Forex FOREX PRO WEEKLY, January 11 - 15, 2021

Sive Morten

Special Consultant to the FPA
Messages
14,236
Fundamentals

So, we've got few important events of different kind right on 1st week of the new year. First is, Georgia elections and unrests around final Congress decision, CV19 difficult situation and NFP data of course.

The dollar started the new year by slipping broadly on Monday as investors sold it for just about everything else in the Asia session, wagering the world's pandemic recovery will drive other currencies higher.

"I think he market is still in this look-through mood," said Bank of Singapore currency analyst Moh Siong Sim. People are looking through pockets of bad news, and the virus resurgence, because of a few things that are supportive," he said, chiefly referring to the vaccine rollout but also mentioning U.S. stimulus and the Brexit trade deal.

Low U.S. interest rates, massive U.S. budget and trade deficits and a belief that rebounding world trade will drive non-dollar currencies higher have set the dollar on a downward course that has gathered pace as more investors piled in.

The dollar hit its lowest level in nearly three years on Wednesday, with markets pricing in a Democrat win in the U.S. Senate election in Georgia that would pave the way for a larger fiscal stimulus package and fuel currency market risk appetite. Democrats won one hotly contested U.S. Senate race in Georgia and pulled ahead in the second by 1200 GMT, edging closer to control of the chamber. Analysts generally assume a Democrat-controlled Senate would be positive for economic growth globally and thus for most riskier assets, but negative for bonds and the dollar as the U.S. budget and trade deficits swell even further.

“The reaction pattern is along the lines of what we were originally expecting if we had seen a Blue wave scenario in the original November (U.S. presidential) election,” said Saxo Bank’s head of FX strategy, John Hardy. “It’s still a pretty tough environment to do stimulus and to do legislation but it’s much more possible than if there was no majority there for the Democrats,” he said.

Hardy said that although the increased likelihood of U.S. fiscal stimulus is in line with expectations for dollar weakness, if the recent rise in U.S. Treasury yields continues, then that could curtail the dollar’s ability to fall in the longer term.

“We had not assumed Democrat victories in these elections and hence some revisions weaker to the extent of USD weakness we expect this year may be warranted,” Derek Halpenny, head of research at MUFG, wrote in a note to clients. “We currently tentatively are targeting 1.2800 for EUR/USD by year-end,” he added.

But Elsa Lignos, global head of FX strategy at RBC Capital Markets said that she disagreed with the market consensus that U.S. fiscal stimulus is “risk-on” and therefore dollar-negative. Instead, she said, big infrastructure spending in the U.S. would strengthen the dollar, particular against non-commodity producing developed market currencies.

Currency markets were largely unperturbed by scenes of chaos in Washington as supporters of outgoing President Donald Trump stormed Capitol Hill. Analysts generally assume a Democrat-controlled Senate would be a net positive for economic growth globally and thus for most risk assets, but negative for bonds and the dollar as the U.S. budget and trade deficits may widen further.

"The dollar will remain weaker against commodity currencies like the Aussie and emerging market currencies," which benefit when risk sentiment is positive, he said.
At the same time, "higher Treasury yields should benefit the dollar against the euro and the yen, because the dollar has underpriced the potential for U.S economic recovery under Biden."

"With Brexit now behind us, we are starting to leg into short-GBP positions," TD Securities strategists Mazen Issa and Ned Rumpeltin wrote in an update of their FX model portfolio dated Jan. 6. With the USD still trading on a uniformly weak footing, however, ... we look to AUD and JPY to express GBP caution."


The dollar rebounded from levels not seen since March 2018 to its highest in a week on Thursday, on the potential for an economic rebound and profit-taking by investors who had been betting on the euro. The certification of Biden's victory has raised expectations for more fiscal stimulus measures to bolster the economic outlook and pushed longer-dated bond yields higher, with the benchmark 10-year climbing above 1% on Wednesday for the first time since March.

"Once the rates start to move, as they did yesterday, it wasn’t a big move but it was in the right direction, that is the direction of the future," said Joseph Trevisani, senior analyst at FXStreet.com. It’s debatable on how long it is going to take for the vaccines to work and hopefully end the pandemic but once that happens you are going to get a much stronger U.S. recovery and that will lead to a stronger dollar."

