Sive Morten
Special Consultant to the FPA
- Messages
- 18,635
Fundamentals
Well, as it is everything clear concerning longer term perspective - markets wait for IIQ GDP report and Fed July statement. Both these events should clarify major trend, at least, as markets expect. This week volatility was not too strong and everything mostly was turning around Powell statement, Fed June minutes protocol and US inflation data.
As Reuters reports - Federal Reserve Chairman Jerome Powell set the stage for a rate cut later this month, vowing to “act as appropriate” to ensure the world’s biggest economy will be able to sustain a decade-long expansion.
In testimony to Congress, Powell pointed to “broad” global weakness that was clouding the U.S. economic outlook amid uncertainty about the fallout from the Trump administration’s trade conflict with China and other nations.
Adding to a generally dovish tone in his testimony, the minutes from the Fed’s previous policy meeting showed many policy makers thought more stimulus would be needed soon, reviving speculation of an aggressive rate cut.
KEY POINTS:
** Powell says it appears trade uncertainties and concerns about global economy continue to weigh on U.S. economic outlook;
** Powell repeats that Fed will act “as appropriate” to sustain economic growth;
** Baseline outlook is for U.S. economic growth to remain solid, labor markets to stay strong and inflation to move back up to central bank’s 2% target - Powell;
** Powell says there is a risk weak inflation will be even more persistent than Fed currently anticipates;
** U.S. economic growth appears to have moderated in Q2; economic momentum appears to have slowed in some major foreign economies in recent months, Powell says
“A rate cut in July is completely sealed now. But on the other hand, Powell dropped little hint on what he would do after that, as he sounded quite optimistic on the economy,” said Kyosuke Suzuki, director of forex at Societe Generale.
“That uncertainty, I think, will most likely keep the dollar in fairly tight ranges in coming weeks,” he said.
Here is in Reuters article, you could find more comment on Powell's speech. The one thing that attracts my attention is many investors also think about "insurance rate cut" and treat it not as starting point of the dovish cycle but as single standing event:
“There continues to be uncertainty around economic growth outside the US and trade concerns linger. This alone may support a cut in rates if only for insurance.”
“Powell’s really making the case that an insurance rate cut is important so July is looking much more likely despite the fact we had a pretty good jobs report. Because of that both stock and bond markets are reacting.”
Next day we've got US inflation data - CPI and yesterday is PPI. Both indexes show 0.1% better than expected results:
Stronger-than-expected U.S. inflation data tempered the prospect of an aggressive Federal Reserve interest rate cut later this month.
The core U.S. consumer price index excluding food and energy components rose 0.3% in June, the largest increase since January 2018, data on Thursday showed.
The signs of a pick-up in underlying inflation, along with separate data on weekly jobless claims showing the labour market remained solid, curbed financial market expectations of a more aggressive 50 basis point cut at the Fed’s July 30-31 meeting.
Markets are still fully priced for a quarter percentage point cut as U.S. policymakers seek to support a slowing economy.
“The dollar bounced back as the strong U.S. CPI got the market to question the Fed’s view on prices and whether inflation was really as weak as projected,” said Takuya Kanda, general manager at Gaitame.Com Research Institute.
“Expectations for a 50 basis point cut had risen after Powell’s comments but were lowered again by the CPI. Until the Fed’s meeting later this month, the prospect of a 50 basis point cut will continue ebbing back and forth on each major data release.”
Comments by Chicago Fed President Charles Evans scheduled later on Friday and New York Fed President John Williams due on Monday will provide a chance to gauge how dovish the central bank really is, said Masafumi Yamamoto, chief forex strategist at Mizuho Securities.
“If these Fed officials are not as dovish as Powell, and if the New York Fed’s manufacturing survey on Monday prove stronger than forecast, they could show that the dollar weakening in response to Powell’s congressional testimony was overdone.”
The dollar briefly trimmed losses after U.S. data showed producer prices rose slightly in June, up 0.1% following a similar gain in May. In the 12 months through June, the PPI rose 1.7%, the smallest gain since January 2017.
Joe Manimbo, senior market analyst, at Western Union Business Solutions in New York said the PPI increase should not shake U.S. rate cut expectations.
Until the Fed’s preferred gauge of inflation, the core personal consumption expenditures price (PCE) index, shows convincing signs of heating up from a low 1.6%, the Fed is unlikely to change its stance on cutting rates this month, he added.
