Sive Morten
Special Consultant to the FPA
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Fundamentals
So, yesterday most part of the session everything was calm as we've suggested but, closer to the end of Friday D. Trump has shaken trading society by signing temporal shutdown of US shutdown
Earlier, on Thu, ECB President Mario Draghi warned that a dip in the euro zone’s economy could be more pronounced than thought a few weeks ago, comments seen as signalling a delay in the bank’s first interest rate hike.
The euro weakened broadly on his comments and fell to a two-month low against the dollar of $1.1289. But on Thursday the single currency recovered, rising 0.3 percent to $1.135.
“A relatively dovish performance from Draghi was already in priced in,” said John Hardy, head of FX strategy at Saxo Bank. “The overriding issue of the U.S.-China trade talks is keeping traders sidelined on committing to USD trades until the outcome is known there,” he added.
Markets are pricing in an interest rate rise only for mid-2020 as the euro zone economy is suffering its biggest slowdown in more than half a decade, with no recovery in sight.
Indeed, a key German business morale indicator fell for the fifth straight month in January.
The euro, which has traded in a range of $1.12 to $1.16 for the past three months and analysts expect it to underperform in the near term as monetary policy is expected to remain accommodative for now.
EUR has hit our weekly 1.13 target accurately Friday morning, before rally starts.
Despite we intend to speak on EUR, a few words on GBP. As we've suggested Cable continues upside action by fundamental and market sentiment reasons that we've mentioned in our updates. As a result our OP target around 1.3185 area has been hit as well.
Reason for that was the same D. Trump initiative and earlier the Sun publication that Northern Ireland’s Democratic Unionist Party had privately decided to offer conditional backing for Prime Minister Theresa May’s Brexit deal next week.
Closer to US session open on Friday, market turns attention to next week. The dollar fell on Friday from
its three-week highs in the previous session, as traders' focus shifted to the Federal Reserve's policy meeting next week when the U.S. central bank is expected to leave interest rates unchanged.
"While the Fed next week may not sound overtly dovish, its tone might emphasize caution and thus do little to alter very low expectations for policymakers to raise rates this year," said Joe Manimbo, senior market analyst at Western Union Business Solutions in Washington.
Later in the session, U.S. President Donald Trump announced a tentative agreement with lawmakers to end a partial U.S. government shutdown for three weeks. Trump’s announcement briefly pared the dollar’s losses, but traders said the currency reaction was not as strong as expected.
The agreement called for three weeks of stop-gap funding and a senior Democratic aide said the money the president demanded for a border wall is not included. Trump had previously insisted on the inclusion of $5.7 billion to help pay for a wall along the vast U.S.-Mexico border in any legislation to fund government agencies.
“The dollar’s reaction has not been super strong because the uncertainty remains,” said Juan Perez, senior currency trader, at Tempus Inc in Washington. “And it’s also a temporary reopening. He was also actually adamant that a permanent solution should be made,” Perez added.
The shutdown dragged on for 35 days, affecting 800,000 furloughed workers. In one of the many effects of the shutdown, hundreds of flights have been cancelled or delayed at airports in the New York area and Philadelphia.
Paul Ashworth, chief U.S. economist, at Capital Economics in Toronto, said Trump caved “presumably ... because of the damage the shutdown is having on his own approval ratings, particularly now that the shutdown is beginning to have a wider impact.”
So, guys, the major event of coming week is Fed meeting and NFP report on Friday, on the 1st of February. The impact of shutdown is yet to be estimated and something tells me that hardly it will please financial society.
Just a confirmation of this guess-work, Fathom consulting updates its view on Fed policy in 2019 and makes it more dovish. I'm strongly recommend to read it, its not too large, but it brings very important and valuable insight. Here we put just some most interesting extractions:
"Taken in the round, this position (previous position of Fathom of aggressive 4 rate hikes in 2019 and other strong expectations of US economy) is looking increasingly untenable. Investors have undergone something of a reappraisal in recent weeks, and so must we.
What we did not foresee, however, was a sudden slowdown in economic activity towards the end of the year, particularly in Europe. Nor did we expect such a dramatic reappraisal of Fed policy, reflected in a flattening of the yield curve, and a 40 basis point reduction in the two-year US Treasury yield from its peak in mid-November. Where does all of this leave our 2019 call?"
"The reassessment of global economic prospects that took place during the final months of last year, in the minds of investors at least, looks to have been driven by:
"We have changed our Fed funds rate forecast. We no longer look for four hikes this year, and instead expect only two, probably in June and December."