A dismal December U.S. payrolls raised expectations for further stimulus measures to prop up an economy battered by the coronavirus and its related government lockdown measures. The Labor Department said nonfarm payrolls decreased by 140,000 in December, the first decline in eight months, well below expectations that called for a still-weak increase of 71,000 jobs. The unemployment rate was 6.7%. Economic data during the week leading up to Friday’s report indicated a stalling labor market.

“You would’ve thought you would get a number like this, and you would say to yourself here comes that downward pressure or weakness into play and, lo and behold, the market says you’re not right, we are going to go a little bit stronger,” said JB Mackenzie, Managing Director for Futures & Forex at TD Ameritrade in Chicago. You do have some expectations priced into the dollar of increased stimulus coming through, obviously the new presidency coming in as well, so expectations got priced in right off the bat so that is why you are seeing it holding.”

U.S. President-elect Joe Biden said the jobs report shows Americans needed more immediate relief now and that taking action now would help the economy even with deficit financing, including $2,000 stimulus checks. The Democrats’ Senate seat wins give Biden latitude to push through more spending, which some analysts predict will fuel risk appetite and be negative for bonds and the dollar, although a strongly bearish consensus outlook for the greenback at the end of 2020 has eased somewhat.

Biden’s initial plan was for a bill under $1 trillion but he said on Friday that “economic research confirms that with conditions like the crisis today, especially with such low interest rates, taking immediate action - even with deficit financing - is going to help the economy.”

Speaking to reporters as he announced his nominees to head the Commerce and Labor departments, the president-elect said action was needed to help Americans get to the other side of the health and economic crisis, and to “avoid a broader economic cost that exists out there, that will happen due to long term unemployment, hunger, homelessness and business failings.”

Biden’s transition team also said on Friday that they are looking into other economic relief actions they can take unilaterally, including extending a pause on repayments of federal student loans. Biden said he would unveil the plan on Thursday.

U.S. Treasury yields on the longer end of a steepening curve rose on Friday after a plunge in payrolls last month raised the prospect of more federal spending to aid the coronavirus-battered economy. The further jump in yields came as stocks eked out new record highs, highlighting the risk-on sentiment that has sucked money out of bonds in anticipation of yet-higher yields.

“The market is going to look at (the report) and say there’s going to be more fiscal stimulus," said Steven Ricchiuto, U.S. chief economist at Mizuho Securities USA LLC in New York. "You’re going to have the 10-year Treasury note push up to higher yields."

The market was also weighing comments this week by U.S. Federal Reserve officials regarding the central bank's bond buying program. Fed Vice Chair Richard Clarida said on Friday that any changes are "well down the road," and that he expects the current pace of bond purchases to remain in place at least through this year.

The most watched part of the yield curve, which measures the gap between yields on two- and 10-year Treasury notes , reached its widest level since May 2017 at 98.49 basis points.

10-year US yields has risen more than 2 times since August and around 25% within recent three days:
1610183624477.png



Virus update

Two new ‘variants of concern’ (VOCs) of the virus that causes COVID-19 have emerged — one in the UK and one in South Africa. There is no evidence yet to suggest that they are more likely to cause serious disease, but both are thought to be 50% – 70% more transmissible. New cases are drifting higher in Europe, driven by rapid growth in the UK, and are rising in sub-Saharan Africa too. In response, the UK has today entered nationwide lockdown, while other countries in Europe are tightening restrictions. What is the likely economic impact? Fathom consulting projected that global GDP would be broadly flat through 2020 Q4 and 2021 Q1, before rebounding sharply from Q2. A sharp contraction in UK GDP in the first quarter of this year now seems inevitable. Smaller contractions may be seen in other countries, depending on how far they can prevent the new variants from talking hold. However, so long as fiscal support packages keep pace with tougher lockdowns, our expectation of a strong rebound in global economic activity, once the most vulnerable have been vaccinated, remains in place. Indeed, after an even longer period of reduced economic activity, and with even higher savings balances, the pace of the turnaround, and the associated risk of a sharp inflation pick-up, may be even greater than we had imagined back in November.
1610186288863.png

The United Kingdom recorded its highest daily death toll on Friday since the start of the COVID-19 pandemic as London declared a major incident, warning that its hospitals were at risk of being overwhelmed. With a highly transmissable new variant of the virus surging across Britain, Prime Minister Boris Johnson has shuttered the economy and is rushing out vaccines faster than the country’s European neighbours in a bid to stem the pandemic.

“Our hospitals are under more pressure than at any other time since the start of the pandemic, and infection rates across the entire country continue to soar at an alarming rate,” Johnson said in a statement. The NHS (National Health Service) is under severe strain and we must take action to protect it, both so our doctors and nurses can continue to save lives and so they can vaccinate as many people as possible as quickly as we can.”

