Forex FOREX PRO WEEKLY, January 23 - 27, 2023

Sive Morten

Special Consultant to the FPA
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Fundamentals

So, it's time to take a look at two important numbers that we've got this week - PPI and Retail sales. Additionally we briefly take a look at the same EU data, because the background mostly stands the same. First is, our task to shake off the rosy glasses and provide clear vision of structural changes that mostly point on economy decreasing but not on "soft landing" and "reversal to growth". Debt ceil issue and current situation on US Treasury market we consider in our Gold market weekly report.

The phenomenon of inflation dropping

Now it is hot debates everywhere concerning drop of inflation across the board. In telegram we've mentioned seven indicators that usually analysts point on to prove that inflation has peaked - CPI, PPI, US yields, CPI Rate of change, Dollar index, wages, and 2/10 year US Treasuries spread. Many of them are mutually related, but, investors come to conclusion of inflation slowdown and somehow it goes without saying that US economy is turning to growth. But we suggest that it is not necessary so. Sometimes, these two subjects have a direct relation but not this time. And bright example is the US Real Estate market. I just show you few numbers and you could transpose it to inflation data and understand what I'm talking about.

Take a look that the US Mortgage rates have turned down and following to the same logic - it has to be treated as a sign of market recovery. The average interest rate on the most popular U.S. home loan dropped to its lowest level since September to 6.23% for the week ended Jan. 13. Just 2-3 months ago it was around 7.62%. But, this week house market data shows no signs of recovery:
U.S. existing home sales plunged to a 12-year low in December, existing home sales, which are counted when a contract is closed, fell 1.5% to a seasonally adjusted annual rate of 4.02 million units last month, the lowest level since November 2010. That marked the 11th straight monthly decline in sales, the longest such stretch since 1999.
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Only jump in December mortgage applications gives shy hope that maybe situation is turning to better.

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Now, people who intend to take a mortgage loan have to be ready to pay ~ 45% of its monthly income to serve the loan. Not everybody is ready to do this. And I would ask you again - now how do you think, does the drop of mortgage rate suggest real estate market reverse up, or, maybe rates are dropping just because it is no demand for houses? People are loosing wealth, savings, earnings and can't afford to take a loan to buy a new house. Decrease of demand leads to decrease of prices... This is how real things stand. Now let's go back to US inflation and take a look what is going on in US economy.

Indeed, our favorite indicator of PPI Commodities (this is not PPI index per se) shows the decreasing. It might be an indication of successful monetary policy...or maybe the reason is different - drop of population wealth and consumer demand? Let's see... First is, here we do not want to de-compound PPI numbers to show the impact of different components, but you should recall our CPI analysis last week, where we've clearly shown that core inflation remains stable and even is growing and inflationary leader is changing every time. It is expected that in 2023 it will be service sector. Thus, nominal inflation is converging to core structural inflation by exhausting of energy component outbreaks of 2022 and pure calculation features. Core inflation goes nowhere and stands stubborn around 5% level despite Fed efforts. As you will see below, in EU is the same situation.
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US economy data shows no signs of improving. Wide look at production, manufacturing, consumption and sentiment analysis shows it with evidence:
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We could proceed and shows you PMI's and some other leading indicators:
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What do the reports of the five FRBs have in common? Everyone is unanimous that orders for new products are falling (a leading indicator) at the highest rate since 2015. If we synchronize the index of new orders with industrial production, then the scale of the fall in orders is equivalent to a drop in industrial production by an average of 5-5.5% YoY, while the actual industrial production is growing by 2-3%.

The index of industrial activity decreases by 10 points on average across the five representative offices of the Federal Reserve – this is the equivalent of a decrease in industrial production by 4-4.5%. The employment index has turned down since February-March 2022, but so far in the positive area – this indicates a sharp reduction in the pace of hiring. Couple of weeks ago we've considered contradictions on US job market, and showed that it doesn't correspond to idea of growth economy as well.

