Forex FOREX PRO WEEKLY, January 20 - 24, 2020

Sive Morten

Special Consultant to the FPA
Messages
12,970
Fundamentals

This week was relatively quiet as EUR has not shown superb action, at least till Friday. Actually this was "normal" week - the way of behavior when market is driven by its own factors, some statistics etc., without external shakes. We've got few numbers, mostly for UK and EU and data was not as good as it was expected. Thus, inflation, GDP, Retail sales in UK has dropped. In US data also was not too positive, but on Thursday Retails sales was not bad and that has supported USD. Market has shown anemic reaction on signing of US-China "stage 1" deal...

The pound slipped after data on Monday showed Britain’s economy grew at its weakest annual pace in more than seven years in November.
“The UK story is a reminder that despite what may have been feared earlier, the U.S. remains in solid shape ... whereas the rest of the world’s struggling,” said Win Thin, global head of currency strategy at Brown Brothers Harriman in New York.

Sterling fell on Wednesday after data showed UK inflation rose at its weakest rate in three years, ramping up expectations of a rate cut from the Bank of England at its January meeting. Consumer prices rose at an annual rate of 1.3% in December compared with 1.5% in November, marking the smallest increase since November 2016. This compared with analyst expectations for a rise of 1.5% rise, according to a Reuters poll.
The numbers brought Britain’s currency under further pressure. It has fallen in recent days after several policymakers, including Bank of England governor Mark Carney, hinted they could vote for a rate cut unless economic data improves significantly, raising expectations of a cut at the bank’s Jan. 30 meeting. These expectations increased further with weaker-than-expected economic growth and industrial production data this week.

Money markets are pricing in roughly a 60% chance of a 0.25% cut at the BoE’s January meeting, compared with 49% prior to the inflation reading.

“The number of doves is building and the data is supportive of rate cuts; so it’s a question of at which meeting,” said Kit Juckes, head of FX strategy at Societe Generale.
Prior to the inflation release, BoE interest rate setter Michael Saunders said he was sticking to his view that borrowing costs should be cut because of weakness in Britain’s labour market and its broader economy. “With limited monetary policy space, risk management considerations favour a relatively prompt and aggressive response to downside risks at present,” he said.


Saunders’ view of limited room to adjust policy came in contrast to Carney’s statement last Friday, when he said combining possible interest rate cuts and the prospect of more asset purchases made the BoE’s current armoury the equivalent of cutting the Bank Rate by 2.5 percentage points.

“We expect two more rate cuts from the Bank of England,” said Wouter Sturkenboom, chief investment strategist for EMEA at Northern Trust Asset Management.
“Now that Brexit has been decided, they (BoE policymakers)finally have the political backdrop that allows them to respond to what they should have been responding to earlier in 2019, which is a weak growth and the inflation environment.”


Major currencies mostly shrugged off on Thursday the signing of the Phase-1 trade deal between the United States and China, as most of the issues agreed upon had been expected by investors since the summer. Beijing and Washington touted the Phase 1 deal, signed late on Wednesday at the White House, as a step forward in resolving their bitter trade dispute. U.S. Vice President Mike Pence fed optimism about further progress, saying further Phase 2 discussions had already begun.
Yet market exuberance was checked because much of this was priced in already and because it addresses few of the issues that led to the trade conflict in the first place.

“Yesterday’s signing of the phase one trade deal provided confirmation of the progress made in trade talks since last summer. The details of the deal were broadly in line with expectations which have dampened the market impact overnight,” said Lee Hardman, currency strategist at MUFG.

But other than the fact that it met expectations, analysts said the agreement does not fully eliminate tariffs and is vague on enforcement, and makes no real progress on host of thorny problems. Some were also sceptical that purchase targets set out in the deal are realistic.

“The deal relies heavily on China’s goodwill and includes forced purchases of U.S. goods and protection for Intellectual Property rights and forced technology transfers,” said Sebastien Galy, strategist at Nordea Asset Management. The centrepiece of the trade deal is a pledge by China to purchase at least an additional $200 billion worth of U.S. farm products and other goods and services over two years. The United States will also cut by half the tariff rate it imposed on Sept. 1 on a $120 billion list of Chinese goods, to 7.5%. “Some demands are extremely hard to swallow, such as changing laws to accommodate the U.S. Overall, it feels like something that will not last more than a few months,” Galy said.

