Forex FOREX PRO WEEKLY, July 05 - 09, 2021

Sive Morten

Special Consultant to the FPA

This week action mostly was turning around NFP numbers. Data is released and mostly stands positive, but not too strong to run new speculations about Fed policy adjustments. Investors mostly have accepted already the idea that Fed makes next step in September, when theoretically, announcement of tapering should happen. Despite that we saw the pullback on Friday due to some components of report, it has made its effect as more talking about inflation starts.

Market overview

Even before report, the dollar rose towards three-month highs versus major counterparts on Tuesday as coronavirus outbreaks threatened to snuff out global economic recovery with the Australian dollar and the British pound leading losses. Australia is battling small but fast-growing outbreaks with snap lockdowns in several cities while the Red Cross said Indonesia's COVID-19 surge is taking the Southeast nation to the edge of a "catastrophe".

"Market sentiment is not that cheery at the start of this week with news of rising COVID cases, new lockdown measures and fresh travel restrictions pouring cold water on global markets," said Ipek Ozkardeskaya, a senior analyst at Swissquote.

"The market had been positioned long of the single currency on optimism regarding the vaccine catch-up trade in the region (but) forecasts that the Delta variant of COVID could spread through Europe (in) the summer months could now be undermining confidence in this trade," Rabobank strategist Jane Foley wrote in a report, cutting a one-month euro forecast to $1.19 from $1.20.

The dollar has gained about 2.5% against a basket of currencies this month, mostly in the wake of a surprisingly hawkish shift in the Federal Reserve's rates outlook.

Paul Mackel, global head of FX research at HSBC, said currency markets seemed to be in transition from closely tracking the ebb and flow of risk sentiment towards a greater sensitivity to interest rates, driving a shakeout that has lifted the dollar.

"There's been a lot of speculative build-up of short dollar positions over the last couple of months and we think that these are being washed out," Mackel told reporters, speaking during an outlook call.

Indeed, data showed the sharpest fall in the value of bets against the dollar in three months occurred last week, a boost for the greenback as the shorts buy dollars to close positions.

U.S. job growth accelerated in June as companies, desperate to boost production and services amid booming demand, raised wages and offered incentives to draw millions of reluctant unemployed Americans back into the labor force. Non farm payrolls increased by 850,000 jobs last month after rising 583,000 in May, the Labor Department said in its closely watched employment report on Friday. The unemployment rate rose to 5.9% from 5.8% in May.

“For capital markets, equities and bonds, this was a goldilocks report. It was strong enough but not too strong which is exactly what they wanted to see. If you got too strong a report the market could’ve had a negative reaction saying that means the Fed can’t wait two years to raise interest rates. There would’ve been concerns that pulls the Fed forward. This was perfect. There were enough jobs that you’d want to see but not so much that it concerns people that the Fed may have to act sooner.”

“Participation looks strong. Its unchanged month over month but there’s good evidence people are returning. “The narrative there is we’re seeing exactly what we were expecting, the services piece turning back on as the economy opens up. That’s great news. That’s exactly what we want at this stage of the recovery.”

“Wages were strong ... It’s starting it’s build. I don’t think we’ve seen the high water mark yet in wage inflation pressure.”

“Up to this point its been largely industrials and goods sector that’s been pushing the economy forward. Services has been turned off as retail, restaurants, travel haven’t been where we’ve wanted them to be. As that turns back on, that will put pressure on wages.”

We still have upward pressure that lies before us in wages. Beyond the headline jobs number, that’s the first place my eyes go to, what’s happening in wages?” said Darrell Cronk, CIO, Wells Fargo, NY.

“The FX market was gearing up for a stronger number all week and you saw that in the dollar’s strength. I think the bar for a positive surprise was higher as a result. We initially reacted positively to the headline, which was stronger than expected. And then moved a little lower because of some of the weaker details of the report such as the higher unemployment rate and the higher bar for a positive surprise.”

