Forex FOREX PRO WEEKLY, January 31 - 04, 2022

Sive Morten

Special Consultant to the FPA
Messages
16,092
Fundamentals

EUR this week was under double impact of rising geopolitical tensions in Eastern Europe and hawkish statement of the Fed. While military tensions ease a bit, all eyes now stand on Fed steps. There are a lot of rumors suggesting that the Fed could act more aggressively in two directions - either to raise rates faster, not just for 25 b.p. but for 50 b.p. at once at some meetings. Second - increase the pace of quantitative tightening (QT), for faster withdrawal of bonds on the balance to open market. Both steps lead to the rising of the interest rates, support the US dollar and become a headwind to its rivals.
Next week also everybody will keep an eye on the NFP report that should provide data for January. This week's statistics were mixed. We've got positive GDP, but the Core PCE index has risen again and consumer sentiment has decreased. Inflation should remain in the focus at least for the 1st half of 2022.

Market overview

The euro fell to a one-month low on Tuesday as tensions between Russia and the West drew investors to the dollar, a day before the Federal Reserve is expected to reveal details on its plans to tighten monetary policy. Tensions remained high after NATO said on Monday it was putting forces on standby and reinforcing eastern Europe with more ships and fighter jets in response to Russia's troop build-up near its border. Western leaders stepped up preparations for any Russian military action while Moscow said it was watching with great concern after 8,500 U.S. troops were put on alert to deploy to Europe in the event of an escalation.

Tensions have exposed the euro and Europe, especially regarding energy, but the dollar's strength has more to do with Fed policy tightening, said Alvise Marino, director of FX strategy at Credit Suisse. The market was pricing in one hike by the Fed in 2022. Now we're pricing four. That is ultimately the major driver of the dollar strength we've seen the past three months," he said. "This accelerated a bit on the back of weakness in the broader equity markets and risk appetites that you've seen in particular since last Wednesday," Marino said.

The dollar's strength indicates its role as the ultimate safe-haven currency, said Marshall Gittler, head of Investment Research at BDSwiss Holding Ltd. Currencies usually gain when rates are expected to go higher and fall when expectations of future rate hikes increase,Gittler said. "It's not just that (the dollar) rose during a risk-off period but also that it rose even as expectations for Fed tightening were pared back."

Deutsche Bank flagging a potentially hawkish surprise over the coming months, with as many as six or seven increases this year. But ING analysts say that if the Fed's balance sheet reduction does the heavy lifting of policy normalization, that could scale back forecasts for the number of rate hikes. Fed funds futures have fully priced in a quarter-point tightening for the Fed's March meeting, plus three more for 2022.

In its latest policy update, the Fed signaled it is likely to raise U.S. interest rates in March and reaffirmed plans to end its bond purchases that month before launching a significant reduction in its asset holdings. In the follow-up press conference, Powell warned that inflation remains above the Fed's long-run goal and supply chain issues may be more persistent than previously thought.

"The market took notice of the stress the Fed Chair put on the inflation side of the equation combined with his stressing of the tight labor market. This implies that the Fed could be comfortable with some reduction in the pace of overall economic growth," said Russell Price, chief economist at Ameriprise Financial Services.

The Fed also said its policy-setting members had agreed on a set of principles for shrinking its balance sheet, set to start sometime after interest hikes begin. The Fed's balance sheet roughly doubled in size during the pandemic to nearly $9 trillion, as it snapped up bonds to help keep longer-term interest rates down to support the economy.

U.S. Treasury yields rose as the Fed issued its update. The U.S. Treasury 2-year yields hit their highest level since February 2020. The benchmark U.S. 10-year yield climbed to 1.8709% shortly after the Fed statement.

Fed Chair Jerome Powell said the U.S. central bank will be open-minded as it adjusts monetary policy to keep persistently high inflation from becoming entrenched. While no decisions have been made, "we'll be humble and nimble," he said.

The balance sheet cut will be "significant," Fed chief Jerome Paull warned at a press conference. He added that the US economy has shown strength and no longer needs strong support from the Fed.