The level 7 in dollar/yuan has been a barometer for U.S.-China tensions, so the fact that the Chinese remnibi has remained below this level shows that investors remain more or less optimistic about the trade relationship between the world’s two biggest economies and its impact on global growth.

The dollar gained on Thursday after multiple data releases painted a positive U.S. economic picture, reversing earlier weakness following the preliminary deal between the United States and China to de-escalate their trade war.

U.S. retail sales increased for a third straight month in December, with households buying a range of goods even as they cut back on purchases of motor vehicles, suggesting the economy maintained a moderate growth pace at the end of 2019. A gauge of manufacturing activity in the U.S. Mid-Atlantic region also rebounded in January to its highest level in eight months, and the outlook is the brightest in more than a year and a half, the Federal Reserve Bank of Philadelphia said.

“The data flurry was positive, particularly the Philly Fed number,” said Greg Anderson, global head of foreign exchange strategy at BMO Capital Markets in New York. It “reduces the probability for a recession, which was low already.” “For the dollar, it’s a mixed bag ... it should mean higher U.S. growth this year, but it also means higher foreign growth this year and less risks abroad, and that tends to pull capital out of the U.S. and be dollar negative,” said Anderson.

The United States on Monday added Switzerland to its watch list of currency manipulators, which analysts say could discourage the Swiss National Bank (SNB) from intervening to try to limit further appreciation of the franc.

The greenback rose to a one-week high against the euro on Friday as economic data pointed to solid economic growth, and reduced fears about an impending slowdown. U.S. homebuilding surged to a 13-year high in December as activity increased across the board, suggesting the housing market recovery was back on track amid low mortgage rates.

“The last couple of sessions we’ve gotten some pretty good data,” said Bipan Rai, North American head of FX strategy at CIBC Capital Markets in Toronto.
“There was a little bit of concern by the Federal Reserve with regard to the health of the consumer and household market in the U.S., but it seems like yesterday’s retail sales numbers and also the housing data from yesterday and today have assuaged some of those fears for the time being,” Rai said.


Pound gave up early gains on Friday after UK retail sales data came in weaker than expected, prompting investors to price in a greater chance interest rates would be cut at the end of this month. Several Bank of England policymakers, including outgoing Governor Mark Carney, signalled this week that a rate cut was likely unless economic data improved. Economic data showed further weakness on Friday, with British consumers failing to increase their spending in December for a record fifth straight month.

“The lack of inflationary pressure could easily persuade the Bank of England that the time is right to inject some zip into the economy with a rate cut, and sterling is likely to recalibrate accordingly,” said Ayush Ansal, chief investment officer at Crimson Black Capital.

Weak inflation readings came in on Wednesday and weak growth numbers on Monday, including slower industrial and manufacturing production. That has raised the likelihood of a quarter-point rate cut in January to nearly 70%, according to Refinitiv data.

Investors now believe Britain and the European Union are more likely to partly agree on a trade deal after Britain quits the EU on Jan. 31, avoiding an abrupt, disorderly departure at the end of this year.
After Prime Minister Boris Johnson said that a trade deal was very likely by the end of 2020 — when the transition period ends — a consensus grew that the two sides would agree on a deal on goods this year and postpone one on services into next year.

An agreement on goods would be easier to achieve, since the EU is a big exporter to the UK, analysts said. “After more pragmatic and more balanced comments from both sides, the market has started to realise that this is a more likely scenario,” said Athanasios Vamvakidis, global head of G10 forex strategy at Bank of America.
Real money investors have remained long sterling and hedge funds have stayed neutral, which has helped keep the pound above $1.30, Vamvakidis said. He does not see sterling falling below $1.30 unless the BoE does ease cut rates in a couple of weeks.