“Overall, we’re moving in the right direction. The U.S. labor market is strong. How quickly we can eliminate slack in the labor market remains to be seen. But our view at UBS is that there is more slack than what appears at first glance. We expect more people to join the labor force in the coming months and as a result, unemployment rate will fall slowly," Vassili Serebriakov said, FX Strategist, UBS, NY

Indeed, the dollar dropped from three-month high earlier on Friday, weighed down by what analysts viewed as a mixed U.S. nonfarm payrolls report for June, that showed a strong headline number but with some weak components. The unemployment rate rose to 5.9% from 5.8% in May, while the closely watched average hourly earnings, a gauge of wage inflation, rose 0.3% last month, lower than the consensus forecast for a 0.4% increase.

Analysts said overall the report was strong and trended in the right direction, which should cement the case for the Federal Reserve to start tapering its asset purchases soon. That should be positive for the dollar.

The greenback has strengthened broadly since the Federal Open Market Committee (FOMC) surprised markets last month by signaling it could tighten policy earlier than expected to curb inflation.

"The bigger picture is that the greenback has extended its post-FOMC rally against the other major currencies this week," said Jonas Goltermann, senior markets economist at Capital Economics. "We expect it to make further headway, provided that the U.S. data continue to come in strong."

Despite the fall, TD Securities, said in a research note that the dollar is not looking at the start of a significant correction.

"Beyond the initial 'sell the fact' reaction that appears to be underway, we think the overall tone of the report remains positive. After two consecutive 'disappointments', the June data offers reassurance that the US economic rebound is on track," the Canadian bank said.

Federal Reserve Bank of San Francisco President Mary Daly said Friday that at the current pace of job growth, averaged over the past three months, U.S. employment could regain its pre-crisis level by the end of next year. “Today’s job market report just says, we’re on our way,” Daly told CNN in an interview.

A stronger than expected U.S. employment report is strengthening investors’ focus on economic data and the Federal Reserve’s next move, as markets cheer further evidence of a robust economic recovery amid worries over persistent inflation. U.S. companies hired the most workers in 10 months in June, Friday’s data showed, raising wages to entice millions of unemployed Americans sitting at home in a tentative sign that a labor shortage hanging over the economy was starting to ease.

While the initial market reaction to the report was positive, with stocks rising to fresh highs and Treasury yields dipping only slightly, investors said the data does little to dispel concerns that a strong recovery and rising wages could force the Fed to begin unwinding its easy money policies faster than expected.

That dynamic could weigh on financial markets over the summer, as investors await the Fed’s July monetary policy meeting and its August symposium in Jackson Hole, Wyo., after a hawkish shift from the central bank last month prompted several days of market turbulence. Minutes from the central bank’s latest monetary policy meeting, due out next week, may also give a glimpse into policymakers' thinking.

“I think the market is torn,” said Priya Misra, head of global rates strategy at TD Securities. "If the data is better, normally that should mean higher rates, but if the Fed is forced to exit faster that would slow down the economy."

Though U.S. stocks stand near highs, some analysts have noted signs of caution in various corners of the market. Worries over the spread of the COVID-19 Delta variant have weighed on travel and leisure stocks and economically sensitive value shares, while concerns over a potentially more hawkish Fed are among the factors keeping yields on U.S. government bonds subdued.

Investors in recent weeks have also noted a concentration of the market’s gains in fewer stocks, which some investors view as a sign of waning confidence in the broader market.

"I'd guess the Fed winds up hiking sooner and/or faster than two hikes in 2023 because of the labor force worries,” said Tom Graff, head of international fixed income at Brown Advisory. “It means the non-transitory phase is probably closer than the Fed is admitting."

Friday's report should prompt the Fed to focus more on tapering its support of the economy at its upcoming August meeting, said Rick Rieder, chief investment officer of global fixed income at BlackRock. "Today's payroll report reinforces that the economy is bursting with demand (particularly for qualified workers) and is only being held back by supply," he noted.