The Fed futures market has booked four increases in 2022. But given inflation, which accelerated to 7% for the first time since the early 1980s, it is possible that there will be more of them, or the first step - in March - will shift the cost of loans immediately by 50 bp. up, ING analysts write. As for the reduction of the balance sheet, it is likely to begin in the summer, the bank believes.

Goldman Sachs forecasts the total QT to be $2-2.5 trillion. In other words, half of the “printed” dollar supply will be withdrawn from the system. Moreover, the speed of these withdrawals will be significant - up to $ 100 billion per month or more, which will allow the process to be completed in two to three years, GS believes.

However, the Fed could start with modest transactions of up to $20 billion a month, and then increase it to $90 billion, ING predicts. According to him, the Fed's balance sheet will decrease to $6 trillion by the mid-2020s and will be equal to 20% of US GDP (against 36% of GDP now).

1643443823549.png

The question remains how decisively the Fed will act. The soft option is to simply wait until the securities purchased on the balance sheet expire. However, in this case, it will be impossible to reduce the balance sheet by more than $60-70 billion in most months, Nomura estimates. The hard scenario is the sale of assets from the Fed's balance sheet to the market.

The Fed could raise rates four times this year and the same number next, according to ING. This will make the tightening cycle the sharpest since 2004, when the US Central Bank increased the cost of borrowing 16 times over a 2-year period.

The result will be a strengthening of the dollar, which may continue throughout the current year, according to ING. The US currency index at the end of the Fed meeting has already updated its maximum for six months (97.2 points), and the yields of US government bonds jumped (1.69% on 5-year securities, 1.87% on 10-year ones).

As for the reduction of the balance sheet, it may even become unprecedented in history. Over the past 20 years, the Fed has carried out quantitative tightening only once, in 2017-19, totaling $700 billion. Now they have to withdraw a few times more.

Then the head of the Fed came under fire from former President Donald Trump, who accused Powell of incompetence and even considered firing him. This time, Powell is again in danger of being a scapegoat: the US economy is slowing, and Biden's ratings are updating lows (41%, according to a January Pew Research poll).

"The statement still leaves a lot of questions to be answered particularly when it comes to the balance sheet roll-off. There wasn't a whole lot of detail provided," said Russell Price, chief economist at Ameriprise Financial.

But Fed policy decisions by design result in a very slow-moving ship, said Peter Cramer, senior managing director at SLC Management. "The market’s rate expectations the last three months has been warp speed in the context of Fed decision-making," Cramer said. "The pace of which the Fed operates is measured in years and maybe quarters, but not months."

Lee Ferridge, head of macro strategy for North America at State Street Global Markets, said "the idea of the balance sheet reduction as now mentioned in the statement puts us on the table for June."

The fine line between taking action to contain inflation but not tightening policy too fast that it brings the recovery to a quick end, is exactly the line Fed chief Jerome Powell has to walk. Markets will be watching his every step.

The outlook for aggressive rate hikes has led to a major reset globally, said Ed Moya, senior market analyst at OANDA. You just don't know how far the Fed is going to go because we don’t know exactly when inflation will really peak," he said. While there is optimism that inflation will subside by midyear, it could get worse and lead to more aggressive Fed action, he said, adding, "you got a little bit more left in this dollar move."

The Fed also said it may be warranted to increase the federal funds rate "sooner or at a faster pace" than had been earlier anticipated. Chair Jerome Powell later stressed at a news conference that no decisions had been made, but in response to a question about whether the central bank would consider a 50-basis point hike, he did not rule it out.

