Forex FOREX PRO WEEKLY, January 16 - 20, 2023

Sive Morten

Special Consultant to the FPA

So, the epic event of this week is no doubts the CPI report. The majority has treated results as positive. Indeed, numbers show inflation decreasing. But the most important thing was to assess the impact of less aggressive rate change. If you remember, Fed has raised rate only for 0.5% and many experts worry that it could push inflation rate up again. But, it seems it was harmless for CPI numbers, and supposedly this also has added more optimism. Still, it is not everything as simple as it stands in report.

CPI breakdown

Here is the major components of report. Mostly analysts were watching on few components. Nominal inflation remains at 6.5%, showing drop for 0.1%. Many analysts talks about shelter component, arguing that it is lagging behind real inflation and keep going lower, but now it is artificially keeps inflation at high levels. If you take a look at data excluding shelter - US shows even deflation and this sparks a furore when data has been released. Many analysts now are sure that inflation in reality even lower than it was showing in report and shelter effect is temporal and economy stands at the edge of the recovery. We disagree. Not about shelter component, but about recovery. You can't judge on economy conditions just based on single CPI report. Besides, it is interesting what PPI data we will get next week.

By our view most reliable analysis has to be made on core Inflation. Core inflation in the US increased by 0.3% mom, and the main contribution to the growth of inflation is provided by rent, which contributed 0.26% to core inflation, respectively, all other categories of goods and services have practically not changed in price. Over the year, rent increased by 7.5% and contributed 2.47 percentage points to the total inflation, which amounted to 6.42%.

The growth rate for food is still high - 11.8% YoY and not so far from the peak rate of 13.5%. Food and beverages: plus 0.044 percentage points of the contribution for the month and 1.48 percentage points for the year. However, the fall in wholesale prices for agricultural products may slow down price growth in 2023.

As we've mentioned medical care up from 7.6 to 8% and all other services ex. rent and shelter were up to 7.4% from 7.3%

What are prices rising for? For services with low added value, where salaries are low and there is a high shortage of personnel. This is public catering, where there is practically no slowdown – growth by 8.3% yoy, culture, sports and entertainment with an acceleration in price growth of over 5% (a record!), other goods and household services are growing by 7% without slowing down.

That's being said In 2023, high inflation will persist in services.

Another important conclusion that we could make is converging of CPI and core CPI. It means that energy (and some others) inflation outbreaks are gradually fading by different reasons - normalizing of logistics, global economy slowdown and decreasing of demand etc., and nominal inflation is coming to the core inflation, which reflects the structural component. We expect that core inflation remains more or less stable around 5% for long term, just because it has non-monetary nature and can't be decreased by rate hike.

Speaking about economy growth - review our last FX market report where we've discussed job market and showed that its conditions doesn't correspond to growth economy situation. Those who are so positive should take a look at small business sentiment chart, that absolutely doesn't take an idea of positive and coming US economy growth - United States Nfib Business Optimism Index very close to 10 years bottom:


Another really scaring moment is massive drop of industrial production in Turkey. As it is export-oriented economy, the drop of production tells that they have problems with export. Second - huge drop of import and especially export from China:
China Exports YoY

China Import YoY

This looks painful, especially because this is annual data.

Here is how world's famous economist, M. Hazin explains this phenomenon:

Let's add another fly in the ointment to the barrel of honey, which is demonstrated by official "expert" publications. For the first time in many months, the number of initial claims in December decreased to 205,000 (in November it was 206,000), despite the fact that the forecast was negative (215K). But we have noted many times that labor statistics in the United States, more precisely, its main indicators, are subject to serious distortions. But no one publicly discusses the indicator of the length of the working week, in connection with which he can be trusted more.

The length of the working week in December (seasonally adjusted, data from January 6) decreased to 34.3 hours compared to 34.4 in November. At the same time, forecasts were promising growth to 34.5. Normally, employers tend to increase the load on existing staff rather than recruit new ones, therefore, at the beginning of the period of economic growth (which, as Fed officials hint, is about to begin or even has already begun), the length of the working week should increase. If it falls, it means that stagnation continues, and quite strong, since the length of the working week is a very conservative indicator.

Further, many interpret the decline in inflation as a positive signal, the reaction of the economy to the monetary policy of the authorities. And indeed, the effect is clearly visible in the graph below for the EU:

The trouble is such a positive effect, both in the US and in the EU, is associated with a drop in aggregate demand (sales volume). Sellers of any product in such a situation begin to reduce prices in order to maintain sales volumes. For the EU, this is even more important because serious de-industrialization is beginning in the region. When large consumers fall out, it is inevitably necessary to reduce margins (recall that intermediaries receive the main profit from gas sales in the EU).

