Forex FOREX PRO WEEKLY, July 06-10, 2020

Sive Morten

Special Consultant to the FPA
Messages
13,930
Fundamentals

This week markets finally were focused on economy - PMI and Job statistics in particular. Political issues stand aside and even situation with Covid-19 barely has made impact on markets as well. As we've said last week - PMI data across the board, US job report are special interest of this week.

The dollar retreated on Wednesday in choppy trading, as generally solid U.S. economic data and improving European numbers diminished its appeal as a safe haven, though the currency’s outlook remained upbeat given renewed risks posed by the novel coronavirus. Analysts said the dollar could still gain, with the resurgence of COVID-19 cases and the potential for renewed lockdowns in U.S. states deemed hot spots.

“In a service economy like the U.S., those that generate the highest number of jobs are in the high-contact businesses such as restaurants, movie theaters, and exhibition parks, which I think will come to a grinding halt,” said Boris Schlossberg, managing director at BK Asset Management in New York. “There’s a significant risk of reclosing some of the states. There’s still a lot of risk-off flows, and the dollar could be the beneficiary of those flows,” he added.

Also on Wednesday, the Federal Reserve released the minutes of its last policy meeting and said the U.S. economic outlook remains highly uncertain and reiterated that a full economic recovery hinges on the virus being under control.

“The minutes underlined the message from the economic projections that officials are fairly downbeat about the economic outlook,” said Andrew Hunter, senior U.S. economist at Capital Economics.

The dollar, meanwhile, reacted little to the ADP National Employment Report, which showed June private payrolls increased by 2.369 million jobs. Data for May was revised upward to show payrolls surging 3.065 million, tracking a surprise rebound in job reported by the government, instead of tumbling 2.76 million as previously estimated. U.S. manufacturing data showed a reading of 52.6, suggesting an expansion for the month of June.

In Europe, IHS Markit’s final euro zone Manufacturing Purchasing Managers’ Index moved closer to the 50 mark separating growth from contraction in June.
Although the dollar has acted as a haven currency for much of the pandemic, U.S. fundamentals have also played a major role, meaning it can appreciate on better-than-expected data.

The Labor Department reported Thursday that nonfarm payrolls increased by 4.8 million jobs in June, more than the 3 million jobs expected by economists polled by Reuters. That was the most since the government started keeping records in 1939. Payrolls rebounded 2.699 million in May. The unemployment rate fell to 11.1% last month from 13.3% in May. Still, the reaction in currencies was limited. Even after two months of job recovery from May, the U.S. economy has regained just over a third of an historic plunge of 20.787 million jobs lost in April.

“In a week characterized by dropping FX volatility, the dollar looks to be re-establishing a gentle bear-trend as equities keep showing complacency to grim contagion news,” FX strategists at ING wrote in a note to clients. “Such complacency still indicates the short-term outlook for risk assets is not lacking hurdles, but there is still a material chance we have seen the peak in the dollar,” they added.

Traders have been balancing hopes for an economic recovery with surging coronavirus infections, particularly in the United States, where infections are rising in the majority of states.

“We are surprised about an emerging consensus that a much-faster-than-expected recovery justifies support for risk assets. What we see in the latest data is just base effects, as economies exit the lockdown,” Bank of America FX strategists Michalis Rousakis and Rohit Garg said in note. “We would expect global output to stabilize soon to well below pre-crisis levels. This is not a V,” they added.

Relations between the United States and China are also in focus over China’s strategy in Hong Kong. The U.S. Senate unanimously approved legislation on Thursday to penalise banks doing business with Chinese officials who help implement Beijing’s new national security law for Hong Kong.

Thus, based on the data released we could acknowledge that mostly it is positive - EU, UK PMI's shows positive shifts, as well as Consumer Confidence in US. US job data shows recovery. Still equilibrium is very fragile.

As Fathom reports, the world hit a morbid milestone on Monday as the total number of deaths due to COVID-19 reached half a million, according to Johns Hopkins University. Whilst Europe has been the largest source of deaths, it has now begun to cautiously re-open as the number of new daily cases per capita continues to fall. In the Americas, the story is very different.

North and South America have the second and third highest number of fatalities respectively, however unlike Europe which is now in the late stages of containing the virus, they are both seeing record increases in new daily cases. In the US, inadequate lockdown measures and enforcement in Southern and Western states are behind the recent surge. Between late April and early May, when many US states began to re-open, the percentage of tests in the US as a whole which were positive was over 10%, twice the level the WHO recommends before easing restrictions. Texas, Florida and California are among states now re-imposing some lockdown measures as new daily cases surpass 40,000 across the country.