"Our new base case for six hikes this year poses challenges to our bullish outlook for U.S. equities. However, it is not sufficient to derail it on a standalone basis if earnings growth remains strong, in our view," BNP Paribas analysts wrote in a note.

he U.S. Federal Reserve has kicked off 2022 with a clear message: rates will rise to contain surging inflation. Other central banks have already started the rates liftoff, and even dovish ones are starting to unwind the stimulus unleashed to protect their economies from the COVID-19 pandemic. Here's a look at where policymakers stand on the path out of pandemic-era stimulus, in order of how hawkish they appear:
1643444906847.png



Deutsche Bank expects the Fed to raise interest rates at every meeting from March to June and then revert to a quarterly tightening cycle from September, amounting to five hikes this year. Nomura, meanwhile, predicts a 50-bps move in March.

1643444943478.png


While inflation is at a record high 5%, the ECB expects inflation to retreat and says a rate rise this year is unlikely. However, it has promised copious support via its long-running Asset Purchase Programme and signalled a very gradual exit from years of ultra-easy policy.

1643444983242.png


The dollar consolidated gains on Friday and posted its biggest weekly rise in seven months as markets priced in a year ahead of aggressive hikes in U.S. interest rates.

Money markets priced in a 28.5-basis-point interest rate hike in March and as many as 119.5 basis points in cumulative increases by year's end as the dollar steadily rose in a week highlighted by a more hawkish tone coming out of a Federal Reserve meeting.

"I look for some consolidation, but nothing to say that the dollar's up move is over," said Marc Chandler, chief market strategist at Bannockburn Global Forex. The Employment Cost Index, which (Fed Chair Jerome) Powell has referred to specifically, was a bit softer than expected and has spurred some position adjusting ahead of the weekend," Chandler said.

U.S. labor costs increased strongly in the fourth quarter, but less than expected, the Labor Department said. The Employment Cost Index (ECI), the broadest measure of labor costs, rose 1.0% after increasing 1.3% in the prior quarter.

But the pace of change from the previous periods fell, and even as investors and many analysts continued penciling in more and faster Fed rate increases this year, some added a footnote. The slowdown in employment cost growth, for example, was a "big step in the right direction" for Fed officials who expect price trends to ease on their own, said Ian Shepherdson, chief economist at Pantheon Macroeconomics.

Where Fed Chair Jerome Powell and other U.S. central bank officials have emphasized the risk that inflation may prove higher and require them to raise borrowing costs faster then expected, Shepherdson in recent forecasts sketched an opposing view: Of an economy that flatlines because of the coronavirus pandemic in the first three months of 2022, loses jobs in January and February, and produces inflation that is "falling sharply" by the second quarter, just as the Fed is presumably gearing up for its rate increases.

That scenario, out of step with investors who expect five rate hikes this year and some forecasters who have gone as high as seven, shows the degree of uncertainty still in play around where the economy is heading and how the Fed will respond.

The U.S. Commerce Department reported that consumer spending fell in December, weakness that may have continued into January given the massive outbreak of new coronavirus cases. Consumer sentiment continued to decline at the start of the year, hitting the lowest point in a decade, according to the University of Michigan's closely watched gauge of American households' sentiment.

Survey director Richard Curtin said the combination of Omicron, high inflation, and the steady dose of news about future Fed rate hikes could trigger a consumer backlash - a possible blow to economic growth on top of what's already coming through lowered government spending. The danger is that consumers may overreact to these tiny nudges," Curtin said.

That could help with inflation, at least some of which has been driven by strong demand for goods during the pandemic, but the Fed may be treading a fine line between what's needed to temper prices and what would be an overreach.

"Panic within the Fed's ranks has begun to set in. The challenge now is to tamp down inflation without allowing the flame on the overall economy to go out," wrote Diane Swonk, chief economist at Grant Thornton, a professional services firm. "There is no road map for doing this after inflation has surged."

Either way, said Minneapolis Fed President Neel Kashkari, it's a reason the U.S. central bank may not ultimately need to "slam on the brakes" with aggressive rate increases. Despite the seemingly hawkish positioning of the Fed, Kashkari told NPR on Friday that the aim is not to restrict the recovery but "let our foot off the accelerator just a little bit.