"If the FOMC does slow the pace of tightening, as it has indicated, then we could see a meaningful rally in equity markets during the first half of this year, as fears that escalating trade disputes would seriously harm global growth start to fade. In this world, there is time for one last party. Indeed, the party may already have begun."
For us, every conclusion of this article is important. Still, we're mostly are interested in estimation of long-term direction on EUR/USD based on fundamental background. It is clear that ECB policy stands anemic, showing total lack of initiative. I do not know how this will change in the future, but currently the obvious statement is ECB has no major impact on EUR/USD rate, except for negative one.
Thus, it means that rate probably will be driven mostly by things that already have been priced-in the rate and by changing of investors' opinion on these things. Mostly these things are USD fundamental background in all spheres of US political and economical life - China relations, domestic political turmoil, US economy statistics, Fed policy etc.
Currently, despite that Fed policy forecast was qualified a bit to just double rate hikes in 2019, this is still more than market expects. Sooner or later, when it comes to surface - this should provide additional dollar support. Also we need to take close look at first 2019 statistics, as result of shutdown becomes visible.
First hints we could get already on next week, on J. Powell press conference. In general, despite what will happen in US, it seems it still holds dominant role and EU is dependent variable of US ongoing processes. Thus, at current moment, USD positions looks preferable compares to EUR in perspectives of 3-5 months.
Technicals
Monthly
Despite high volatility of the market last week, EUR holds inside the monthly flag pattern and our long term picture mostly stands the same.
Here we mostly wait for clarity - either downside breakout and start action to 1.08 and later to 1.03 or ability of the EUR to hold above 1.12 and turning up. Market stands at support area around major 5/8 Fib level. In case of upside action, YPP will be important target , because, as a rule, market tends to touch YPP through the year.
Indirect technical factors point on market's weakness, at least in long-term perspectives, as EUR can't jump out from strong support within more than 5-6 months and just lays upon it. Trend stands bearish here.
Monthly situation shortly could be described as indecision with light gravitation to the downside. In fact, long standing around Yearly Pivot confirms things that we've discussed above. MACD trend stands bearish here.
Thus we keep valid our downside COP target around 1.03 by far.
Weekly
On weekly chart market still keeps dual setup. This week has bullish sentiment while previous week was bearish, but it stands in a row with recent consolidation and makes no significant impact on the chart. Weekly ranges are overlap on 70%. Here actually we have two different setups. First is our initial bearish setup, which, in fact, is continuation on the same logic that we have on monthly chart.
Here we have downside channel.Since market shows very weak reaction on major 5/8 Fib support level - it brings some signs of bearish dynamic pressure, when MACD shows upside trend but price action stands flat.
Conversely, we have MACD divergence and possible reverse H&S shape. But market has to climb back to neckline at least, to resurrect this scenario, and break the channel up. Precisely this type of action we do not see yet. It means that we could get some different action, say, fallen wedge pattern instead. Anyway, currently weekly chart doesn't support any bullish inspiration and overall price action looks mostly indecision.
It means that again we mostly will be focused on daily/intraday tactical setups as we do not have any longer-term direction yet.
Daily
On daily chart market behaves so as it knows what Fed will say and this should be something really dovish. Anyway, upside momentum of Friday action is strong and we could try to use it in the beginning of the week.
Market stands not at Overbought and we've got two bullish signals. First is classic engulfing pattern, second - fake breakout of the trend line. Both suggest some upside continuation.
Finally, upside reversal has happened right at MPS1 and price moved above MPP, which also looks bulilsh. MPR1 stands 1.1530 area.
Intraday
So, combination of bullish reversal pattern here, on 4H chart and bullish engulfing pattern on daily, lets us count on deep retracement on Monday, guys, and, consequently, on reverse H&S pattern. So, our first trading setup is waiting for retracement to WPS1 and 5/8 Fib support, also watching for "222" Buy pattern.
Another setup is just minor add-on. Since upside action was rather fast - we also could get hourly B&B "Buy" setup. It's not the fact that it will be formed, but it could. DRPO "Sell" is also possible instead, as we expect that deep retracement will be formed.
Conclusion:
Investors and analysts across the board make adjustments of their previous forecasts of economic fundamentals and make them softer. It seems that EUR/USD will be driven by mismatch of what has been priced-in with current EUR/USD rate and what we will get in reality.
The technical portion of Sive's analysis owes a great deal to Joe DiNapoli's methods, and uses a number of Joe's proprietary indicators. Please note that Sive's analysis is his own view of the market and is not endorsed by Joe DiNapoli or any related companies.