Speaking on BOE rate cut probability, indeed - CME BoE watch tool suggests single rate cut at nearest meeting by far - on 30 of January for 25 basis points. Probability stands for 72%:
1579355469190.png

Source: cmegroup.com

CFTC Data


Speculators cut their net long bets on the U.S. dollar in the latest week to the smallest position in 19 months, according to calculations by Reuters and U.S. Commodity Futures Trading Commission data released on Friday. The value of the net long dollar position was $6.64 billion in the seven-day period ended Jan. 14, down from $9.07 billion last week. This week’s long U.S. dollar position is the smallest since June 12, 2018.

As on EUR as on GBP long positions have been increased. GBP net position already stands positive, while on EUR net short position has dropped:
1579355296805.png

Source: cftc.gov
Charting by Investing.com


So, guys we have not very simple task actually. Because we see a bit contradictive information from different sources. Data of recent week mostly support USD and actually we see this in price action, especially on Friday. From the other side - long position on dollar decreases. In fact, open interest on EUR tells that Hedgers (Commercials) position stands near zero and decreased from 80+K contracts in 2019. It means that real economy sector doesn't expect EUR drop now as they have closed all hedging positions for EUR depreciation. Simultaneously speculators' positions are rising, which lead to increasing of open interest. This moment tells, that situation on EUR could change and recent drop is not a final judgement yet.

It is interesting, guys, that this week Fathom Consulting dedicates to politics, as risks increase this year. Here we put just few extractions from report, while you could read it totally, following the link.

2019 saw a number of major political changes in Europe with the European Parliament elections accompanied by a number of domestic elections and ongoing Brexit uncertainty. While investors would probably have treated such developments with apprehension during the crisis years, in 2019 they appeared to embrace the changes.

1579358917581.png


Overall, the euro area starts this decade with an outlook distinctly different from that at the start of the last. In the 2010s, the key story in Europe was the debt crisis that saw investors fear for the solvency of many sovereigns in the periphery, and the subsequent policy response. However, by the end of the decade, the market-implied probabilities of both default and exit had fallen below 10% in all countries. Fathom agrees that the odds of these events are lower than in the past but still believes they are some way north of the likelihoods implied by markets, especially if another downturn should occur.

Technicals
Monthly


Technically market tests our patience as it is coiling around bullish invalidation point. This week market has moved closer to the bottom, making us think again about validity of monthly bearish grabber. Second - price stands below YPP. Its first test fizzles as EUR was not able to move above it. Interesting time stands ahead as now we could start gambling - whether this is just a pullback, reaction on resistance or something greater...

From the technical point of view, we have October reversal month and 2019 Yearly Pivot Support 1. This year it holds downside action. We know the major feature of pivot supports - it has to hold downside action if this is a retracement. This is particular what we have right now and this is potentially bullish sign.

October candle is still valid and keeps its reversal features, as lows stand intact. Now everything depends on EUR itself. It has to show more active upside performance. The vital point which determine everything is 1.09 lows. It seems that it is just two weeks till the new year, but lows also stand just 150 pips from current market.

Conversely - sudden drop below 1.09 area and YPS1 will unlock our bearish view and downside continuation back to 1.03 lows. EUR has to show breakout either above 1.12 area or below 1.09 to unleash larger time scale setups. Until we stand in this range - we deal with tactic short-term setups on daily and intraday charts.

Finally, we have the bearish grabber that we treat as additional risk factor, because it also coincides with YPP, providing more resistance.

EUR has to move above YPP to erase the grabber and prove its strength. This is what we will watch here. But right now - it is not time for happy sentiment - EUR has failed to break YPP and increase harmonic swing upside pullback, shows weak statistics, while US keeps the level moderately positive numbers. US trade balance also will improve this year due phase 1 agreement. Despite that EUR stands above MACDP line - bullish trend is not confirmed yet here as well.

Weekly

It is tough time for EUR on weekly chart as well. In addition to YPP, here price meets Fib level and upper border of the channel. And the breakout of this level is crucial for bullish scenario. Here, of course, we would like to see stronger upside performance. But unfortunately now we have to acknowledge that EUR has failed to break channel and resistance level. This adds strength to the "dark" side and mentioned previously bearish dynamic pressure action.