In two worlds, we could say that Business is extremely pessimistic about the prospects, and pessimism correlates with the freezing of investment activity and hiring staff. This should soon have a negative impact on the economy.
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Note that all this is happening against the background of declining inflation. This suggests that the reduction in inflation itself is not a panacea for the crisis. Well, it confirms that the crisis is now structural, which flows smoothly from one sector of the economy to another. Industrial inflation in terms of the total volume of goods (this is not the PPI index) decreased in December, which corresponded to the expectations of the Fed leadership. But there may be a twofold interpretation.
J. Powell&Co hoped that a reduction in inflation would improve the economy. But, on the other hand, it is possible that the decline in inflation is a consequence of the ongoing recession of the economy and then it is rather a negative symptom. We treat this scenario as a most probable for now, at least until other indicators will not rebut this evidence.

The same is in EU

From our point of view, the second option is clearly taking place in EU and looks even brighter and this is not a positive circumstance at all. If you take a look at EU nominal and core inflation you could see the same thing - nominal inflation is turning down, while core inflation hits the new records. By November 2022, inflation slowed to 10.1%/11.1% and 9.2%/10.4% in December 2022.

Inflation is fading, but inflation without energy continues its rapid ascent to new records! A year ago, inflation without energy was 2.8%, in October – 6.9%, in November – 7%, and in December – 7.2%, i.e. the acceleration rate slowed down, but the growth continues. Moreover, prices increased by 0.6% over the month, which corresponds to an annual rate of over 7%.
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What should we proceed from? By Q2 2023, energy inflation may make a negative contribution to the overall price change due to the effect of the base of 2021 and the fall in energy prices in 2023, however, non-energy inflation is persistently high. The core (ex. food and energy) CPI of the eurozone is a record for 32 years of observations (+5.2% per year). Let's not dig this time components - mostly we also could see the same, that inflation is becoming structural drifting from one sector to another but remains around 5-5.5% in sum. It is 5 times higher than typical and continues to grow!

And here is Germany statistics - all the same stuff that we're familiar with already. Drop of the sentiment, vacancies, real wage, Retail Sales, production and... nominal inflation. While core inflation is keep rising.
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This situation is not specific to the Germany. You could see the same stuff in UK as well and other countries across the board - Australia, NZ, Japan etc:
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The nature of a structural crisis

Well, hopefully our prove of structural crisis is reasonable enough to assure that the US is not even near to upside economy reversal. Additionally, we could show it, based on re-structure of the US economy. High technology and service sector have replaced classic spheres such as an agriculture, mining etc.:

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The share of the manufacturing industry in the US economy in the 3rd quarter of 2016 was 11.6%, practically unchanged for 6 years and by Q2 2022 the share was 11.3% compared to 13.5% before the 2008 crisis.

There is a more pronounced trend in the share of industrial production, excluding the production of computers and components. In Q3 2016, this share in GDP was 10%, now 9.5%, before the crisis of 2008 – 12.3% at the maximum. The trend has been steadily descending for the last 15 years.

Agriculture, fishing, forestry forms only 1% of GDP. Mining forms 1.84% of GDP. Utilities (electricity, water supply, sewerage) have a share of 1.4% of GDP. Thus, the "real" manufacturing economy forms only 15.6% of the US economy, and excluding the production of computers and components – 13.8%

The accelerated decline began from the 3rd quarter of 2020 and continues to the current moment on the trajectory of the expansion of the digital economy. At the same time, we recall that in the middle of the twentieth century, the share of industry was more than 60% in the structure of GDP.

Someone will say that there is nothing wrong with this, it's just that the United States has built a "post-industrial" economy. The trouble is that the structure of consumption has changed much less over these decades (everyone can check it for themselves - do you spend 87% on gadgets or food, utilities and goods?), this is clearly seen in the structure of household costs. The essence of the structural crisis is precisely that stimulating demand has led to an increase in the costs of various kinds of gadgets.