The greenback is poised to gain further versus the euro and yen as the Fed raise rates but the European Central Bank and Bank of Japan likely stand pat. BOJ Governor Haruhiko Kuroda said Friday it was premature to raise the bank's rate targets

A preliminary estimate next week of euro zone consumer prices in January is expected to lower the year-over-year rate toward 4.3% from 5.0%, allowing ECB President Christine Lagarde to keep the hawks at bay, Chandler said.

Persistently high inflation will haunt the world economy this year, according to a Reuters poll of economists who trimmed their global growth outlook on worries of slowing demand and the risk interest rates would rise faster than assumed so far. This represents a sea change from just three months ago, when most economists were siding with central bankers in their then-prevalent view that a surge in inflation, driven in part by pandemic-related supply bottlenecks, would be transitory.

In the latest quarterly Reuters surveys of over 500 economists taken throughout January, economists raised their 2022 inflation forecasts for most of the 46 economies covered. While price pressures are still expected to ease in 2023, the inflation outlook is much stickier than three months ago.

At the same time, economists downgraded their global growth forecasts. After expanding 5.8% last year, the world economy is expected to slow to 4.3% growth in 2022, down from 4.5% predicted in October, in part because of higher interest rates and costs of living. Growth is seen slowing further to 3.6% and 3.2% in 2023 and 2024, respectively.

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COT Report

Speculators' net long bets on the U.S. dollar fell to a 21-week low in the latest week, 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 $9.87 billion for the week ended Jan. 25, compared with a net long position of $12.59 billion for the prior week.

Meantime, EUR position has not changed too much, at least before the recent collapse, as data stands for the 25th of January. Next week, supposedly we should see a quite different picture. This week, we see that net short position has dropped for ~ 5-6K contracts on a background of open interest decreasing:

1643446383403.png


NEXT WEEK TO WATCH

#1 the USD NFP data

The Federal Reserve is clearly out to tame inflation and reckons a "historically tight" labour market gives it plenty of room to raise rates without hurting jobs growth.
January jobs data out Friday will likely confirm that view. Economists polled by Reuters forecast the U.S. economy created 238,000 new jobs versus 199,000 in December when employment rose less than expected due to worker shortages.

1643446530618.png


#2 BoE rate hike

At Thursday's Bank of England meeting, expect interest rates to rise to 0.5% from 0.25%, to curb inflation running at its highest in almost 30 years.
The big question - one many central banks are grappling with - is whether a series of rate hikes now can curb inflation before price pressures trigger higher wage demands, and feed into generally higher price pressures.

Watch out for comments from Governor Andrew Bailey about the strength of the labour market, wage growth, and his take on how fast inflationary pressures are building beyond supply chain disruptions and spiking energy prices.

1643446596344.png


#3 ECB meeting

The same contentious topic - inflation - is dividing European Central Bank officials. Euro-area inflation is at a record high 5% and January data, released Wednesday, could provide the hawks with fresh ammunition to press for a policy shift.

Comments from ECB President Christine Lagarde suggest inflation will drop back below its 2% target this year as pressures from high energy prices and supply bottlenecks ease. She may push back against market pricing for rate rises this year, which is out of sync with ECB messaging. The spillover from U.S. rate-hike bets is a potential headache for officials keen to avoid an unwanted tightening of monetary conditions.

So, Thursday's meeting could prove lively even if no immediate action is expected - the ECB has already outlined plans to wrap up its PEPP stimulus scheme.

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#4 RBA rate decision

As rate-hiking campaigns gather pace in other big economies, central bank doves are becoming an endangered species down under.

The Reserve Bank of Australia meets Tuesday against the backdrop of the hottest consumer inflation since 2014 and strongest labour market since 2008, piling pressure on RBA Governor Philip Lowe to take action.

Lowe has insisted a 2022 rate rise is unlikely, but economists are split on whether the RBA will capitulate. Traders, though, have long wagered Lowe is behind the inflation curve, and are pricing a rate hike in May, followed by at least three more by year-end.

1643446740407.png



To be continued...
 