So, yesterday most part of the session everything was calm as we've suggested but, closer to the end of Friday D. Trump has shaken trading society by signing temporal shutdown of US shutdown
Earlier, on Thu, ECB President Mario Draghi warned that a dip in the euro zone’s economy could be more pronounced than thought a few weeks ago, comments seen as signalling a delay in the bank’s first interest rate hike.
The euro weakened broadly on his comments and fell to a two-month low against the dollar of $1.1289. But on Thursday the single currency recovered, rising 0.3 percent to $1.135.
“A relatively dovish performance from Draghi was already in priced in,” said John Hardy, head of FX strategy at Saxo Bank. “The overriding issue of the U.S.-China trade talks is keeping traders sidelined on committing to USD trades until the outcome is known there,” he added.
Markets are pricing in an interest rate rise only for mid-2020 as the euro zone economy is suffering its biggest slowdown in more than half a decade, with no recovery in sight.
Indeed, a key German business morale indicator fell for the fifth straight month in January.
The euro, which has traded in a range of $1.12 to $1.16 for the past three months and analysts expect it to underperform in the near term as monetary policy is expected to remain accommodative for now.
EUR has hit our weekly 1.13 target accurately Friday morning, before rally starts.
Despite we intend to speak on EUR, a few words on GBP. As we've suggested Cable continues upside action by fundamental and market sentiment reasons that we've mentioned in our updates. As a result our OP target around 1.3185 area has been hit as well.
Reason for that was the same D. Trump initiative and earlier the Sun publication that Northern Ireland’s Democratic Unionist Party had privately decided to offer conditional backing for Prime Minister Theresa May’s Brexit deal next week.
Closer to US session open on Friday, market turns attention to next week. The dollar fell on Friday from
its three-week highs in the previous session, as traders' focus shifted to the Federal Reserve's policy meeting next week when the U.S. central bank is expected to leave interest rates unchanged.
"While the Fed next week may not sound overtly dovish, its tone might emphasize caution and thus do little to alter very low expectations for policymakers to raise rates this year," said Joe Manimbo, senior market analyst at Western Union Business Solutions in Washington.
Later in the session, U.S. President Donald Trump announced a tentative agreement with lawmakers to end a partial U.S. government shutdown for three weeks. Trump’s announcement briefly pared the dollar’s losses, but traders said the currency reaction was not as strong as expected.
The agreement called for three weeks of stop-gap funding and a senior Democratic aide said the money the president demanded for a border wall is not included. Trump had previously insisted on the inclusion of $5.7 billion to help pay for a wall along the vast U.S.-Mexico border in any legislation to fund government agencies.
“The dollar’s reaction has not been super strong because the uncertainty remains,” said Juan Perez, senior currency trader, at Tempus Inc in Washington. “And it’s also a temporary reopening. He was also actually adamant that a permanent solution should be made,” Perez added.
The shutdown dragged on for 35 days, affecting 800,000 furloughed workers. In one of the many effects of the shutdown, hundreds of flights have been cancelled or delayed at airports in the New York area and Philadelphia.
Paul Ashworth, chief U.S. economist, at Capital Economics in Toronto, said Trump caved “presumably ... because of the damage the shutdown is having on his own approval ratings, particularly now that the shutdown is beginning to have a wider impact.”
So, guys, the major event of coming week is Fed meeting and NFP report on Friday, on the 1st of February. The impact of shutdown is yet to be estimated and something tells me that hardly it will please financial society.
Just a confirmation of this guess-work, Fathom consulting updates its view on Fed policy in 2019 and makes it more dovish. I'm strongly recommend to read it, its not too large, but it brings very important and valuable insight. Here we put just some most interesting extractions:
"Taken in the round, this position (previous position of Fathom of aggressive 4 rate hikes in 2019 and other strong expectations of US economy) is looking increasingly untenable. Investors have undergone something of a reappraisal in recent weeks, and so must we.
What we did not foresee, however, was a sudden slowdown in economic activity towards the end of the year, particularly in Europe. Nor did we expect such a dramatic reappraisal of Fed policy, reflected in a flattening of the yield curve, and a 40 basis point reduction in the two-year US Treasury yield from its peak in mid-November. Where does all of this leave our 2019 call?"
"The reassessment of global economic prospects that took place during the final months of last year, in the minds of investors at least, looks to have been driven by:
- Fears that there would be an end to cheap money, as the Fed continued to tighten at a steady pace
- Fears that escalating trade disputes would seriously harm global growth
- Fears that a sharp, domestically-driven slowdown was in train in China
"We have changed our Fed funds rate forecast. We no longer look for four hikes this year, and instead expect only two, probably in June and December."