Speaking on bullish scenario - weekly chart has to form bullish reversal, and preferably by some clear pattern. Currently it seems that we should focus on reverse H&S pattern. Current AB-CD pattern has XOP around 1.1450 Fib resistance and potential neckline. Right arm should be formed later around 1.1150 area.

This anticipated pattern is also useful as we could make judgement on EUR direction by comparing how it matches to the H&S project. While it follows it - it keeps bullish scenario. But if something goes wrong - this will be clear signal that sentiment changes and EUR turns downside.

Here is the low of "C" point has vital meaning, as drop below it tells that market destroys H&S setup. This will mean just one things - market will drop and put under question monthly bullish scenario as well. Currently EUR stands closer to bearish progress. It means that we have to avoid taking any long-term bullish positions on monthly/weekly time frames.

eur_w_20_01_20.png


Daily

Here the implementation went off without a hitch. All setups that we were tracking through the week have worked properly. This happens every time when market is driven by its own factors - statistics, economical events, etc.

It seems that we were right on H&S pattern here. At least at DXY it looks swanky. Taking in consideration 70% component of EUR in DXY, here, we also could stick with this setup, I suppose. On EUR the neckline has greater slope than on DXY. Still, recent sell-off was strong, our long-term divergence is still here and we could consider next target - OP Agreement area with major 5/8 Fib support level.

K-support area already has been tested, so at current 2nd test this level becomes weaker and it will be interesting to see what will happen next week, especially keeping in mind situation on weekly chart...

Daily context is bearish, no longs by far.
eur_d_20_01_20.png


Intraday

On 4H chart we have another AB-CD pattern, but target stands at the same area of 1.1020 level. This is XOP extension, which coincides with daily OP and major 5/8 Fib support:
eur_4h_20_01_20.png


As sell-off stands strong and market is not at oversold, we could consider retracement levels based only on recent swing down. 1.1120 K-resistance is particular interesting. The only question is whether EUR will show bounce right at on Monday, or complete minor XOP target first. Anyway, levels structure remains the same - just re-calculate price numbers...

eur_1h_20_01_20.png


Conclusion:

Long-term trend is yet to be clarified as event of this week mostly was tactical, making no impact on long-term EUR/USD balance. Technically, EUR stands at the edge and close to both scenarios. Bears probably could pride themselves with last week EUR performance.

In short-term perspective, it seems that EUR should proceed lower, at least to 1.1020 - next major daily support area.
 
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Sive Morten

Special Consultant to the FPA
Messages
12,970
Morning guys,

Despite minor action yesterday - there are a lot to discuss today on EUR. Again, we will take a look at cross market analysis with DXY. As we've said, it might happen so that while DXY will climb to 4H XOP target - EUR could stands flat because it at strong support. And this has happened precisely so. Take a look at 4H DXY chart:
dxy_4h_21_01_20.png

Now it stands at Agreement and K-resistance area. It means that no longs should be taken here (it means no new short on EUR as well). Besides, DXY chart makes us think that real right arm of H&S pattern is yet to be formed, which means deep retracement here could happen.

Correspondingly, this makes chance to scalp traders on EUR, as DXY situation suggests that EUR could climb back to 1.12 area again.

On 4H chart we also see some signs for that. Take a look, by correct market mechanics of our AB-CD pattern, EUR has to proceed to XOP target, but this has not happened and action fizzled. We've got a kind of W&R of "OP" target lows instead. For the truth sake - this type of action is very typical for the Double Bottom pattern... I'm not dare to suggest that we definitely will get it, but at least this is warning that it would be better to stay aside from any short positions by far.
eur_4h_21_01_20.png


On 1H chart we have the shape of reverse H&S as well. This is the pattern that scalp traders could use. Stop should be below potential XOP target, that has not been hit - somewhere around 1.1060-1.1065. Because if market still will drop below this area, it probably will mean real downside breakout and we will go to 1.1015-1.1020 - next strong daily support area. As you can see - situation is relatively clear
eur_1h_21_01_20.png


For the bears - either to wait for breakout down, or, wait when upside setup will be done. Supposedly this should happen around 1.12...
 