Sive Morten

Special Consultant to the FPA
Messages
16,092
The bottom line:

Just a few weeks ago, prior Dec meeting we've discussed that the US Dollar could lose some value temporarily as it was a bit overpriced because of Omicron's fears and expectation of Fed aggressive action. And initially, indeed, once fears around Omicron were starting to settle, the dollar has started to climb down a bit. But then the value boost has come from where nobody expected. Started geopolitical tensions in Eastern Europe and surprisingly hawkish J.Powell's speech have brought the cold shower for bargain hunters and forced investors to push capitals into safe-haven assets again. In fact, we have two topics to discuss - one is the Fed policy, including the QT program's pace, and the second - geopolitics.

Although we've brought above the conservative view on the US statistics and data, suggesting that Fed could deny the rate change in March, we still think that this scenario has low chances to happen, despite that period-over-period change in inflation data is decreasing indeed. This is just because Fed sets the trend and does not like to surprise markets. It is consistent with its promises. The anticipation of interest rate changes has gotten the momentum already as markets were preparing for this step by the Fed. A sudden stop of this trajectory could bring a lot of uncertainty and volatility which is not welcome. From this standpoint, I would choose from either a single or double rate change value rather than between a single and no rate change at all. Besides, we see another weakness of the "flat" Fed strategy from the geopolitical point of view, which brings a lot of risk to the US domestic political stability.

Discussing of QT programme and its speed is not very important right now as we agree that it should start closer to the summer and its pace depends on other mentioned factors. It might be curious to say that the QT programme could depend on geopolitics, but, if the US geopolitical positions weakened, it could increase the domestic political tensions that indirectly could hurt the economy in a longer-term perspective. So, I wouldn't start talking about QT right now.

Speaking on geopolitics and tensions in Eastern Europe we suggest that this is a long-term journey and we should not be deceived with temporal relief. This is just the silence before the storm. As we've said in a previous report, a politician of such scale as V. Putin just can't make emotional steps. He can't set security claims to NATO, get the deny, and then said - "it's ok, let's forget about it". This is a vital loss of reputation in the global political arena. NATO answer was not a surprise, it was obvious. And Putin definitely was ready for that. This, in turn, means, that if he starts this, he knows what to do, has plans and arguments. Now the ball is on Russia's side and Putin comes to China on Olimpic games opening to meet Mr. Xi. We should not expect obvious steps that are supposed by mass media, who just repeat the same mantras "Russia invades Ukraine". This step is too obvious and brings no geopolitical advantage. Besides, if somebody pushes you precisely to this step - this is the best argument to not do this. With 99% probability, there will be no invasion of Ukraine, and Putin's response is difficult to predict, it could be smooth and long-term but directional. These tensions stand for the long term, guys.

All these thoughts make us doubt on flat Fed policy just because of decreasing of month-to-month inflation growth. The win over Russia in geopolitical struggle should become a big boost to the US reputation, Biden rating, and argument to press on China. But If NATO starts losing positions in Europe, Biden's chair could start shaking, with rising unrests inside the US and piking of political struggle.

That's being said, we do not see any valuable arguments right now that could assure us that the US Dollar should become weaker in the nearest few months. At least it should keep its value, but it is more probable that it should keep going higher.

Technicals
Monthly

Since we have just a single session till the end of January, we probably get a bearish reversal month that stands in a row with our expectations of a downside trend.

All other things mostly stand the same. The trend is bearish here, downside CD leg speed is faster than AB, which doesn't let us count on upside reversal. Besides EUR has broken all meaningful support levels here and YPP of 2021. December becomes the inside month, showing the consolidation after reaching of major COP target.
The monthly chart suggests the next long-term destination point after retracement will be over is around the 1.09-1.10 area - the combination of YPS1 and the trend line. The market is not oversold, the key rules of financial strategy are set, and with no strong support areas below - the reaching of 1.10 seems to be a question of time.