The trouble is that the sales chain still ends with private (final) demand. Yes, it was approximated to the future with maximum growth rates and capitalized on the digital economy today, taking into account potential future sales. But today it is clear that demand is falling and this means that the capitalization of digital giants (and non-giants) will soon begin to decline. Layoffs in some super companies are an example of this:
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The structure of the world and American economies gradually spontaneously returns to a more natural state, in which the structure of the economy (that is, value added) corresponds to the structure of the final. consumption. You can add to the pictures of the unbalanced structure of the economy and graphs of private debt and savings:
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In general, it is possible that the decrease in inflation is due not only to the purely monetary effect of the increase in the cost of credit, but also to the accumulated effect of a decrease in GDP (we have already noted that for the United States, the decline by the end of 2022 is 6-8%) and spontaneous corrections of structural imbalances. Until recently, the US monetary authorities tried to slow down these natural processes through emission mechanisms, but the stop of the emission returned the economy to the trajectory of its normal change, that is, an increase in the relative share of the real sector due to a sharp decrease in the capitalization of the digital economy.

Conclusion:
As you could see, the negative moments are just starting to appear in statistics, which should be more evident in nearest few months. Some analysts anticipate that, telling that Fed hardly will be able to hold this burden:

The Federal Reserve can probably start to slow its balance sheet runoff once bank reserves fall to around 10% or 11% of gross domestic product, Fed Governor Christopher Waller said on Friday. Those reserves and repurchase agreements currently total just over $5.6 trillion, roughly around 22% of gross domestic product as of the third quarter of last year. So, they hint that they will sell around $2.5-2.8 Trln more and that's it.

Morgan Stanley in turn, cuts its 2023 year-end forecast for the dollar index to 98, and expects the greenback's weakness to be more pronounced against the euro this year as worries about the severity of an economic downturn start to ease. They previously saw the index , which weighs the U.S. currency against a basket of six major rivals, ending 2023 at 104.

"Global growth is showing signs of buoyancy, macro and inflation uncertainty are waning and the USD is rapidly losing its carry advantage," said currency strategists at Morgan Stanley led by James K Lord, in a note published late on Sunday.

The Wall Street bank now sees the euro strengthening against the dollar to 1.15 by year-end versus a previous forecast of 1.08. The euro was last trading at 1.08. Among G10 currencies, MS strategists expect negative returns for the year from the British pound given domestic growth challenges, and from the Japanese yen due to its preference as a funding currency.

We're a bit sceptic on this suggestion by common sense reasons. First is, as we've shown above, EU economy hardly looks better than the US one. Geopolitical situation is much better in the US, and EU keeps its back-seat role. Big fragmentation and non-uniform economy structure, existence if PIIGS countries problems hardly will let EUR to take the lead. Morgan Stanley is respectable authority, maybe we're wrong, but we do not see reasons to change our view for now. If recovery starts, it starts earlier in US than in EU. EU now is clear financial donor to US.
 
Technicals
Monthly

Now the fundamental picture gives more issues to think about rather than technical one. Monthly chart is preparing to meet IVQ GDP and PCE numbers next week, with coming NFP and Fed meeting then. Currently, as overall price action was relatively quiet, we're still watching for previously mentioned 1.1050 resistance area

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. B&B "Sell" setup is not cancelled, and is on the table. Major 50% resistance area could be the one where it could start. Besides, January is a 3rd month above 3x3 DMA and the last one, where B&B could start, at least based on a strict rules of this pattern:

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Weekly

Here picture barely has changed. Weekly chart shows that 1.0950-1.1250 area should become a big test for EUR strength. Starting with 50% resistance, it comes up to K-resistance area and unfilled gap, accompanied by previous 2019 lows consolidation. Right now EUR could climb a bit higher but barrier stands close:
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Daily

The weekly chart analysis tells that we should be careful to any bearish signs on daily chart that could be formed around 1.10-1.12 area. Today we use EUR Futures chart, because its vastly different from Retail Broker chart. First is, we have two side by side bullish grabbers that FX Choice chart doesn't show. Second - market already has hit 1.618 extension of most recent downside retracement. In general this extension is typical for H&S patterns. Grabbers suggest that OP still could be hit. While they are valid it is not reasonable to consider taking short positions. And this is supportive to existed bullish positions...

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Intraday

4H trend has turned bullish, forming another grabber here. So, the feature of reversal bar as well as downside scenario is becoming more phantom:
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While on 1H, despite slow action, we could suggest appearing of butterfly pattern and reaching of 1.0950 area. So, despite that background was looking not up to much, EUR was able to follow tight bullish conditions, holding near standing support areas and climbing higher. Now probably it is possible to use recent lows around 1.0780 as invalidation point for this scenario.
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Definitely noteworthy to read the upgraded EURUSD 2023 rates from analysts. Thanks for transparently including these views in the reporr.
 