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Looking at contagiousness, symptoms, immunity, vaccine and stability, there is still a lot that is not understood about the virus, even as a consensus about how to deal with it has clearly emerged. From an economic and sociological standpoint, it is hard to reject the idea that the ongoing normalisation in economic statistics is being confused with a return to normal, pre-COVID conditions.

The release in the US nonfarm payrolls is a good case in point. The 4.8 million increase in June payrolls shows that around one-third of jobs lost so far in the pandemic has been recovered over the last two months. The leisure and hospitality sector has contributed a large share of the increase with 2.1 million jobs created over the past two months (bars and restaurants alone saw an increase of 1.5 million). However, the broader picture remains far more subtle than that suggested by the welcome reopening of your favourite watering hole. For example, the June payroll report looks at employment trends up to the week of 12 June and it does not capture the more recent spikes in COVID-19 cases in Arizona/California/Florida/Texas. As a result, July is likely to show a more subdued momentum on the road to recovery.
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The unemployment report also underlined how the current environment remains significantly worse than previous recessions. As unemployment soared, almost all of those who had lost their job reported being ‘on temporary layoff’. So far, unemployment among this group has dropped from 18m to 11m while the number of people who report being ‘permanently laid off’ has actually increased by 1.6m since February with a +600k number in June after +300k in May. The bottom line is that there is a high risk of these ‘temporary’ lay-offs becoming crystallised into permanent ones particularly as generous government income support programmes are tapered over the coming months.

Europe is increasingly emerging as a rare bright spot in terms of validating a more confident recovery, even if only in terms of economic numbers. June data for German retail sales and May figures for French consumer spending surpassed expectations and point clearly at a more buoyant, pent-up willingness to approach the summer season with renewed optimism (and an updated wardrobe).

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More ominously, however, data continue to validate previously highlighted trends pointing at contracting consumer incomes and clear deleveraging forces taking hold of households. In the UK, June consensus forecasts of consumer credit were way off the mark (-4.6bn vs -2.5bn expected) pointing to a significantly more muted normalisation since May’s trough.
This theme is going to be a particularly important one to follow going forward. The combination of falling incomes, higher precautionary savings, higher unemployment, low interest rates and higher government debt monetised by central banks has the potential to become increasingly toxic for the economy and the corporate sector in particular.

June has also seen quite a large change in market dynamics. Our proprietary, market-based gauges of macro fundamentals, liquidity and inflation surprises have seen some notable changes in fortunes. In particular, the liquidity trade that has supported one of the sharpest ever recoveries in equity markets is showing signs of losing steam. At the same time, investors have continued to embrace a recovery in macro fundamentals, albeit at a pace lagging behind some of the more recent bullish market narrative. Finally, our inflation indicator suggests that markets are increasingly positioned for upside surprises to consumer prices in the medium term. Broadly speaking we would agree with this mood and have been recommending assets that have greater exposure to inflation, a neutral stance on macro fundamentals while flagging risks that the liquidity trade may have overextended itself

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Thus, this is the real situation and it is rather complicated. Recent data lets us to make few worrying conclusions. First is, euphoria from huge liquidity injections gradually is exhausting. At the same time we see rising cases of Covid in US that potentially could lead to re-closing of retailers of different kind (stores, bars, mini-shops etc.) and return to self-isolation environment. But this is only the half of the problem. It seems that job data is skewed in positive side as at least 50% of new persons employed are hospital employees and re-opened public food sector. It means that overall recovery pace stands even slower than we see it from the data.
Bringing the component of US domestic unrest, fragile political position of D. Trump and coming elections we get deadly combination of factors. Rising of inflation expectations brings also nothing good to financial markets, because despite the inflation, Central banks have no choice but keep rate at zero levels.

It seems that EU stands in better position as in terms of Covid spreading as in terms of political and economical situation. But it is difficult to suggest how markets will react on deteriorating of global situation. Very often any problems and difficulties rise demand of US dollar. Ignoring the factor of safe-haven demand, I would say that EUR/USD balance stands in favor of EUR right now.