eur_m_31_01_22.png


Weekly

Here we do not have a lot of things to comment on. The nominal trend stands bullish, but with the breaking of all support levels, the only thing that could hold the downside pressure is the oversold area that agrees with our supposed target around 1.09-1.10:
eur_w_31_01_22.png


Daily

On the daily chart market still stands at oversold, suggesting that minor upside bounce should happen, at least. With the anticipation action to 1.09-1.10 area, it seems that it could be the rally to sell. As the recent plunge fits the minimum requirement of the thrust quality, the B&B "Sell" pattern is the one that we could keep an eye on here:
eur_d_31_01_22.png


Intraday

On 4H chart we have XOP that agrees with weekly oversold area and fits to monthly 1.09-1.10 support:

eur_4h_31_01_22.png


1H chart shows some upside bounce on Friday, but it is too small to make far going conclusions. In fact, the market here has to reach 1.1236 Fib level to give us daily B&B. So let's keep watching.
eur_1h_31_01_22.png
 

chalo

Private, 1st Class
Messages
37
The bottom line:

Just a few weeks ago, prior Dec meeting we've discussed that the US Dollar could lose some value temporarily as it was a bit overpriced because of Omicron's fears and expectation of Fed aggressive action. And initially, indeed, once fears around Omicron were starting to settle, the dollar has started to climb down a bit. But then the value boost has come from where nobody expected. Started geopolitical tensions in Eastern Europe and surprisingly hawkish J.Powell's speech have brought the cold shower for bargain hunters and forced investors to push capitals into safe-haven assets again. In fact, we have two topics to discuss - one is the Fed policy, including the QT program's pace, and the second - geopolitics.

Although we've brought above the conservative view on the US statistics and data, suggesting that Fed could deny the rate change in March, we still think that this scenario has low chances to happen, despite that period-over-period change in inflation data is decreasing indeed. This is just because Fed sets the trend and does not like to surprise markets. It is consistent with its promises. The anticipation of interest rate changes has gotten the momentum already as markets were preparing for this step by the Fed. A sudden stop of this trajectory could bring a lot of uncertainty and volatility which is not welcome. From this standpoint, I would choose from either a single or double rate change value rather than between a single and no rate change at all. Besides, we see another weakness of the "flat" Fed strategy from the geopolitical point of view, which brings a lot of risk to the US domestic political stability.

Discussing of QT programme and its speed is not very important right now as we agree that it should start closer to the summer and its pace depends on other mentioned factors. It might be curious to say that the QT programme could depend on geopolitics, but, if the US geopolitical positions weakened, it could increase the domestic political tensions that indirectly could hurt the economy in a longer-term perspective. So, I wouldn't start talking about QT right now.

Speaking on geopolitics and tensions in Eastern Europe we suggest that this is a long-term journey and we should not be deceived with temporal relief. This is just the silence before the storm. As we've said in a previous report, a politician of such scale as V. Putin just can't make emotional steps. He can't set security claims to NATO, get the deny, and then said - "it's ok, let's forget about it". This is a vital loss of reputation in the global political arena. NATO answer was not a surprise, it was obvious. And Putin definitely was ready for that. This, in turn, means, that if he starts this, he knows what to do, has plans and arguments. Now the ball is on Russia's side and Putin comes to China on Olimpic games opening to meet Mr. Xi. We should not expect obvious steps that are supposed by mass media, who just repeat the same mantras "Russia invades Ukraine". This step is too obvious and brings no geopolitical advantage. Besides, if somebody pushes you precisely to this step - this is the best argument to not do this. With 99% probability, there will be no invasion of Ukraine, and Putin's response is difficult to predict, it could be smooth and long-term but directional. These tensions stand for the long term, guys.

All these thoughts make us doubt on flat Fed policy just because of decreasing of month-to-month inflation growth. The win over Russia in geopolitical struggle should become a big boost to the US reputation, Biden rating, and argument to press on China. But If NATO starts losing positions in Europe, Biden's chair could start shaking, with rising unrests inside the US and piking of political struggle.