ICE Natural Gas EU prices (MW/h):

At the same time, the cost of credit is growing, this is very clearly seen on card loans in the USA:


And anyway, the wage real growth is lagging behind CPI numbers. The decline of households prosperity continues. And this is one of the big reasons why Fed will hike again on 1st of February meeting.


Here, by the way, the same law is perfectly working but in the opposite direction: an increase in demand causes an increase in prices (that is, an increase in interest on a loan). Accordingly, very soon, in a few months this will inevitable give a new wave of falling demand, since part of the money that households spend on purchases today, they will be forced to give as payment for a loan:

Since the authorities do not recognize the economic downturn in either the US or the EU, they cannot explain the fall in inflation by a decrease in demand. We estimate the real decline in GDP in the United States by the end of 2022 at 7-8%, and for this reason the monetary component of inflation should be reduced not only because of the tightening, but also because of a direct and obvious drop in demand.

At the same time, the structural component of inflation (associated with an increase in the cost of production of goods and services) does not depend on a drop in demand in any way. Because it is no matter how much demand drops - you anywhere will not sell with a loss. You have to get profit on your business - this is a market economy. For example, in some spheres with big added value, such as gas re-sale, the price drop is possible, as re-sellers get tens or even hundreds of percents.

But with low added value industries, such as trade and service, this is almost impossible. Accordingly, it is possible to hope for a serious drop in inflation from current values only in a situation of a sharp decline in demand (i.e. GDP), since in this case the structure of demand will change greatly towards the cheapest products. And sector of cheap goods will grow due to the collapse of more expensive (and high-quality) goods and services. That is the core of structural crisis - total restructure of economy model - the production cycle, logistics, goods nomenclature, markets orientation etc.

Finally, we should mention some tricky political moments. They are not dominant but still, have played some role I suppose.

If inflation would had risen relative to November, it would have been necessary to sharply raise the rate, which would have jeopardized the financial markets (they do not like" rate increases), and would have given "trump" (!!! LOL) cards to the Republicans, who took control of the House. And Biden's announcement that he wants to run for the presidency again would not look very successful.

Let's see what Powell said in a speech prepared for the forum under the auspices of the Swedish Riksbank, before the inflation data were announced, but, of course, already knowing them:

"Restoring price stability when inflation is high may require measures that are unpopular in the near term, as we raise rates to slow down the economy. The lack of direct control of politicians over our decisions allows us to take the necessary measures without looking at short-term political factors."

In other words, he immediately "excused himself" from possible accusations of political bias. But let's face it: it is very likely that the indicators for consumer inflation were specially embellished, proceeding precisely from political expediency! Note that there is no data on PPI inflation yet, they will be next week. Maybe they will somehow clarify the situation. But the overall picture in the US economy is not rosy at all.


First is - hopefully you enjoy that this report is shorter than usual (LOL) :)

Seriously speaking, we do not take an idea of mass celebration and inspiration around stable CPI numbers. We suggest that markets follow to wishful thinking as everybody were waiting fruits of rate hike for too long and are tired from crisis looming. Other words, it seems more like some psychological factor and reaction rather then real matching to the data. Markets reaction looks too optimistic.

Additionally, we should mention the purely calculation effect here. First is next month CPI will calculate on different basis, formulae will change. Second - as we will go further into 2023 as more high inflation months will exclude from YoY moving data, which will lead to decreasing effect of nominal number of CPI index. For example, recent data doesn't include already December 2021, where was big jump in inflation, which makes CPI smoother and closer to an average annual level.

If rally doesn't exhaust in near term, then it will be painful collapse in near future, when Fed steps and statistics put everything in its proper place. Mismatches are massive and well visible, so it becomes even more surprising of current market reaction. Job market performance doesn't correspond to the growth pattern of economy, sentiment is strongly negative in all countries and all spheres - just take a look PMI and Sentiment indicators. Inflation remains stable, with rising of Core inflation after the year of interest rate hiking.

We consider current EUR rally as temporal, on a background weak economy, rising political tensions, exhausting of Fed reserves and coming unavoidable collapse of stock markets - demand for safe haven, which is a US dollar by far, should be triggered sooner rather than later. Although we do not exclude that EUR could reach next strong resistance level of 1.10-1.1050 in near term.

Monthly trend stands bullish, price has broken through K-resistance and new YPP, but now it comes to another barrier - monthly overbought around 1.0980, 50% Fib level of 1.1050 and all-time trend line since 1998. If our fundamental view is correct, this is an area where EUR rally could meet the serious challenge.



