Sive Morten
Special Consultant to the FPA
- Messages
- 18,727
Fundamentals
(Reuters) - The U.S. dollar recovered slightly on Friday, but posted its biggest quarterly decline against a basket of rival currencies in nearly seven years after hawkish signals from foreign central banks this week pressured the greenback further.
Investors have ramped-up expectations for tighter monetary policy from the European Central Bank, Bank of England and Bank of Canada after hints from officials this week.
This has made the greenback less attractive, in addition to skepticism that the Federal Reserve would be able to raise interest rates again this year given a recent batch of weak U.S. economic data and doubts that U.S. President Donald Trump could enact his pro-growth agenda.
The U.S. dollar index, which measures the greenback against a basket of six major currencies, declined about 4.6 percent for the second quarter to mark its steepest quarterly percentage drop since the third quarter of 2010.
The euro accelerated more than 7 percent against the greenback for its biggest quarterly percentage gain since the third quarter of 2010. The euro racked up about 2 percent of its gains and the dollar index posted about 1.6 percent of its losses this week alone. The dollar gained about 1 percent against the Japanese yen over the quarter.
"What really gave the hawkish central banks extra punch was how it seemed to be a coordinated effort to signal a shift away from low-rate policies," said Joe Manimbo, senior market analyst at Western Union Business Solutions in Washington.
He said improving economic growth in Europe and Canada opened the door for those comments and was "a reality check how the U.S. isn't standing head and shoulders above everyone else."
Analysts said Friday's bounce for the dollar came as some traders likely took profits on gains in the euro as well as the sterling. The dollar fell against the Canadian dollar, however, and was last at C$1.2971 after touching a nearly 10-month low of C$1.2948 earlier.
"It appears as though the euro and the pound could be testing some resistance levels, and that could also contribute to ... the profit-taking," said Eric Viloria, currency strategist at Wells Fargo Securities in New York.
Fathom StRRiM rises to its highest level of the year
by Fathom Consulting
The Fathom StRRiM (Sterling Relative Risk Metric) has risen to its highest level this year, as uncertainty over monetary policy has added to existing political uncertainty.
Following this month’s Bank of England MPC meeting, and the announcement that three MPC members had voted to increase interest rates, last week we received important speeches from two MPC members. First, Governor Carney stated that “now is not yet the time” to begin raising rates. Indeed, he spoke of wanting to assess evidence “over the coming months”, suggesting that, for now at least, he is not minded to vote for tighter policy any time soon. The pound fell and short sterling interest rate futures rallied as markets pushed back expectations of an imminent rate rise. However, Bank Chief Economist Andy Haldane followed up with a hawkish speech on Wednesday, where he argued that a reversal of the 25 basis point cut enacted after the Brexit vote last year would be “prudent relatively soon”. Markets changed course once again, and are now fully pricing in a 25 basis point increase in interest rates by the middle of next year.
In our central view, UK monetary policy is on hold for at least the next two years. Nevertheless, we do see a risk that last year’s futile 25 basis point post-referendum cut is reversed. With the UK macroeconomic outlook set to deteriorate through the second half of this year, any modest tightening would need to happen sooner rather than later. On that basis, August would be the most likely month for a move.
All three major components of StRRiM — foreign exchange, fixed income and equities —are now in positive territory, meaning that relative risk in all sterling markets is higher than the norm. With heightened political uncertainty likely to remain for some time, the metric is likely to remain elevated until the future of monetary policy is resolved.
COT Report
Recent report doesn't show any change yet in sentiment, as it stands on 27th of June, while recent rally has happened later, at the end of the week. Still, even some moments that we see there point on some "indecision" situation. Take a look how open interest has dropped in last two weeks, while net short position mostly stands the same. It means that longs and shorts were closed approximately at equal values. It will be interesting to see how sentiment will change in next report:
Technicals
Monthly
Today, guys, we just can't ignore changes that we see on GBP. Even Fathom consulting has changed its opinion and now suggests that some short-term tightening could happen, starting in August. At the same time they talk that this will not be full cycle, but 1-2 hikes, because overall situation in UK economy is not very positive.
At the same time possible upside action not harm overall bearish technical picture on monthly chart. In fact Cable could show very high retracements there and they still will be just retracement. Action to YPR1 around 1.4240 will be just minor retracement up. To break overall bearish picture here price should exceed 1.72 C point. Hardly this happen very soon.