Inflation in focus again
(By Fathom Consulting)
Pure monetarist theory asserts that growth in an economy’s money supply translates directly into higher prices. This stems from an identity stating that the value of all expenditures in an economy is equal to the stock of money multiplied by how quickly that money is spent. As an identity, this statement is hardly controversial among economists, but the way in which it is interpreted is.
In this equation:
M stands for money.
V stands for the velocity of money (or the rate at which people spend money).
P stands for the general price level.
Q stands for the quantity of goods and services produced.

One controversy arises from the monetarist assertion that the velocity of money is close to stable and is predictable. If true, and if we assume that in the long run there is no impact on real expenditures, then the price level and the money supply are inextricably linked. As the chart below shows, the implied velocity of money (as measured by the ratio of the M2 money supply to nominal GDP) was indeed broadly constant up to the start of the 1990s. However, since then the trend (as measured by a simple HP filter) has begun to wander, with more rapid circulation in the late 1990s followed by a long downward trend. That said, even if the velocity changes over time, it tends not to deviate too far from trend, so we cannot so readily dismiss the assertions of monetarist theory.


So, what does this mean for inflation? An equilibrium correction model suggests that deviations in the velocity of money from trend typically narrow at a rate of about 10% per quarter. So, assuming that the ‘velocity of money gap’ closes at that rate, and that money supply grows at 5% per annum, and that real GDP grows in line with Fathom’s central forecast, then the identity outlined above suggests that US inflation could reach double digits. Even a more benign scenario, where velocity behaves as it did in the aftermath of the global financial crisis, would result in price growth well above the Fed’s inflation target.

Should we really expect US monetary velocity to revert to trend so quickly? A monetarist would probably argue “Yes”, reasoning that the velocity of money looks absurdly low, given the rapid increase in the money supply that has taken place during the pandemic, and the progressive lifting of the curbs that restricted how that money could be spent. Once the constraints on activity are relaxed, if money begins to circulate at least as quickly as it did before, we would expect to see much higher inflation in the coming quarters.

Moreover, the pandemic has yielded a more direct policy response than the Global Financial Crisis did. This time round, cash payments were made directly to households, fuelling the sharp rise in M1 (narrow money in the form of currency and deposits held by households); whereas before, money creation primarily flowed from QE, yielding asset (as opposed to consumer) price inflation.


However, all of this assumes that prices will make the adjustment required for velocity to return to normal. There are, of course, other possibilities. For instance, it is possible that a portion of the increase in the monetary stock might be unwound via deleveraging. In other words, we could see a fall in rather than a rise in ,1 as firms and households repay debt. Survey data from the New York Fed suggests that roughly a third of US stimulus cheques are being used in this way.


Overall, it seems higher inflation is around the corner. The signals from the monetarist arithmetic are worrying and, given their magnitude, it would be foolish to discount them. However, monetarist theory can be an unreliable friend in forecasting the evolution of prices. There is a reason why central banks, and Fathom, tend not to rely on such frameworks.

Watch on next week

#1 Forward thinking

With markets into the second half of 2021, can the fast and furious run of the last 15 months keep going? H1 saw some spectacular action: Oil soared 45%, one 'meme' stock loved by amateur traders rose more than 2,500%, Brazil's currency went from zero to hero. But all that stimulus money also means U.S. inflation now annualises at 8% versus an average of just 3% over the last 100 years.

As Donald Rumsfeld, who died on Tuesday, said about something completely different: There are many known unknowns. COVID-19 is one, but BofA reckons only a market crash would now stop the Fed reining in stimulus before year-end.

Considering how much markets love cheap money, Q3 may be a bumpy ride.

#2 Bank of Australia meeting

Tuesday's Reserve Bank of Australia meeting is shaping up as a blockbuster. The fate of the RBA's three-year yield target and bond buying scheme will be decided, the language on the rates outlook potentially altered.

At least one hint is implicit: Either the RBA rolls over the yield target set at the cash-rate level of 0.1% from the April to November 2024 bond lines, which signals steady rates until then - or it doesn't, opening the door for a move sooner.