Sive Morten

Special Consultant to the FPA
Messages
12,970
Morning guys,

situation on EUR is becoming more interesting day by day. On daily time frame market still stands at major support, which has vital meaning not only for daily but for weekly/monthly time frames as well. Wedge downside breakout will lead probably to more serious consequences than just drop to next 1.1016 Fib support area...
eur_d_22_01_20.png


Still, we suspect that round is not over yet, despite that yesterday EUR has dropped back to the lows. And we have three reasons for that. First is, on 4H chart it could be double bottom shape. As we have here bullish divergence, market keeps chances on upside reversal. Besides, if you take a look at DXY 4H chart, you could see that it shows a bit different price shape:
eur_4h_22_01_20.png


Second reason is DAX stock index. Today we appy specific cross-market analysis. The point is DAX now challenging all time highs, but at the same time completes large AB=CD OP target, which stands just few points above this all time highs. It is great chance in favor of W&R, which should lead to moderate drop of stop index. This, in turn, will support EUR.

Finally, On 1 H chart - do not forget about XOP target that we've discussed yesterday and in weekend. It stands around 1.1070. Market could tending right to complete it. Thus - watch for possible W&R there. If, it will be formed indeed - be prepared for upward continuation. Real downside breakout will erase bullish setup, I suppose and in this case EUR will go to 1.1016-1.1020 area. (Our H&S pattern has worked nice, btw...)
eur_1h_22_01_20.png
 

Sive Morten

Special Consultant to the FPA
Messages
12,970
Morning guys,

EUR currency shows really unique situation when nothing happens on daily chart, but there are a lot of stuff on intraday ones. The same is today. Actually, I think that we are close to resolving of this riddle as today is ECB meeting and major topic is stimulus (i.e. QE or bonds buyback programme) in 2020. If any hint will be given to its contraction - stock market will collapse, while EUR itself should show upside action. No other news we suggest to hear as EU economy stands in critical but stable condition.

Thus, on 4H chart we see real churning action around support area that contradicts normal market mechanics as usually, in 99% of cases, EUR has to follow to XOP target. (DXY actually already has hit it). As market doesn't do it, it means that background has changed. This is warning to the bears.
eur_4h_23_01_20.png


On 1H chart, as we've suggested EUR has hit our XOP and jumped right back up. This situation is a "wild card" for the bulls. Because all technical picture is already stands in place and it doesn't exclude upside reversal - divergence, falling wedge pattern etc. But - we know that the only driver today is ECB. So, I call it as "wild card", because it cares the feature of gambling. The reason for that is - outstanding potential profit and low risk, as EUR has to hold above recent lows. So death will be fast but not too expensive. :)
Another kind of question is - whether you want to get in or not...
eur_1h_23_01_20.png


For bears it is different task. The only chance to jump in will be, if market will drop below 1.1065 lows. So, you could think about placing Stop "Sell" order below this level, but it would be better to set it a bit lower to avoid spiking on ECB announcement. Conversely, in a case of upside rally - it is nothing to do but wait when it will be over.
That's the pinocle for today's session...
 

Sive Morten

Special Consultant to the FPA
Messages
12,970
Morning guys,

ECB statement more dovish rather than hawkish as they hint on review of inflation calculation and utility of the stimulus measures that now applied. This makes investors worry on next ECB steps and has made impact on EUR and DAX stock index.

On daily chart, from technical point view - picture brings nothing good to bulls. Now we will not look too far in the future, but weekly wedge breakout and K-support is a serious point. Today we're watching for next 1.1015-1.1020 support area.
eur_d_24_01_20.png


Here is also solid divergence exists between DXY and EUR. While 4H XOP and daily AB=CD OP target stands in the same area on EUR - on DXY they are quite different and OP stands higher on next major 5/8 resistance area where DXY should follow. This puts the shadow on any bullish perspectives on EUR as well. For example, it could mean that EUR H&S will lead price to its XOP extension around 1.08 lows...

eur_4h_24_01_20.png


Thus, as we have bearish context, here on 1H chart, if, say, minor AB-CD pullback will happen and EUR re-tests broken wedge, it could be chance for short entry by "222" Sell pattern. If not - then EUR will drop directly to major daily support area.
eur_1h_24_01_20.png
 
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