The major problem right now is that no one factor stands stable. The months leading up to the U.S. presidential election in November will be choppy, especially if Democrat Joe Biden extends his poll lead. The EU needs to agree on a $750 billion recovery fund proposal. And will the U.S. Congress extend a scheme supplementing jobless benefits beyond July 31? Investors also worry about authorities getting cold feet as debt levels mount. No sign of that yet, but their track record of premature policy tightening post-2008 makes investors nervous. Any sign of policymakers tapping on the stimulus brakes too soon will spell trouble.


There’s no time to waste for Germany, which has just assumed the six-month rotating presidency of the European Union. Europe faces its deepest recession since WW2, must agree on a multi-year budget of over 1 trillion euros ($1.1 trillion), launch a recovery fund for economies hit hardest by COVID-19 and clarify its future relationship with post-Brexit Britain.
A meeting of euro area finance ministers next week could be telling before a looming July 17-18 summit - crucial to securing agreement on a recovery fund. Germany wants to use its time in the EU presidency to make Europe strong again; a recovery fund agreement would certainly help. Markets are hopeful that solidarity will prevail - the euro is up over 5% since March but optimism could fade if bickering sets in. Indeed, the next six months in the EU hotseat will not be easy for Berlin.


Technicals
Monthly


Long term charts monthly, weekly are barely impacted by price action as EUR mostly spends the time in the same trading range as last week. Thus, we keep analysis mostly the same - where price was last week, here it stands this week as well. July range is very small by far.

In June market turns to motion. Although it is too early to talk about major breakout but here we see attempt to go higher and maybe our grabbers will work. Currently we see the pullback below Pivot again, but we have objective reasons for that and they are mostly technical. Overall sentiment stands positive on the market.

In longer-term perspective major direction still depends on breakout of the huge March doji. But side-by-side grabbers set bullish context and point on its invalidation level - grabbers' lows. This fact changes technical picture on EUR as trend on monthly chart remains bullish.

Interestingly, that doji levels coincide with Pivots support and resistance levels as well. Downside breakout opens road to the parity, while upside break should open road for equal doji distance to upside - somewhere to 1.23 area. As EU and particularly ECB has provided strong driving factors, we hope that they will be enough to keep EUR on a road to 1.15-1.16 area and YPR1 level. At least, March top has chances to be re-tested.

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Weekly

Weekly picture also stands the same. We've got another inside candle here, second in a row. This picture shows that we were correct when warned that it is too early to bet on the rally, and now we see how deadly combination of K-resistance and overbought level hold EUR. Long tails with four consecutive weeks tells that this level is very important for long-term traders as a lot of sellers step in here, holding EUR from further appreciation. This fact, from the other side, also tells that in a case of upside breakout rally could be furious. Conversely, despite sellers' activity - price doesn't start deeper pullback, forming tight consolidation. Traders call this situation as "churning" when a lot of currency changes the hands in very tight range. This type of activity has special meaning and usually leads to explosive breakout.

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Daily

Even daily chart almost the same as last week. Here we do not have clear signs or patterns suggesting definite direction and now could rely only on indirect factors. Somehow situation seems bullish to me - flag, very small retracement and hint on bullish dynamic pressure makes me think that upside breakout has better chances to happen. As we've said few time already, bullish scenario is safe until price holds above 1.11 K-support area.
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Intraday

On 4H chart we still keep in mind potential upside butterfly and our journey continues:
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On 1H chart price stands stands very choppy inside the triangle. Here you could find a lot of MACD divergences, but at the same time nothing really valuable. The only thing that could make some sense to us is combination of weekly and monthly Pivots in the middle. This is double sentiment indicator and if price moves above it on Monday - it could be first bet on bullish win. But in general, price action shows indecision and lack of driving factors. Good fundamentals keep EUR on surface, although can't push it higher. Thus, our trading plan - take stake in butterfly setup, while it is valid. If EUR drops lower - wait for 1.11 K-support and bullish reversal patterns there.
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Sive Morten

Special Consultant to the FPA
Messages
13,930
Morning guys,

So, it seems that our weekend suspicious were correct and EUR yesterday has shown not bad jump. But this is just the beginning of the story as price has to hold at current levels to keep bullish context intact.
But, now we see the hazard of appearing of bearish grabber that absolutely doesn't correspond to bullish scenario. On GBP, BTW, we've got this grabber last week.