The producer prices data followed a report on Thursday showing the core U.S. consumer price index, excluding food and energy, rose 0.3% in June, the largest increase since January 2018.
The CPI reading pushed U.S. Treasury yields higher, but money markets still indicated one rate cut at the end of July and a cumulative 64 basis points in cuts by the end of 2019, especially after Fed Chairman Jerome Powell flagged such a move in his two-day testimony before Congress this week.
That should be dollar-negative in general, analysts said.
But Jane Foley, head of FX strategy at Rabobank in London, believes dollar weakness will not be as severe as many anticipated because other major central banks are easing as well.
“The dovish stances of most other G10 central banks is offsetting the impact of potential Fed action on the U.S. dollar crosses,” Foley said, noting, for instance, that she expects the European Central Bank to cut its discount rate further into negative territory at its September meeting.
Our forecast on GBP starts to work, as BoE changes its view on UK economy perspectives:
GBP is down on the week as the British currency has been dogged by Britain’s economic gloom and a fast-approaching Brexit deadline.
A raft of dismal UK data and the risk of crashing out of the European Union without agreeing transitional trade arrangements have forced the Bank of England to change its upbeat assessment of the economy.
CFTC data shows that speculators keep net bearish position on EUR and it slightly has increased this week. Net short position has dropped significantly since May and has become 3 times smaller. But now it seems this trend has stopped as some doubts appear on durability of Fed dovish view.
That's being said, taking in consideration recent events, it seems that market will show no reaction on 25 b.p. rate cut and could turn in opposite direction as soon as event will happen, if Fed will not provide new dovish drivers. Our view we discussed many times here - we had careful hope that may be no rate cut still possible on July, but it seems it would be too much for markets' psyche and Fed has to cut rate to keep market calm, despite wants it or not.
Once this calm injection will be done, we hope that facts will take control over emotions and good job market, moderate inflation and personal spending, especially if GDP will be good, turn situation to normal way.
Otherwise, US economy will turn to clear overheat stage, and Fed will have to make the same steps later that it tries to escape right now, but in different worse environment. Rate hike will have to be done aggressively with stronger negative impact on economy. Right now it is still possible to do it smooth, avoiding dovish rate cut cycle and finish it by just single rate cut.
As markets hungry for blood from the one side and my expectations that no dovish comments will be on July meeting from another one - leads us to only one direction on EUR/USD pair in August. Down.
Technicals
Monthly
Technical part of research is not as interesting as fundamental one this week. We hope that coming IIQ GDP in July and Fed meeting will shake the market a bit.
July month still stands inside one to the June, so the intrigue still stands around major support where price is right now.
Our nearest culmination point is Fed July meeting which should clarify whether we right or wrong in our hypothesis. Our plan (according to fundamental issues) tends to idea of downside breakout.
As we've said last week, changes are still look insignificant, trend stands bearish. Monthly chart is rather large and any upside action will have retracement feature, until 1.26 area breakout. The first meaningful resistance here stands around YPP of 1.1740 area, which approximately agrees with 3/8 Fib resistance.
As market has minor drivers, situation changes only on lower time frames - daily and below.
Weekly
Here we have two potential patterns. The short-term "Evening star" pattern is interesting with two nearest weeks, as it is mostly tactical and doesn't suggest big price swings. On coming week we get two good drivers - Retail sales on Tue and Michigan on Friday. They could be strong enough to complete the target of this pattern. In general, "Evening Star" suggests downside continuation, which usually takes the shape of AB=CD pattern on daily/4H chart.
But it is not everything clear with the second pattern, which is reverse H&S. It is just two weeks - two candles, till the end of July, but chart tells that it should be much more to complete the shape of the pattern. Currently it is unclear how to combine this facts. Either it will be upside reaction to 1.15 as a result of Fed meeting, then downside retracement later. Or H&S will be erased by downside breakout of 1.1150 area.
For us any direction will be good, as specific of H&S pattern is its dual character. It keeps door open for both scenarios. Upside scenario is based on reverse H&S while downside scenario could be confirmed by its failure, which happens around Right arm bottom.