A further 68,053 COVID-19 cases were reported - also a new daily high - meaning almost three million people have now tested positive for the disease in the United Kingdom, which has a total population of around 67 million.

London Mayor Sadiq Khan, from the opposition Labour Party, said hospital beds in the capital would run out within the next few weeks because the spread of the virus was “out of control”.

Britain, the first country to approve vaccines made by Pfizer/BioNTech and AstraZeneca, on Friday approved Moderna’s shot, which it hopes to begin administering this spring. It also agreed to purchase an additional 10 million Moderna doses. However, transport minister Grant Shapps said there were fears that some vaccines might not work properly against a highly contagious variant of the coronavirus that has emerged in South Africa.

“This is a very big concern for the scientists,” he told LBC radio.

A laboratory study by the U.S. drugmaker Pfizer, not yet peer-reviewed, indicated that the vaccine it is making, developed by Germany’s BioNTech, does work against one key mutation in the new variants found in Britain and South Africa.

Next week major topics

Investors will get a snapshot of how the economy is performing next week with the release of data on inflation, retail sales and consumer sentiment.

One trade is gripping markets in the early days of 2021: reflation - nowhere more evident than in bonds, where U.S. 10-year Treasury yields topped 1% on Georgia’s Senate runoff results. Betting on a fiscal boost under President-elect Joe Biden, investors pushed the 10-year TIPS breakeven inflation rate above 2% for the first time since 2018. Euro zone long-term inflation expectations are near one-year highs.

But COVID-19 is raging and economies gripped with stricter economic lockdowns and fast-spreading variants. Can a pick-up in prices be sustained? Euro zone December inflation was unchanged at -0.3%, pulling the bloc’s bond yields back down. Only one side of the reflation debate will be proved right.

1610187212557.png


Global merchandise trade will rebound by 7.2% in 2021 after shrinking by a tenth last year, the World Trade Organisation predicts. The uptick is already evident in shipping rates, container traffic volumes and freight indexes.

Recent data bode well. U.S. imports are almost back to pre-crisis levels, German November exports rose for the seventh straight month and Taiwan’s December exports hit record highs. Figures from China on Thursday and the euro zone on Friday will show how their trade fared towards the end of 2020.

Pandemic-related medical gear and goods linked to remote working dominate exports. Chip sales have led export growth in bellwether South Korea. This has also upped demand for copper, iron and other raw materials, benefiting African and South American exporters.

Good news for global GDP, which is closely linked to trade and forecast to expand by more than 5% this year.
1610187520208.png



As usual, let's try to make some conclusions from all this stuff. With a lot of important events on the back, such as US elections, Brexit and others, there are new important drivers on the horizon. First is, we are not occasionally pay a lot of attention to inflation. Previously, we've taken in depth analysis on this subject and have a concern on the pace, as inflation in all times is a major driver with all other tools twisting around it. And this driver starts to show different dynamic compares to what we've expected initially. The rising of inflation per se is not the surprise to us, as our strategy includes this, but the surprise stands with the term as it starts rising earlier, compares to our expectations.
Currently it is not clear yet, whether this is emotional reaction on Biden's victory, or starting of a new stage in global finance. But, as yields start to rise since August - hardly it is due emotions. This is decisive moment and it could mean that US dollar weakness ends faster than we thought initially. Have you thought about recent NFP report - why with "-140K" on a back US Dollar jumped strongly? Because of inflation. Investors watch not on "-140" but on hourly earnings that has dropped above 5% on a background of rising unemployment and decrease of average working hours. This is inflation and it is rising already. And rising inflation means higher interesting rates. Higher rates, in turn, means more attractive US assets as they generate higher interest and this, in turn, leads to higher carry trade and greater demand for the currency with higher interest rate. Thus, circle is closed. This is the reason why US Dollar plays back the lost positions.
Of course, the long trades need time to be broken and rally on EUR doesn't end immediately and surprisingly. But the first bell is rung already. With more stimulus from the Biden and Yellen, this tendency should enforce. But, simultaneously the corporate and public spending and consumption should start rising as well, accelerating US economy recovery. As rates remains low until 2-2.5% anticipated inflation level, we're entering in a stage of "disinflationary growth" when official rates level remains low while inflationary pressure rising.
This view makes us to take more careful look on perspective of EUR rally. Still as changes should come relatively slow, and US data is expected to be poor in nearest two quarters, we still keep our view on 1.28-1.30 level on EUR by far, as EU also could provide more stimulus, trying to boost inflation as well. But, closer to the summer, the dollar appreciation should become visible and upside tendency might be over. Depending on US measures on pandemic struggle in nearest time and vaccination performance this process could accelerate or be delayed.