Upside target that we can estimate right now here is double of harmonic retracement, which mostly coincides with 1.42 Yearly Pivor Resistance 1 area.
That's being said price could take a pause in long-term downside action for few months, may be even till the end of 2017 due coming events that we've just discussed above.
Still longer term perspective situation also stands unclear. GB has bought Brexit ticket, but currently it is difficult to suggest where it will lead it. Fathom consulting has negative fundamental view on perspective of UK economy. We place their articles here regularly. In two words speaking they think that UK has "deffered" effect of Brexit. It will come, but later, despite that many economists were fast to aknowledge that no negative effect will happen as we do not see it right now. Finally, taking in consideration possible 150 points US rate hike in 2 years also will be headwind to GBP. That's why we have doubts on perspective of GBP rising in long-term.
Besides, if you will take a look at all-time GBP chart, you'll see that market already has broken major 5/8 Fib support and on a way down, drop is really fast since first leg was on 2008 crisis. Overall fundamental situation is mostly supportive to this scenario, besides, 20 points is not really big distance to GBP that is more volatile than many other major currencies.
Thus we will keep for some case here our next downside target, which is 1.1240 area. This is 1.618 butterfly extension and Yearly Pivot Support 1 area.
Weekly
This idea of 1-2 rate increasing mostly corresponds to our technical picture around weekly butterfly. When we saw it for the first time and planned the first trade down we said that price could fluctuate freely till 1.26-1.2650 strong support area. 1.26 is a fulcrum. Breaking it down will mean long-term bearish trend continuation while standing above it will keep chances on action to next 1.618 extension of weekly butterfly. By this reason our target on first trade down was 1.26 support area. So, it seems that as technical as fundamental situation mostly gravitates to scenario of upside continuation right now.
Next nearest target on weekly chart stands at 1.3255 area. This is 1.618 butterfly extension and also this will be an area near weekly overbought level.
Daily
On daily chart cable has hit our last week ceil level almost pips-to-pips. Indeed overbought level and MPR1 around 1.3050 held price from further appreciation. On daily chart we have another pattern that points on the same 1.3250 area. This is 1.618 AB-CD target.
Currently situation is simple here. We need to take in our favor situation with overbought and try to catch meaningful retracement down. Other words speaking - we could try to buy some deep on intraday charts.
As major retracement and reaction on weekly butterfly 1.27 target already has happened. It was the action from .13050 top to 1.26 bottom - right now price stands in extension mode and retracement will be relatively small. For trading we could focus only on most recent swing up:
4-hour
Here is guys, our major trading chart for coming week. It is needless to say that it is better to take position as lower as possible but we need to be reasonable with levels' choice.
Retracement indeed could start here. Besides of daily OB, market here has completed Double Bottom target and price is forming DRPO "Sell" pattern. We have two K-support areas that stand side-by-side to each other and in fact they make 1.2830-1.29 area difficut to pass. Let's try to estimate major issues here.
First, taking in consideration all background that we've talked above - price should not drop below 1.2830 area. First - this is neckline of double bottom, second - this is WPS1, and finally, if price will drop through it - it will break two side-by-side K-support areas. This action will be hard to accept as bullish action.
DRPO pattern (if it will be formed, of course), suggests 50% drop, approximately to major 1.2860 3/8 Fib support area. That's why, good area to think about taking at least some part of long posiiton is around MPP and Fist K-area @ 1.2880. You could add a bit more, if price will reach 1.2830-1.2850 level.
As we plan extended trades on daily chart, be prepared for far stops and reduce trading volume correspondingly. Your money potential loss should be the same as in any trade (I do not risk more than 2% of assets in any trade). It seems that initial stop should be placed somewhere below 1.28, but better even below 5/8 Fib level and MPS1 around 1.2720 to get market room to breath. As soon as upward action will re-establish, stop should be moved below new lows.
If this is too far for you - wait when major retracement will be finished and market will start new leg up, then you could try to get in on minor retracement. This will let you to use tighter stop, but this is more difficult to do.
Conclusion:
Although recent new fundamental background assumes bullish changes for few months, our long-term view on GBP still stands intact and we expect downward continuation in 2017-2018. Our next long-term target stands around 1.12 area.
In shorter-term perspective possible 1-2 rate hikes starting in August could lead to solid rally on daily chart. First - to 1.3250 and later to 1.42+ area. Thus, trading process mostly will stand around this new scenario.