Daily
On Friday, we've made cross market analysis, involving DXY chart, as usual. Picture on Dollar Index stands a bit more clear, showing the same pattern on weekly chart, but on daily one the shape of H&S pattern looks better:
Following to pattern's harmony, it seems that USD should drop a bit more, to reach 96 Fib support level, which agrees with the bottom of right arm. Drag&drop this situation on EUR - it suggests some upside continuation to 5/8 Fib resistance before reversal.
Daily chart tells that weekly "Evening star" pattern takes the shape of H&S on daily chart, and action to the target will take the shape of AB=CD pattern, based on the head and right arm points, as usual. This is at least something that we could use as a background for trading.
Intraday
Keeping the logic of daily chart, here, on 4H we could suggest the first stage of our trading plan. EUR has to reach and form the top of right arm. Our last week setup is done well, as EUR has shown ab=cd reaction on K-resistance. Now we have "222" Buy pattern here, "C" point is also an engulfing pattern. It is interesting guys, that you could find cross-market divergence on 4H chart with Dollar index. As on EUR as on DXY - it was downside AB-CD reaction on K-area, which stands supportive to upside EUR action.
This situation tells that we should not search for deep retracement on 1H chart and focus just on minor pullback as upside action could continue. We do not exclude the chance that it again could be minor reverse H&S on top:
Conclusion:
So, on coming week we continue our "tactic" trading with weekly pattern.
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.
Well, as it is everything clear concerning longer term perspective - markets wait for IIQ GDP report and Fed July statement. Both these events should clarify major trend, at least, as markets expect. This week volatility was not too strong and everything mostly was turning around Powell statement, Fed June minutes protocol and US inflation data.
As Reuters reports - Federal Reserve Chairman Jerome Powell set the stage for a rate cut later this month, vowing to “act as appropriate” to ensure the world’s biggest economy will be able to sustain a decade-long expansion.
In testimony to Congress, Powell pointed to “broad” global weakness that was clouding the U.S. economic outlook amid uncertainty about the fallout from the Trump administration’s trade conflict with China and other nations.
Adding to a generally dovish tone in his testimony, the minutes from the Fed’s previous policy meeting showed many policy makers thought more stimulus would be needed soon, reviving speculation of an aggressive rate cut.
KEY POINTS:
** Powell says it appears trade uncertainties and concerns about global economy continue to weigh on U.S. economic outlook;
** Powell repeats that Fed will act “as appropriate” to sustain economic growth;
** Baseline outlook is for U.S. economic growth to remain solid, labor markets to stay strong and inflation to move back up to central bank’s 2% target - Powell;
** Powell says there is a risk weak inflation will be even more persistent than Fed currently anticipates;
** U.S. economic growth appears to have moderated in Q2; economic momentum appears to have slowed in some major foreign economies in recent months, Powell says
“A rate cut in July is completely sealed now. But on the other hand, Powell dropped little hint on what he would do after that, as he sounded quite optimistic on the economy,” said Kyosuke Suzuki, director of forex at Societe Generale.
“That uncertainty, I think, will most likely keep the dollar in fairly tight ranges in coming weeks,” he said.
Here is in Reuters article, you could find more comment on Powell's speech. The one thing that attracts my attention is many investors also think about "insurance rate cut" and treat it not as starting point of the dovish cycle but as single standing event:
“There continues to be uncertainty around economic growth outside the US and trade concerns linger. This alone may support a cut in rates if only for insurance.”
“Powell’s really making the case that an insurance rate cut is important so July is looking much more likely despite the fact we had a pretty good jobs report. Because of that both stock and bond markets are reacting.”
Next day we've got US inflation data - CPI and yesterday is PPI. Both indexes show 0.1% better than expected results:
Stronger-than-expected U.S. inflation data tempered the prospect of an aggressive Federal Reserve interest rate cut later this month.
The core U.S. consumer price index excluding food and energy components rose 0.3% in June, the largest increase since January 2018, data on Thursday showed.
The signs of a pick-up in underlying inflation, along with separate data on weekly jobless claims showing the labour market remained solid, curbed financial market expectations of a more aggressive 50 basis point cut at the Fed’s July 30-31 meeting.
Markets are still fully priced for a quarter percentage point cut as U.S. policymakers seek to support a slowing economy.
“The dollar bounced back as the strong U.S. CPI got the market to question the Fed’s view on prices and whether inflation was really as weak as projected,” said Takuya Kanda, general manager at Gaitame.Com Research Institute.