Anticipating a rates liftoff in 2022, investors will watch Governor Philip Lowe's unusual post-meeting news conference. The U.S. Fed has become more hawkish, perhaps it's time for the hitherto dovish RBA to follow.

- POLL-Australia seen adopting 'flexible' QE, rate hikes seen in 2023


#3 The Fed

Fed June meeting minutes on Wednesday will be scrutinized after a hawkish shift roiled markets last month. Policymakers moved their first projected rate hikes to 2023 from 2024 and opened talks on how to end crisis-era bond buying.

While this should put pressure on risk assets, stocks have recovered since and hit new highs, helped by reassuring words from Fed Chair Jerome Powell, who's reaffirmed its intent to encourage a "broad and inclusive" recovery in jobs and not raise rates too quickly.

Markets will analyse the language on rising consumer prices and other indications that officials believe a strong recovery means the end of aggressive policy support could come soon.


# 4 German Elections

With just three months to go until German elections - Europe's key political event this year - polls seem to confirm that Greens are losing their mojo. Leader Annalena Baerbock faces plagiarism allegations and questions over her CV, and the party is struggling with a Christmas bonus payments scandal and a regional election setback.

Having briefly surged in the polls after Baerbock was picked as chancellor candidate, latest surveys show the Greens with 20% of votes, trailing well behind Angela Merkel's ruling CDU/CSU on 30%.

The shifting permutations of Germany's coalition arithmetic matter for future policy in Europe's largest economy. Right now, a CDU/CSU-led coalition with the Greens looks likely - a combination expected to bring more continuity than change.

But then there's still some time to go.

So, overall situation stands weighted on the market - no rush, no panic or some big concerns. Everybody knows the direction - Fed is going to tightening, gradually and openly. Recent report provides perfect result for the markets, as it gives positive but not aggressive results, escaping Fed from more speculation about possible even earlier rate hike. This is what markets want right now - stability on the way. The risk factor that stands in the shadow right onw is Delta virus. Everybody habits already that vaccination is underway and virus mostly is overcome, but risks on vaccine efficiency still stands. Hopefully this factor takes no domination over situation to force Fed adjust its plans because of new virus type and not lead to massive lockdowns again.

In longer term perspective markets indeed could get some relief from inflation fears pressure, as numbers become lower, which is typical in summer. Indirectly, Federal Reserve Bank of San Francisco President Mary Daly has confirmed our suggestion that Fed keeps in mind the lack of jobs to pre-pandemic level and tries to close this gap right to the moment of first rate hike. As Mary Daly said Friday that at the current pace of job growth, averaged over the past three months, U.S. employment could regain its pre-crisis level by the end of next year. Indeed, 7.5Mln gap (now it is around 6.8M) divided in 18 months till suggested rate hike gives us on average 400-430K jobs per month to be created.

It means that before major trend on US dollar turns up finally, EUR and other dollar rivals could get 1-year gap to move in the previous direction, especially if national central banks show independence and ability to set their own, more aggressive policy. Other words speaking - in this period of 12-18 months till the rate change, markets will not be under constant pressure of rising inflation and US rate change, and could show bullish trends on short distances. Besides, more balance in US economy, when lagging sectors finally come back to normal life should lead to smoothing of inflationary spikes in bottlenecks of demand and supply on some goods and services. It also should give additional calming effect to the markets and economy.


Despite that some EUR positive issues exists, technically we have bearish tail close in June and unconfirmed bearish trend on monthly chart. Monthly action makes no impact on long-term direction by far, as price mostly stands in wide 1.16-1.23 consolidation. But breakout in any direction becomes decisive. In general, with June performance, it is difficult to could on sharp reversal in July.

Theoretical targets mostly stands the same. Taking the parallel view on Dollar Index - EUR has corresponding upside AB-CD with 1.2860 OP, standing near Yearly Pivot Resistance of 1.26. If our suggestion is correct - 1.26-1.28 is an area that corresponds to DXY 87.40 target. But it is unclear what factors could let EUR to get there.