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.
(Reuters) - The U.S. dollar recovered slightly on Friday, but posted its biggest quarterly decline against a basket of rival currencies in nearly seven years after hawkish signals from foreign central banks this week pressured the greenback further.
Investors have ramped-up expectations for tighter monetary policy from the European Central Bank, Bank of England and Bank of Canada after hints from officials this week.
This has made the greenback less attractive, in addition to skepticism that the Federal Reserve would be able to raise interest rates again this year given a recent batch of weak U.S. economic data and doubts that U.S. President Donald Trump could enact his pro-growth agenda.
The U.S. dollar index, which measures the greenback against a basket of six major currencies, declined about 4.6 percent for the second quarter to mark its steepest quarterly percentage drop since the third quarter of 2010.
The euro accelerated more than 7 percent against the greenback for its biggest quarterly percentage gain since the third quarter of 2010. The euro racked up about 2 percent of its gains and the dollar index posted about 1.6 percent of its losses this week alone. The dollar gained about 1 percent against the Japanese yen over the quarter.
"What really gave the hawkish central banks extra punch was how it seemed to be a coordinated effort to signal a shift away from low-rate policies," said Joe Manimbo, senior market analyst at Western Union Business Solutions in Washington.
He said improving economic growth in Europe and Canada opened the door for those comments and was "a reality check how the U.S. isn't standing head and shoulders above everyone else."
Analysts said Friday's bounce for the dollar came as some traders likely took profits on gains in the euro as well as the sterling. The dollar fell against the Canadian dollar, however, and was last at C$1.2971 after touching a nearly 10-month low of C$1.2948 earlier.
"It appears as though the euro and the pound could be testing some resistance levels, and that could also contribute to ... the profit-taking," said Eric Viloria, currency strategist at Wells Fargo Securities in New York.
Fathom StRRiM rises to its highest level of the year
by Fathom Consulting
The Fathom StRRiM (Sterling Relative Risk Metric) has risen to its highest level this year, as uncertainty over monetary policy has added to existing political uncertainty.
Following this month’s Bank of England MPC meeting, and the announcement that three MPC members had voted to increase interest rates, last week we received important speeches from two MPC members. First, Governor Carney stated that “now is not yet the time” to begin raising rates. Indeed, he spoke of wanting to assess evidence “over the coming months”, suggesting that, for now at least, he is not minded to vote for tighter policy any time soon. The pound fell and short sterling interest rate futures rallied as markets pushed back expectations of an imminent rate rise. However, Bank Chief Economist Andy Haldane followed up with a hawkish speech on Wednesday, where he argued that a reversal of the 25 basis point cut enacted after the Brexit vote last year would be “prudent relatively soon”. Markets changed course once again, and are now fully pricing in a 25 basis point increase in interest rates by the middle of next year.
In our central view, UK monetary policy is on hold for at least the next two years. Nevertheless, we do see a risk that last year’s futile 25 basis point post-referendum cut is reversed. With the UK macroeconomic outlook set to deteriorate through the second half of this year, any modest tightening would need to happen sooner rather than later. On that basis, August would be the most likely month for a move.
All three major components of StRRiM — foreign exchange, fixed income and equities —are now in positive territory, meaning that relative risk in all sterling markets is higher than the norm. With heightened political uncertainty likely to remain for some time, the metric is likely to remain elevated until the future of monetary policy is resolved.
COT Report
Recent report doesn't show any change yet in sentiment, as it stands on 27th of June, while recent rally has happened later, at the end of the week. Still, even some moments that we see there point on some "indecision" situation. Take a look how open interest has dropped in last two weeks, while net short position mostly stands the same. It means that longs and shorts were closed approximately at equal values. It will be interesting to see how sentiment will change in next report:
Technicals
Monthly
Today, guys, we just can't ignore changes that we see on GBP. Even Fathom consulting has changed its opinion and now suggests that some short-term tightening could happen, starting in August. At the same time they talk that this will not be full cycle, but 1-2 hikes, because overall situation in UK economy is not very positive.
At the same time possible upside action not harm overall bearish technical picture on monthly chart. In fact Cable could show very high retracements there and they still will be just retracement. Action to YPR1 around 1.4240 will be just minor retracement up. To break overall bearish picture here price should exceed 1.72 C point. Hardly this happen very soon.