That's being said, we do not see any valuable arguments right now that could assure us that the US Dollar should become weaker in the nearest few months. At least it should keep its value, but it is more probable that it should keep going higher.

Technicals
Monthly

Since we have just a single session till the end of January, we probably get a bearish reversal month that stands in a row with our expectations of a downside trend.

All other things mostly stand the same. The trend is bearish here, downside CD leg speed is faster than AB, which doesn't let us count on upside reversal. Besides EUR has broken all meaningful support levels here and YPP of 2021. December becomes the inside month, showing the consolidation after reaching of major COP target.
The monthly chart suggests the next long-term destination point after retracement will be over is around the 1.09-1.10 area - the combination of YPS1 and the trend line. The market is not oversold, the key rules of financial strategy are set, and with no strong support areas below - the reaching of 1.10 seems to be a question of time.

View attachment 73404

Weekly

Here we do not have a lot of things to comment on. The nominal trend stands bullish, but with the breaking of all support levels, the only thing that could hold the downside pressure is the oversold area that agrees with our supposed target around 1.09-1.10:
View attachment 73405

Daily

On the daily chart market still stands at oversold, suggesting that minor upside bounce should happen, at least. With the anticipation action to 1.09-1.10 area, it seems that it could be the rally to sell. As the recent plunge fits the minimum requirement of the thrust quality, the B&B "Sell" pattern is the one that we could keep an eye on here:
View attachment 73406

Intraday

On 4H chart we have XOP that agrees with weekly oversold area and fits to monthly 1.09-1.10 support:

View attachment 73407

1H chart shows some upside bounce on Friday, but it is too small to make far going conclusions. In fact, the market here has to reach 1.1236 Fib level to give us daily B&B. So let's keep watching.
View attachment 73408
Dear Sive,
All the information you share is always enlightening and helps so much to look a new week from a different perspective. Thank you so much for your time to put together in great detail your analysis.

Regards,
Chalo
 

Sive Morten

Special Consultant to the FPA
Messages
16,092
Morning everybody,

So, the pullback that we've discussed in weekly report has started and rather actively. So, that on daily chart we've got huge Morning star pattern and market already stands near daily 3/8 Fib level. The strong upside momentum lets us to watch not only for B&B "Sell", but to following upside extension as well.
eur_01_02_22.png


But first, as we've said, lets see whether we get B&B "Sell from 1.1240-1.1270 area. In fact, market has not closed yet above 3x3 DMA and has not reached yet the Fib level, which means that formally we do not have yet the B&B confirmation. As recent momentum stands strong, it is preferable to get some bearish patterns on 1H or lower time frames, before pulling the B&B sell trigger. Now we have only XOP that has been reached, but it seems not enough by far. At least this is my preference to wait for bearish signs... It has some own adv. and disadv. Theoretically it is possible to anticipate B&B with stop above 3/8 daily resistance area, but it is uncomfortable to get strong upward momentum on the back. This is, actually the major reason why it seems better to get some bearish signs first, particularly for this trade.
eur_1h_01_02_22.png


Finally when and if B&B will be done, we could consider upside extension in a shape of some AB=CD pattern, as market shows solid upside momentum and huge bullish pattern on daily chart.
 

Sive Morten

Special Consultant to the FPA
Messages
16,092
Welcome everybody,

So, formally EUR stands at the point - we've got 1st close above the 3x3 DMA and daily resistance is reached. the B&B "Sell" setup is confirmed.
eur_d_02_02_22.png


But, as usual we have surprises inside. First is, price action is wobble around the resistance and we do not have absolutely clear bearish pattern. Yes, we have K-area and 1H bearish divergence with some widening top consolidation, but this is not clearly bearish. And here we have the option - either to accept the compromise, take a position with stops somewhere above 1.1305-1.1310 area, or just wait a bit longer. Because here, say, another butterfly might be. EUR is trying to launch B&B but the previous thrust is strong enough and it can't fade its momentum yet. That's the option that you need to think about. I'm not 100% sure that 2nd butterfly will be formed, this is just to illustrate what we could get.
eur_1h_02_02_22.png