Technically vital area for monthly bullish setup is 1.16 lows that we've discussed earlier. As we've explained already - deep retracement here is not reasonable, especially if price drops below YPP. The pullback that already has happened was a reaction on COP target. Thus, as reaction already is done, market has to follow up. Another deep retracement here will be clear bearish sign.

On coming month we suggest EUR spends time in the same range of 1.16-1.23, as it will be silence before Aug-Sep storm from the Fed. Besides, now is vacation time, and seasonally markets become wobbling and slower these days.



Here situation stands evident, at least from technical point of view. Bullish trend will be over for EUR, once it breaks below 1.16 K-area, forming bearish reversal swing and out of triangle consolidation. Hence, until it holds inside - it keeps chance to proceed higher. Of course, it is rhetoric question whether EUR is possible to complete butterfly. Now it looks more like theoretical target.

This week action shows that market stops right at weekly oversold area. Minor pullbacks in recent two weeks suggest that market doesn't see the reasons and has no drivers that could trigger more or less significant upside retracement. NFP data definitely is not enough to do it. It makes us think that EUR should keep going to major target and Friday's relief probably is temporal.



Chart shows no break in bearish tendency. Overall downside action stands strong with clear acceleration on CD leg of our AB=CD pattern, that perfectly fits to weekly picture and agrees with K-area. On intraday charts we could get more or less extended upward action but it should not exceed 1.20 area, which is K-level and daily overbought.

Since daily and weekly trends stand bearish, and 1.20 looks perfect for short entry, here on daily chart, we mostly consider chances to go short at some intraday upside targets, based on Friday's reversal:


For the beginning of the week, we use 30-min chart this time. In fact EUR turns up from minor 1.27 extension that we've mentioned on Friday on 4H chart, 1.1810 area. Some chances exists that EUR could bounce right back to 1.20 level, but we treat this probability as not very high. Mostly because of patterns that we could get. This is 1.27 H&S and more probable that it could lead EUR just to 1.1910 area. Anyway, as we intend to go step by step, we will see what to do when price appears around it.

Here we would consider sharp AB-CD pattern with OP around 1.1880 and XOP around 1.1910. Both create Agreements with Fib resistance levels. If EUR later starts to form H&S pattern - it makes no difference to us, as XOP target stands the same as H&S AB-CD target. Anyway it will be 1.1910 Agreement. Thus, right now we focus mostly on this level as suitable for short entry.

If action will become stronger through the week, then we turn directly to daily 1.20 K-resistance area.


Great analysis as usual Sive. Thank you!

"Considering how much markets love cheap money, Q3 may be a bumpy rush, no panic or some big concerns. Everybody knows the direction - Fed is going to tightening, gradually and is vacation time, and seasonally markets become wobbling and slower these days."

Yup, indeed, time to take a couple steps back and reevaluate market conditions.
BUT, I am wondering how high is high for WTI crude and whether OPEC+ will "help" alleviate present market squeeze. High oil prices now will most certainly be additional financial burden to vast majority of oil importing countries who are still either in the throes of or is still reeling from the Covid-19 pandemic crisis.

Sive Morten

Special Consultant to the FPA
Yup, indeed, time to take a couple steps back and reevaluate market conditions.
BUT, I am wondering how high is high for WTI crude and whether OPEC+ will "help" alleviate present market squeeze. High oil prices now will most certainly be additional financial burden to vast majority of oil importing countries who are still either in the throes of or is still reeling from the Covid-19 pandemic crisis.
You're absolutely right. But, with concerns around Delta and OPEC+ in action and seasonal factors (summer), crude oil should not show any strong appreciation in nearest few months I suppose. Besides, technically we're at monthly 75$ major resistance area. In general this level suits to everybody.

Great analysis as usual Sive. Thank you!
Thanks mate, you always support me.

Sive Morten

Special Consultant to the FPA
Morning everybody,

As EUR is creeping higher, lets keep up with our trading plan. As we've decided, on daily chart we're watching for short entry, preferably around 1.20 area as it is perfect level of K-resistance and daily overbought. But the problem is market could not reach it.