Morning everybody,

So, EUR is gradually moving with our trading plan. Two daily grabbers are completed, as new top is formed. Now we have nothing to do on daily chart - no bearish signs from one side, and market is too close to OP target from another one. IT would be better to wait for big bulk of data release - GDP, PCE, Durable Goods etc.
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Still, on intraday charts, bulls could find something to do. For example, on 4H chart we have 4 grabbers in a row, suggesting upside continuation:
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Pullback has happened from our butterfly 1.27 target. Once the upside action is re-established, EUR should keep going to 1.618 of 1.0950, which is the same as daily OP. Take a look that 1.272 extension of recent pullback perfectly agrees with the same target. Probably we could call it as 3-Drive, we will see. But, anyway, if market starts forming another, smaller butterfly, you could try to use it. Previous lows around 1.0845 probably is an invalidation point.
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Morning everybody,

So, while on daily chart situation mostly is the same, there were a lot of market-makers tricks on intraday charts yesterday. Still, the one thing that we have to know on daily is the grabber from DXY. We do not have it on EUR, but it gives confidence that EUR should try to hit our 1.0950-1.0970 area. By the way daily AUD chart is almost a replica of EUR, and it has hit the OP due inflation data:
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On intraday charts there are still few interesting moments. On 4H chart our grabbers have been erased, but market has formed upside reversal bar and now price returns back to triangle's border:
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Take a look how it has happened on 1H chart. Recall that we intended to use minor butterfly pattern, and market with downside retracement was holding lows for a few hours, but then - fast W&R in a shape of engulfing pattern that has erased as grabbers as butterfly. Stops also have been grabbed as many people were watching for it. This is pure MM tricks. Yes, we've got "222' buy instead, but still entry moment has been lost.

Today situation is hardly better as price stands even higher. So we could say the same as yesterday - not very attractive, but possible. If you still would like to buy, then you need only most recent upside swing for Fib levels and stop placement. Target is too close already:
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Morning everybody,

So, it seems that our yesterday plan is working, after 5/8 pullback on 1H chart market keeps moving to the new top. First, I would like to remind you about the grabber on Dollar Index. Although market has moved in correct direction, but it has not reached the target yet, so dollar should drop a bit more. BTW, yesterday another grabber has been formed:
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It means that 1.0950-1.0970 area is still a reasonable destination point. Also I would like to remind you our weekly analysis - 1.0942 is weekly 50% resistance area. Thus, chances on some pullback around it looks high. EUR could touch 1.0970-1.0980 but I suspect that most probable it could happen in a way of some short-term spike, because major area is 1.0950.

On 4H chart upside action could be finalized by butterfly pattern. We've discussed this yesterday:
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While on 1H chart it might be nicely looking 3-Drive Sell.
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What I'm going to say is bears should standby. Once data will be released, 3-Drive should be completed and it might be a good background for short entry to consider. Obviously right now is not good moment for new long positions.
 
Morning everybody,

So, it is rare happen, but sometimes market shows almost no reaction on important data. Still there are few pretty interesting things in component of GDP and Durable orders that shed some light on relatively positive numbers. Another interesting moment - GDP prices , which means inflation, have increased. Now we see some downside pressure and signs of weakness as on EUR as on Gold market.

Although dollar index was able to complete the grabber - EUR has not reached 1.0950 level:
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On 4H chart market stands in the same widening triangle but now we're getting signs of bearish divergence:
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Most bright sign of weakness has happened on 1H chart. Recall our potential 3-Drive "Sell" pattern and we asked yesterday whether it will be completed or not. It seems it is not. EUR has formed downside reversal swing and failed attempt to reach the top.

Now, theoretical chances still exist that, say, EUR could form another butterfly and complete 1.0950 and 3rd Drive. But, this is only theoretical. Personally I'm more gravitating to weakness idea. Maybe we get "222" Sell, but chances on downside continuation now seem better. Downside breakout of 1.0835 lows should confirm this suggestion. Thus, today we do not see many things to do.
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