracements recently have happened. On a way up, when the price is tending to OP - it should not be too deep pullbacks, especially, when COP is passed already. This is the reason why we do not consider dropping to the 1.1315 support area. Vital area, as we've said above - 1.13 lows.
eur_1h_03_01_22.png
 

Vokin

Private, 1st Class
Messages
25
Hi Siv,
is it also possible that the pressure on the ECB will increase somewhat in connection with the appointment of the new BUBA president? (The Bundesbank is one of the big players at the forefront of EU pricing policy).
 

Sive Morten

Special Consultant to the FPA
Messages
16,103
Hi Siv,
is it also possible that the pressure on the ECB will increase somewhat in connection with the appointment of the new BUBA president? (The Bundesbank is one of the big players at the forefront of EU pricing policy).

Hi mate, well, who knows... In general, now many Heads of local Banks criticize ECB for its dovish standing - Germany, Portugal, and some others. But I do not see that it has any feasible effect. Thus, if BuBa Head will be replaced - it is a question still, whether it makes any impact.
 

Sive Morten

Special Consultant to the FPA
Messages
16,103
Morning guys,

So, the glory of the bulls hasn't lasted too long with yesterday's dramatic collapse. Still, although drop was really impressive and now short-term bullish context stands at the edge - we should not to overvalue this drop. In fact, this is the attempt to shake the boat while we do not have new statistics and Omicron impact is still unclear, and until Fed keeps silent until the March meeting. So, big whales trying to play with fears.
Thus, the recent collapse on Gold and EUR is easy to explain - 10 year US rates have jumped above 1.6% and the dollar has strengthened.

As a result, we've got the drop. Although our long-term view stands in favor of the USD, we still have hoped that EUR is able to complete at least a minor upside bounce. Now, this scenario stands at the edge. We do not consider taking the new long position today and wait for a more bullish context. Thus, on a daily chart it makes sense to wait for bullish grabbers, as the price starts flirting with the MACD:
eur_d_04_01_22.png


On the 4H chart, price has dropped to a major support cluster, which is a second factor for the bullish context. Because downside break leaves us without grabbers, and here downside reversal swing will be formed. In this case, we should be ready for a drop to the lows and downside continuation with our major scenario...
eur_4h_04_01_22.png


On 1H chart price completes XOP and stands near ultimate butterfly extension of 1.1275 area. Thus, here we could keep an eye on appearing of some bullish reversal pattern, such as a butterfly:
eur_1h_04_01_22.png


Thus, the combination of the daily grabber, major support area, and bullish reversal pattern on the 1H chart could give us a more or less suitable bullish context that if not lead to a bullish reversal but at least provides a relatively safe background for a long entry.
 

Sive Morten

Special Consultant to the FPA
Messages
16,103
Morning everybody,

So, it seems that EUR is trying to stabilize around 1.1275 support area and we've got two points of three ones that we've discussed yesterday.

First is daily bullish grabber has been formed:
eur_d_05_01_22.png


Second - market is still coiling around solid support area on 4H chart:
eur_4h_05_01_22.png


Downside targets have been completed, as well as our minor butterfly pattern. But the problem is we do not have a clear bullish reversal pattern here by far. Only some choppy action around. Thus, it seems that the only option is to either trade daily grabber directly, by taking a position here with the stops below the lows or wait for the pattern on the 1H chart to get more confidence, which is everyone should make their own decision what is better.
eur_1h_05_01_22.png
 

Sive Morten

Special Consultant to the FPA
Messages
16,103
Morning everybody,

So, despite that pullback to 1.1345 has happened but it brings no happy to the bulls because our suspect on intraday H&S is confirmed. although formally daily bullish context is not failed yet, but it seems that this is just a question of time, and there are two reasons for that.

First is - recent hawkish Fed minutes protocol that doesn't exclude chance of faster action from the Fed. As a result we see bearish signals across the board - many currencies, gold and stocks... EUR, in general, has weaker position now compares to all other majors, so, it should start dropping earlier than the others.

Second - geopolitical tensions in Kazakhstan. At first glance, it seems that this is a minor event as Kazakhstan is a small country and has no significant geopolitical position. But, the problem is that it has military conflict, Baikonur spaceport stands on their territory which is a strategic objective. Finally, some military analysts suppose that military tensions around Ukraine and events in Kazakhstan are the parts of the same chain and response to Russia's initiative to limit NATO expansion setting some strict conditions in December (you should have heard about it). Ruble by the way has dropped strongly in the last 2 days. So, somehow I suspect that this turmoil hardly finishes easily. This is also potentially dollar-supportive action.

That's being said, on the daily chart - bullish context has not failed yet. But we have no intention of trying to trade it again, as EUR was not able to utilize recent bullish drivers and dropped. Besides, today we also could get bearish grabber instead:
eur_d_06_01_22.png


On 4H chart now it is easy to recognize of H&S shape.
eur_4h_06_01_22.png


It seems that on the 1H chart we could get a big AB-CD pattern back to the lows, which in fact, could become the reversal point leading to the continuation of the downside tendency. Especially with the anticipation of higher nominal interest rates
eur_1h_06_01_22.png
 

Sive Morten

Special Consultant to the FPA
Messages
16,103
...and Master Sive, I still have that dollar smile in the back of my head.
Hi mate. Yep, I also, when I see any dollar boost, especially for some fundamental reasons, I recall about it. In general, the pullback that we thought could happen on EUR appears to be less than it has seemed initially.
 
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