On 30-min chart, our OP target is done, and market now stands on the way to the XOP and Agreement resistance of 1.1910. By our view, this is the first level, where EUR could turn down again. So, today-tomorrow we're watching for this level:

If market breaks XOP, we turn to another scenario, suggesting more extended upward retracement that could lead market to desirable 1.20 area. By first approximation it might be reverse H&S on 4H chart:

Currently, it looks like chances are low to get it, because of too slow upward recovery. So, all eyes on 1.1910 and what EUR will do around it...

Sive Morten

Special Consultant to the FPA
Greetings everybody,

So, EUR fell as a victim of poor EU statistics - ZEW was first one, and second is demand for German goods outside the EU collapsed as well, putting the shadow on recovery. Thus, now we can't talk not only about 1.20 that was looking just perfect for the selling but even about 1.1910 area.

As market is forming the wedge pattern here, and we have few grabbers (not only on EUR but on GBP as well), I would say that another swing down should happen. Then, theoretically, market could get chances to bounce from 1.1760, if there will be something like 3-Drive Buy. At the same time, as we're mostly watching for 1.1650 - I wouldn't be surprised with downside acceleration on wedge breakout. Maybe today's Fed minutes release pushes market in one or other direction.

On 4H chart market keeps theoretical chances to form H&S pattern, as lows has not been broken yet. But, due the reasons on 4H chart and as you will see below on 1H chart - it seems that this is the question of time. And I think that 3-Drive has more chances here than H&S. Besides, on GBP we have the same daily grabber, but market is far from the target lows. It also stands in favor of another downside swing to 1.1760 at least:

Here we have rude crush of bullish context. Right in the moment when price was tending to XOP - price has got deadly hit from stats release. As a result all bullish construction has been destroyed, including AB-CD pattern.
Now, market has formed "222" Sell pattern, and in general, 1.1850-1.1860 seems the signal level. Because if we're correct on suggestion of downside continuation, EUR should not erase recent sell-off:

Sive Morten

Special Consultant to the FPA
Morning guys,

So, as we've suggested, EUR slipped down again, reaching nearest standing intraday extension target. Still, on daily chart price stands at fragile foundation, as we have no oversold and fib levels. In fact, road to 1.1630-1.1650 target is open.
That's why I'm mostly tend to idea of direct downside breakout rather than classic reversal by wedge pattern here:

On 4H chart, so-called 3-Drive provides some support but upward bounce stands heavy and slow. We do not consider any long positions here, mostly because of daily situation, and would think about sell any rally that could happen here. Currently all our positions that we've discussed stand riskless. And we keep watching for 1.1850-1.1860 as important signal level. If we're correct on bearish context - market should not erase recent downside swing:

On 1H chart our "222" is worked nice. Now we could consider here another AB-CD pattern of minor scale. Currently COP is hit and price shows upward bounce. Now it seems that 1.1815-1.1824 is proper target of retracement. So let's see how market response to it, and whether it forms upside reversal swing, if breaks above 1.1836 top. This might be decisive moment for intraday charts. Now new short positions should be taken by far:

Sive Morten

Special Consultant to the FPA
Morning everybody,

Despite recent nice pullback, EUR was not able to achieve any bullish goals. It has not broken the bearish tendency and it remains below 1.1850 resistance area. On daily chart price still stands inside the wedge pattern:

Currently price stands at the point where time is come to set next direction. It should either break the wedge down, or jump above 1.1850 resistance. How to understand what direction will be set?

To answer we intend to look at 1.1815 support and Agreement area. If downside action continues - EUR breaks it down, erasing recent rally. If price stands above it - be prepared for upward continuation to 1.19 area first and potentially to 1.1975.

It means that if you have bullish view - it is possible to consider 1H "222" Buy pattern, while for bearish entry we have to wait its downside breakout and reaching of at least half way to the bottom. As you can see - not too difficult.