Upside target that we can estimate right now here is double of harmonic retracement, which mostly coincides with 1.42 Yearly Pivor Resistance 1 area.
That's being said price could take a pause in long-term downside action for few months, may be even till the end of 2017 due coming events that we've just discussed above.
Still longer term perspective situation also stands unclear. GB has bought Brexit ticket, but currently it is difficult to suggest where it will lead it. Fathom consulting has negative fundamental view on perspective of UK economy. We place their articles here regularly. In two words speaking they think that UK has "deffered" effect of Brexit. It will come, but later, despite that many economists were fast to aknowledge that no negative effect will happen as we do not see it right now. Finally, taking in consideration possible 150 points US rate hike in 2 years also will be headwind to GBP. That's why we have doubts on perspective of GBP rising in long-term.
Besides, if you will take a look at all-time GBP chart, you'll see that market already has broken major 5/8 Fib support and on a way down, drop is really fast since first leg was on 2008 crisis. Overall fundamental situation is mostly supportive to this scenario, besides, 20 points is not really big distance to GBP that is more volatile than many other major currencies.
Thus we will keep for some case here our next downside target, which is 1.1240 area. This is 1.618 butterfly extension and Yearly Pivot Support 1 area.
Weekly
This idea of 1-2 rate increasing mostly corresponds to our technical picture around weekly butterfly. When we saw it for the first time and planned the first trade down we said that price could fluctuate freely till 1.26-1.2650 strong support area. 1.26 is a fulcrum. Breaking it down will mean long-term bearish trend continuation while standing above it will keep chances on action to next 1.618 extension of weekly butterfly. By this reason our target on first trade down was 1.26 support area. So, it seems that as technical as fundamental situation mostly gravitates to scenario of upside continuation right now.
Next nearest target on weekly chart stands at 1.3255 area. This is 1.618 butterfly extension and also this will be an area near weekly overbought level.
Daily
On daily chart cable has hit our last week ceil level almost pips-to-pips. Indeed overbought level and MPR1 around 1.3050 held price from further appreciation. On daily chart we have another pattern that points on the same 1.3250 area. This is 1.618 AB-CD target.
Currently situation is simple here. We need to take in our favor situation with overbought and try to catch meaningful retracement down. Other words speaking - we could try to buy some deep on intraday charts.
As major retracement and reaction on weekly butterfly 1.27 target already has happened. It was the action from .13050 top to 1.26 bottom - right now price stands in extension mode and retracement will be relatively small. For trading we could focus only on most recent swing up:
4-hour
Here is guys, our major trading chart for coming week. It is needless to say that it is better to take position as lower as possible but we need to be reasonable with levels' choice.
Retracement indeed could start here. Besides of daily OB, market here has completed Double Bottom target and price is forming DRPO "Sell" pattern. We have two K-support areas that stand side-by-side to each other and in fact they make 1.2830-1.29 area difficut to pass. Let's try to estimate major issues here.
First, taking in consideration all background that we've talked above - price should not drop below 1.2830 area. First - this is neckline of double bottom, second - this is WPS1, and finally, if price will drop through it - it will break two side-by-side K-support areas. This action will be hard to accept as bullish action.
DRPO pattern (if it will be formed, of course), suggests 50% drop, approximately to major 1.2860 3/8 Fib support area. That's why, good area to think about taking at least some part of long posiiton is around MPP and Fist K-area @ 1.2880. You could add a bit more, if price will reach 1.2830-1.2850 level.
As we plan extended trades on daily chart, be prepared for far stops and reduce trading volume correspondingly. Your money potential loss should be the same as in any trade (I do not risk more than 2% of assets in any trade). It seems that initial stop should be placed somewhere below 1.28, but better even below 5/8 Fib level and MPS1 around 1.2720 to get market room to breath. As soon as upward action will re-establish, stop should be moved below new lows.
If this is too far for you - wait when major retracement will be finished and market will start new leg up, then you could try to get in on minor retracement. This will let you to use tighter stop, but this is more difficult to do.
Conclusion:
Although recent new fundamental background assumes bullish changes for few months, our long-term view on GBP still stands intact and we expect downward continuation in 2017-2018. Our next long-term target stands around 1.12 area.
In shorter-term perspective possible 1-2 rate hikes starting in August could lead to solid rally on daily chart. First - to 1.3250 and later to 1.42+ area. Thus, trading process mostly will stand around this new scenario.
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.