Here we're also mostly concerned by Overbought level - it stands around 1.1050 level for now. EUR could start getting problems already around 1.0925 - first 50% resistance. Another interesting combination is major 5/8 Fib level of 1.1275 and unfilled gap. It is early to speak about it, but should keep this in mind...



Here is few moments that we need to keep an eye on. General context stands bullish - we 're not at overbought, MACD is up and we do not have any bearish directional patterns. At the same time, no clear continuation patterns as well. Soon EUR should hold a test of 1.0895-1.09 resistance area. Since this is 1.618 extension of recent retracement, potentially it might be H&S pattern. This is one of the patterns that we need to keep an eye on.

Alternatively, market could show retracement to one of the levels and keep going higher to OP @1.0790.
Here we exclude all level below daily oversold and take in consideration only 1.0720, 1.0630 K -area and 1.0470 - 1.0511.

1.0720 is also important because it is broken weekly K-area. Optimally, bullish market should re-test it and keep going higher. Downside breakout of this level suggests deeper retracement, and chances for H&S will increase:


Here we have two extension targets - 1.0750 and 1.07, that mostly rely to nearest 1.0720 daily support area. So, let's start with them and depending on market performance then decide what to do next:

Morning everybody,

So, markets stand quiet either because of PPI waiting or just aware of coming debt ceil and due MLK holiday. Although we haven't mentioned monthly B&B in recent few weeks - this setup is potentially valid. What is interesting, that January is a 3rd month above 3x3 DMA, and it is last month when B&B could start, at least based on strict rules.

So, we have to keep an eye on any bearish signs. Besides, 1.10-1.1050 area stands relatively close. Meantime on daily chart we do not have yet any signs of weakness. That's why we still should either wait for patterns or wait, at least for deeper retracement:

4H trend has turned bearish, although price action is not quite. Still, First area that makes sense to consider is 1.0720 support - Fib level, natural support zone and former weekly K-resistance level. Maybe some patterns will be formed as well...
Morning guys,

Market shows mixed action today. While EUR, JPY are moving down, showing some strength in USD, some others - GBP, NZD are showing solid upside action. BTW, on NZD it is interesting daily picture, which hardly suggest and dollar strength now.

Supposedly, markets wait for confirmation from PPI and Retail Sales today. Besides, banking statement shows poor results. Thus, GS shares has dropped yesterday for ~7%. This also supports market suggestion on sooner Fed easing.

On EUR we're going with our plan and watching for the same 1.0720-1.0750 support area, where it could turn up again. At least currently we do not see any clear bearish action. Retracement is very slow and choppy.
Greetings everybody,

So, recent Retail Sales has spooked investors a bit, triggering some demand for USD. It seems that somebody have understand that we're still could turn to economy decrease and -1.1% sales hint that we're probably not in a growing economy. Still, reaction was relatively shy.

EUR still shows no clear patterns. Daily trend is bullish, so bears again have nothing to do by far. Bulls have to watch for bullish grabber here by the end of the session. It could improve the context that we have:

4H chart shows big volatility, forming widening triangle pattern. Inside we have bearish reversal bar and big "Evening star" pattern, potentially it could mean deeper downside retracement:

At the same time, daily trend remains bullish only until 1.0730 area. And to trade the trend direction we could consider only two nearest standing K-support areas. So, if you want to go long - you could consider 1.0785 and 1.0730 K-support areas. Downside breakout will turn daily trend bearish and context will change. But for now it is still stands bullish:

In general, I wouldn't call charts as super attractive for trading - no patterns, wobbling action, but we have what we do have...
Morning everybody,

It's difficult to make updates this week as market mostly goes nowhere. Range is very narrow. Today, real estate statistics could bring some activity and probably could make investors recall poor Retail Sales, as real estate market stands in clear depression already.

Meantime, EUR still keeps bullish trend, flirting with the MACD. We haven't got grabber yesterday but price once again is very close, so, today it is also possible to get.

On 4H chart we have the same widening triangle with reversal bar (and Evening star) inside. Gold market has jumped above the top and erased all these stuff, while EUR is not. Is it possible AB-CD downside action? Yes. But unfortunately we have not enough technical factors that could let us to answer with more precision, whether it happens or not...

On 1H chart the upside action, that we've discussed within a daily trend is started, but it stands very slow. Still it is possible to move stops to breakeven. For new position taking... well, picture barely has changed, but if you worry about 4H chart picture and real estate statistics, it would be better to do nothing. If you don't - you could try to buy and keep an eye on the grabber. It's appearance should bring some more confidence with upside continuation. But it is obvious guys, that the background for trading is not superb with no patterns and slow wobbling intraday market...