On GBP, by the way upward action accurately has started from 4H XOP agreement area that we've discussed last week. There we also could keep an eye on 1H reverse H&S pattern.... Coming BoE decision could bring a lot of volatility.
GBP_4h_02_02_22.png
 

Sive Morten

Special Consultant to the FPA
Messages
16,092
Morning everybody,

So, EUR was able to move slightly higher and our doubts on entry yesterday were not in vain. Anyway, this is a great example of what you usually get when you try to catch the proper moment for entry on intraday charts with a good ready-to-use setup on higher time frame. Our journey here continues.

Today is exception session by another reason as well. Yesterday, we've got outstanding inflation data in EU, which is above 5% and today - ECB meeting. C. Lagarde statement this time supposedly get greater resonance, especially if it becomes anemic once again.

From technical point of view, now we have more prominent background for short entry, just because this is the last area where retracement could start. It should start right from here or it doesn't start at all. On daily chart EUR hits K-area and overbought. Just these two levels together gives us bearish "Stretch" pattern. Also price re-tests broken line.
eur_d_03_02_22.png


On 4H chart we have separate upside thrust, that also could be used for trading by scalpers. As we expect deep retracement on daily, it is logical to suggest appearing of DRPO "Sell' here, rather than B&B pattern.
eur_4h_03_02_22.png


Another reason why I'm looking for DRPO is the price action on 1H chart. As we haven't got any patterns yesterday, we do not have it right now as well. It could mean only one thing. You could get the bearish confirmation only, if price fails to go up. Which supposedly means attempt to break the top and forming the W&R here. And this action in fact, is the same as DRPO on 4H chart....
Market theoretically could start dropping immediately, but, as upside momentum is rather strong, scenario with W&R seems more probable.
eur_1h_03_02_22.png


That's being said - bulls should do nothing and wait for moderate pullback, as EUR stands at overbought and daily resistance. Bears should try to catch position following to DRPO and W&R action. Those who are not sure that have experience to do it - try to take position as closer to the top as possible with the stops above daily K-area.

And let's see what will happen later in the day, especially during ECB meeting.
 

Sive Morten

Special Consultant to the FPA
Messages
16,092
Morning everybody,

So, as we've said yesterday EUR could break this level only if something unexpected happens. And dramatically, unexpected has come, as C. Lagarde and ECB changes the rhetoric and eliminate phrase on supposed inflation decreasing later in the year, and second - that rate change is highly unlikely. This was the cold shower as nobody expected any changes from ECB. The later action that we see is just re-balancing of the dollar value that has priced-in domination over other currencies due Fed policy. Now BoE is 0.5% ahead of the Fed and ECB, and ECB doesn't exclude the rate change.

At the same time, we should overvalue this rally as it is many emotions stand there. Downside action was long-term and bearish momentum is still here. Strong rally suggests that upward action should be extended but it is too early to speak about some major reversal.

Now EUR is extremely overbought and stands at major daily K-resistance area. For long entry it makes sense to wait. One of the patterns that we could suggest here is reverse H&S:
eur_d_04_02_22.png


On 4H we haven't got the DRPO "Sell" so, and this shows why we prefer do not to anticipate price reversal and wait for the patterns. We haven't got it - so no entry signal has been formed. Now thrusting action looks solid here, and scalp traders probably could start watching for the bearish patterns around it. Downside retracement supposedly should be slow but more or less extended, somewhere to 1.13 area, if we suggest daily H&S pattern.
eur_4h_04_02_22.png


On 1h chart once again - upward action happens that we've discussed, but not in the way of W&R as EUR just exploded above the previous top.
eur_1h_04_02_22.png


At the same time, guys, those who were not waiting for patterns that we've discussed and just opened short position - this was not the mistake, this is just the part of the business, as unexpected things rare but happen. So, don't down yourself too much, take it, and go forward. In 90% cases, you would get good result in the same circumstances.
 
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