That's being said- keep an eye on the grabber, as for EUR it is crucial to hold outside of the broken flag pattern. Otherwise be prepared for drop and challenge of 1.11 area.
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On 4H chart market has completed OP target and Agreement resistance area. Now it stands in reasonable pullback. But, as price just turns to extension, retracement should not be deep:
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Thus, we have to focus on 1H K-support area. For perfect bullish price action, EUR has to hold above. Ultimately we could accept flirting between K-area and trend line, but not deeper.
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Sive Morten

Special Consultant to the FPA
Messages
13,930
Morning guys,

So, EUR is done precisely what we've expected - brings us daily grabber and re-tests broken trend line. Now price stands in "culmination" point that is the border between bullish and bearish context. Despite that situation becomes more complicated, it provides interesting setups. First is daily grabber itself - if you want it, you could trade it. Stops above the top that is invalidation of the pattern, target - at least 1.11, I suppose.
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But, it is not as simple as it seems, because EUR keeps nominal bullish context by far as it stands above the trend line:
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Indeed, market has dropped precisely to an area that we've specified, completing XOP target. Our K-support is broken, but take a look at price action around trend line.

At first glance, it is nothing to celebrate. Once XOP has been hit, healthy pullback followed, but price was not able to re-establish upside trend. Doesn't this tell about turning to bearish scenario? Not yet. Take a look at following action. Price has formed "222" Buy and then minor W&R of previous lows, that also has become a bullish grabber. EUR here shows bullish market mechanics. We can't say that it definitely take out the top and continue higher. But, EUR probably shows upside bounce from here and you should get chances to move stops to breakeven. Thus, If you ready to take minimal risk - you could try to buy it here. This is best point that gives minimal risk and maximum potential reward, although it doesn't guarantee the success. Decision stands up to you. Theoretically daily grabber also could fail...
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jkbarasa

Recruit
Messages
6
I have put pending orders bboth for bullish and bearish. for bullish above 1.1310 and for bearish below 1.1250 that is on the EurUsd am I good?
And again, sir, do you trade for people? Like if I would want to be traded for,?
 

Sive Morten

Special Consultant to the FPA
Messages
13,930
Morning everybody,

So, situation around EUR has become clear, grabber is failed and we consider major target around 1.1550, although may be EUR will not reach it this week...

Today we need to update GBP analysis. On daily chart Pound somehow has found necessary power to stay above vital support area and keep bullish context. It means that theoretically GBP stands in extension mode with target around 1.3270. Of course, hardly it will be straight forward action, but somehow it should tend there.
With this leg we should not get deep retracements, because they are done already. First one is BC leg, second - reaction on COP target. Inability of the price to break COP top also will be the sign of weakness. Now we would like to see may be not very strong but straight action.
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In shorter-term we have closer standing target around previous top - 1.27. Recall our H&S pattern here. Right arm is smaller but, we still have here AB-CD pattern and its OP target is around 1.27 and accompanied by MPR1. On a way to it GBP should not show too deep pullbacks:
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Thus, if you plan to take long position - do not expect retracement back to major 3/8 support around 1.25, but consider harmonic retracement and closer stand levels. IT seems that 1.26 and 1.2560 the ones that could be reached, but hardly lower ones.
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Sive Morten

Special Consultant to the FPA
Messages
13,930
Morning guys,

Two days ago I've made the mistake that doesn't let us to recognize possible downside reaction that we see here. I'm taking about OP target and daily "222" Sell. We've talked about butterfly, but somehow I've missed idea of "222". As EUR has no barriers till 1.15 area, it might be a surprise why it suddenly has stopped again. The reason is AB-CD target of "222" Sell. Now again we stand in the same situation as two days ago. Mostly it depends on market reaction to "222" pattern. Minimal 30% reaction suggests that EUR turns up again, while downside breakout of current level tells about deeper retracement, and 1.11. might not become the final point.
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Here is the OP that I've missed. Price now stands at two Pivots, Fib level and support of former flag pattern. That's why it is important to stay above them. At the same time, fast and strong reaction to OP looks like compound bearish engulfing pattern and it suggests some pullback first but continuation second.
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Here is how we could find it out. On 1H chart price is taking the shape of the H&S pattern. Minimum target of daily "222" pattern is done already. Thus, now we have to keep an eye on 1.1335 area - where potential right arm should be formed. If EUR turns down from there again and H&S will be formed - be prepared for downside action, at least to 1.11, while in a case of upward continuation, erasing of H&S shape means that our bullish context is valid and EUR is tending higher.
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All trading setups today stand around H&S shape here. Bulls could try to buy from current support with target around the right arm - 1.1335-1.1350, while bears could use the same level to consider short entry, but this probably will happen next week already.
 
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