Another risk factor that we see that indirectly impacts EU - Scotland elections in May. As Scotland initially was against Brexit, we see high risk of UK breakdown and Scoxit within two years out of GB, setting direct relations with EU or maybe becoming the member again. This this risks in mind, hardly any serious GBP appreciation possible until the summer.

Technicals

Monthly

So, first week of 2021 shows that EUR feels some resistance pressure as it is entering zone of 1.25 Fib level and natural support/resistance area. Trend is bullish here, market is not at overbought. 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.

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.

eur_m_11_01_21.png


Weekly

Weekly chart shows that our trading range is even smaller as 1.16 lows stand outside of weekly oversall area. In fact, trading range for us is limited with 1.19 area where we have strong K-support area and oversold level. This is a kind of "floor" to price action within few weeks probably.

Still, weekly chart has few tricky moments. Our XOP target around 1.2440 has not been reached still, but market shows real problems with upward action and stuck around the top of candlestick pattern, with no ability to break it up. MACD trend stands bullish by far, but once it turns bearish, we get divergence. It could mean that XOP could be reached later, after retracement takes place. The recent tops are crucially important to EUR as it has to break them up to prove ability to hit XOP target. While it stands below it, upward continuation is doubtful and chances on deeper retracement holds. Also do not forget about H&S pattern that might be formed here as well:
eur_w_11_01_21.png


Daily

NFP data on Friday has bought adjustment to price action. Once EUR has hit predefined support areas on intraday chart, the way how this has happened makes us to wait for clarity and confirmation of market's ability to turn up again, as this is not obvious right now. Daily grabbers has worked as price drops below recent lows, forming reversal swing with price out of the channel.

Trend stands bearish here and overall situation makes us to consider deeper retracement, at least to the levels above daily oversold area - 1.2115 first and 1.20 K-area second. IT means that there are just two options for the bulls - use Stop "Buy" entry above the top and wait for bullish signals around support areas. Bearish trades area possible only on intraday charts by far, if get any patterns.
eur_d_11_01_21.png


Intraday

Here, on 4H chart we do not have something special. Trend stands bearish. Potentially we could suggest appearing of 1.27 H&S pattern, if EUR shows deep upside pullback to 1.23 area. Local support is 1.2170 - 1.2186:

eur_4h_11_01_21.png


Hence, on 1H chart, as price hits our predefined XOP target as well, we could focus on possible upside pullback first, and check H&S scenario on 4H chart. Here we see signs of minor reverse H&S as well. So, we could start with it first and see then, whether it pushed price higher or just become a part of retracement to 1.2290 level.
eur_1h_11_01_21.png
 

RahmanSL

Major
Messages
2,579
Don't know how you do it Sive, but it can't be easy to balance Fundamentals with Technical analysis. But still, pretty good & impressive analysis all round

However, with 45% of Traders Bullish, 44% Bearish, and 11% Sideways on EUR/USD, we might as well toss a coin and call whatever turns up because there will be winners & losers and everybody is correct and incorrect at some point.

All the best and stay safe!
 

Sive Morten

Special Consultant to the FPA
Messages
14,236
Morning everybody,

So our potential trading setup stands in place. As you could see on daily chart - price hits Fib support + oversold level that results in DiNapoli bullish "Stretch" pattern, suggesting either upward continuation or meaningful bounce:
eur_d_12_01_21.png


On 4H chart, if deeper downside retracement follows, we could get H&S pattern. It means that bounce could be ~100 pips from current level, where potentially the top of right arm should be:
eur_4h_12_01_21.png


On 1H chart everything stands good as well, concerning preparation to the trade, as price has completed AB=CD target that means that we're at Agreement support and daily oversold level. The only problem here, is that we do not have clear bullish pattern yet. I was able to find only puny "222" Buy. Still, as we have good context overall, it is possible to take part of the position now and then add more when more bullish signs or patterns appear. Initial stop supposedly should be below 1.2120 area:
eur_1h_12_01_21.png
 

Sive Morten

Special Consultant to the FPA
Messages
14,236
Morning everybody,

So, we keep going with our intraday setup on EUR. Yesterday we've discussed DiNapoli daily bullish "Stretch" pattern and suggested upside bounce. Today, on daily chart recent upside action provides daily bullish engulfing pattern. This is good to us as it increases chances on second swing up on intraday charts, as engulfing usually takes AB-CD shape:
eur_d_13_01_21.png


Meantime EUR hits K-resistance area on 4H chart suggesting downside pullback, that could become our BC leg. It means that if you haven't taken position yesterday - you could consider long entry from one of the Fib support levels today. Others, who have position already could move stops to breakeven.