"If the FOMC does slow the pace of tightening, as it has indicated, then we could see a meaningful rally in equity markets during the first half of this year, as fears that escalating trade disputes would seriously harm global growth start to fade. In this world, there is time for one last party. Indeed, the party may already have begun."
For us, every conclusion of this article is important. Still, we're mostly are interested in estimation of long-term direction on EUR/USD based on fundamental background. It is clear that ECB policy stands anemic, showing total lack of initiative. I do not know how this will change in the future, but currently the obvious statement is ECB has no major impact on EUR/USD rate, except for negative one.
Thus, it means that rate probably will be driven mostly by things that already have been priced-in the rate and by changing of investors' opinion on these things. Mostly these things are USD fundamental background in all spheres of US political and economical life - China relations, domestic political turmoil, US economy statistics, Fed policy etc.
Currently, despite that Fed policy forecast was qualified a bit to just double rate hikes in 2019, this is still more than market expects. Sooner or later, when it comes to surface - this should provide additional dollar support. Also we need to take close look at first 2019 statistics, as result of shutdown becomes visible.
First hints we could get already on next week, on J. Powell press conference. In general, despite what will happen in US, it seems it still holds dominant role and EU is dependent variable of US ongoing processes. Thus, at current moment, USD positions looks preferable compares to EUR in perspectives of 3-5 months.
Technicals
Monthly
Despite high volatility of the market last week, EUR holds inside the monthly flag pattern and our long term picture mostly stands the same.
Here we mostly wait for clarity - either downside breakout and start action to 1.08 and later to 1.03 or ability of the EUR to hold above 1.12 and turning up. Market stands at support area around major 5/8 Fib level. In case of upside action, YPP will be important target , because, as a rule, market tends to touch YPP through the year.
Indirect technical factors point on market's weakness, at least in long-term perspectives, as EUR can't jump out from strong support within more than 5-6 months and just lays upon it. Trend stands bearish here.
Monthly situation shortly could be described as indecision with light gravitation to the downside. In fact, long standing around Yearly Pivot confirms things that we've discussed above. MACD trend stands bearish here.
Thus we keep valid our downside COP target around 1.03 by far.
Weekly
On weekly chart market still keeps dual setup. This week has bullish sentiment while previous week was bearish, but it stands in a row with recent consolidation and makes no significant impact on the chart. Weekly ranges are overlap on 70%. Here actually we have two different setups. First is our initial bearish setup, which, in fact, is continuation on the same logic that we have on monthly chart.
Here we have downside channel.Since market shows very weak reaction on major 5/8 Fib support level - it brings some signs of bearish dynamic pressure, when MACD shows upside trend but price action stands flat.
Conversely, we have MACD divergence and possible reverse H&S shape. But market has to climb back to neckline at least, to resurrect this scenario, and break the channel up. Precisely this type of action we do not see yet. It means that we could get some different action, say, fallen wedge pattern instead. Anyway, currently weekly chart doesn't support any bullish inspiration and overall price action looks mostly indecision.
It means that again we mostly will be focused on daily/intraday tactical setups as we do not have any longer-term direction yet.
Daily
On daily chart market behaves so as it knows what Fed will say and this should be something really dovish. Anyway, upside momentum of Friday action is strong and we could try to use it in the beginning of the week.
Market stands not at Overbought and we've got two bullish signals. First is classic engulfing pattern, second - fake breakout of the trend line. Both suggest some upside continuation.
Finally, upside reversal has happened right at MPS1 and price moved above MPP, which also looks bulilsh. MPR1 stands 1.1530 area.
Intraday
So, combination of bullish reversal pattern here, on 4H chart and bullish engulfing pattern on daily, lets us count on deep retracement on Monday, guys, and, consequently, on reverse H&S pattern. So, our first trading setup is waiting for retracement to WPS1 and 5/8 Fib support, also watching for "222" Buy pattern.
Another setup is just minor add-on. Since upside action was rather fast - we also could get hourly B&B "Buy" setup. It's not the fact that it will be formed, but it could. DRPO "Sell" is also possible instead, as we expect that deep retracement will be formed.
Conclusion:
Investors and analysts across the board make adjustments of their previous forecasts of economic fundamentals and make them softer. It seems that EUR/USD will be driven by mismatch of what has been priced-in with current EUR/USD rate and what we will get in reality.
The technical portion of Sive's analysis owes a great deal to Joe DiNapoli's methods, and uses a number of Joe's proprietary indicators. Please note that Sive's analysis is his own view of the market and is not endorsed by Joe DiNapoli or any related companies.