Since we consider possible H&S pattern here, our upside target stands at 5/8 Fib level around 1.2265.
eur_4h_13_01_21.png


On 1H chart we have two levels as potential retracement target:
eur_1h_13_01_21.png
 

knight270

Private
Messages
22
Morning everybody,

So, we keep going with our intraday setup on EUR. Yesterday we've discussed DiNapoli daily bullish "Stretch" pattern and suggested upside bounce. Today, on daily chart recent upside action provides daily bullish engulfing pattern. This is good to us as it increases chances on second swing up on intraday charts, as engulfing usually takes AB-CD shape:
View attachment 61082

Meantime EUR hits K-resistance area on 4H chart suggesting downside pullback, that could become our BC leg. It means that if you haven't taken position yesterday - you could consider long entry from one of the Fib support levels today. Others, who have position already could move stops to breakeven.

Since we consider possible H&S pattern here, our upside target stands at 5/8 Fib level around 1.2265.
View attachment 61083

On 1H chart we have two levels as potential retracement target:
View attachment 61084
Thanks a lot Sive! Make profit from the first AB leg, thanks to your yesterday analysis, TP at the current 38.2Fib level. Will assess the BC leg like you said for another opportunity to ride the CD leg to 1.2265. Cheers
 

Sive Morten

Special Consultant to the FPA
Messages
14,236
Morning guys,

So, EUR was not able to proceed with our plan, breaking all tactic Fib support levels and dropping back to the lows. It means that bearish pressure either stronger or growing. The divergence of the price action with our trading plan is a great stuff as it gives you early evidence that changings come to the market and in the sentiment. As a result, we do not consider right now taking long position for awhile.

Here price action is taking the shape of the flag pattern, that could mean another drop to the next level - 1.20-1.2063, a bit wide K-support area around former top:
eur_d_14_01_21.png


Despite that we have bullish grabber right now on the 4H chart - it is too week bullish context. You could try it if you like to, but this will be mostly the bet on luck rather some reasonable decision. Here we also do not consider H&S pattern any more, at least currently. Only price return back to 5/8 resistance and forming of right arm could make it reasonable again:
eur_4h_14_01_21.png


So, as chances on downside continuation increase, lets see what shape price could take. As it might go to strong daily support, some bounce out there should happen. It means that here, on 1H chart reversal pattern could be formed and potential butterfly fits well to this task. Its target agrees as with XOP as with daily K-support. As a result, we could focus on this pattern by far and see what will happen within session or two. Potentially it might be few different trades - short position with the butterfly and stops above its top, Stop "Sell" entry with the breakout of "X" lows. For the bulls I do not see currently good scenario and we need to get more signs that market is still bullish, which currently doesn't look so:

eur_1h_14_01_21.png
 

Sive Morten

Special Consultant to the FPA
Messages
14,236
Morning guys,

we have very small changes today. As we've suggested EUR ticked down, but it tries to stay above the support area, forming the wash & rinse of intraday lows. Thus, bulls are trying to keep chances for upward bounce, at least theoretical ones. But despite these efforts bullish context look insufficient and weak by far, which makes us stay aside of any long position for now:
eur_d_15_01_21.png


To keep bullish chances price has to stay inside the W&R Bullish engulfing pattern and start to climb higher. Theoretically it is possible to take the bet on luck, as we have engulfing and W&R, risk is small, just around 30 pips (invalidation point is the low of the pattern), but this is more the gambling in current circumstance, I suppose.
eur_4h_15_01_21.png


If somehow EUR will be able to proceed higher - the nearest destination is the top of the daily flag, around 1.22 area. Price is forming puny H&S here and already stands at 5/8 Fib level. So it has to keep standing above it and start upward action to keep this scenario. Conversely, in a case of drop back to the lows - it just confirms our general view on situation
eur_1h_15_01_21.png
 
Top