“Expectations for a 50 basis point cut had risen after Powell’s comments but were lowered again by the CPI. Until the Fed’s meeting later this month, the prospect of a 50 basis point cut will continue ebbing back and forth on each major data release.”
Comments by Chicago Fed President Charles Evans scheduled later on Friday and New York Fed President John Williams due on Monday will provide a chance to gauge how dovish the central bank really is, said Masafumi Yamamoto, chief forex strategist at Mizuho Securities.
“If these Fed officials are not as dovish as Powell, and if the New York Fed’s manufacturing survey on Monday prove stronger than forecast, they could show that the dollar weakening in response to Powell’s congressional testimony was overdone.”
The dollar briefly trimmed losses after U.S. data showed producer prices rose slightly in June, up 0.1% following a similar gain in May. In the 12 months through June, the PPI rose 1.7%, the smallest gain since January 2017.
Joe Manimbo, senior market analyst, at Western Union Business Solutions in New York said the PPI increase should not shake U.S. rate cut expectations.
Until the Fed’s preferred gauge of inflation, the core personal consumption expenditures price (PCE) index, shows convincing signs of heating up from a low 1.6%, the Fed is unlikely to change its stance on cutting rates this month, he added.
The producer prices data followed a report on Thursday showing the core U.S. consumer price index, excluding food and energy, rose 0.3% in June, the largest increase since January 2018.
The CPI reading pushed U.S. Treasury yields higher, but money markets still indicated one rate cut at the end of July and a cumulative 64 basis points in cuts by the end of 2019, especially after Fed Chairman Jerome Powell flagged such a move in his two-day testimony before Congress this week.
That should be dollar-negative in general, analysts said.
But Jane Foley, head of FX strategy at Rabobank in London, believes dollar weakness will not be as severe as many anticipated because other major central banks are easing as well.
“The dovish stances of most other G10 central banks is offsetting the impact of potential Fed action on the U.S. dollar crosses,” Foley said, noting, for instance, that she expects the European Central Bank to cut its discount rate further into negative territory at its September meeting.
Our forecast on GBP starts to work, as BoE changes its view on UK economy perspectives:
GBP is down on the week as the British currency has been dogged by Britain’s economic gloom and a fast-approaching Brexit deadline.
A raft of dismal UK data and the risk of crashing out of the European Union without agreeing transitional trade arrangements have forced the Bank of England to change its upbeat assessment of the economy.
CFTC data shows that speculators keep net bearish position on EUR and it slightly has increased this week. Net short position has dropped significantly since May and has become 3 times smaller. But now it seems this trend has stopped as some doubts appear on durability of Fed dovish view.
That's being said, taking in consideration recent events, it seems that market will show no reaction on 25 b.p. rate cut and could turn in opposite direction as soon as event will happen, if Fed will not provide new dovish drivers. Our view we discussed many times here - we had careful hope that may be no rate cut still possible on July, but it seems it would be too much for markets' psyche and Fed has to cut rate to keep market calm, despite wants it or not.
Once this calm injection will be done, we hope that facts will take control over emotions and good job market, moderate inflation and personal spending, especially if GDP will be good, turn situation to normal way.
Otherwise, US economy will turn to clear overheat stage, and Fed will have to make the same steps later that it tries to escape right now, but in different worse environment. Rate hike will have to be done aggressively with stronger negative impact on economy. Right now it is still possible to do it smooth, avoiding dovish rate cut cycle and finish it by just single rate cut.
As markets hungry for blood from the one side and my expectations that no dovish comments will be on July meeting from another one - leads us to only one direction on EUR/USD pair in August. Down.
Technicals
Monthly
Technical part of research is not as interesting as fundamental one this week. We hope that coming IIQ GDP in July and Fed meeting will shake the market a bit.
July month still stands inside one to the June, so the intrigue still stands around major support where price is right now.
Our nearest culmination point is Fed July meeting which should clarify whether we right or wrong in our hypothesis. Our plan (according to fundamental issues) tends to idea of downside breakout.
As we've said last week, changes are still look insignificant, trend stands bearish. Monthly chart is rather large and any upside action will have retracement feature, until 1.26 area breakout. The first meaningful resistance here stands around YPP of 1.1740 area, which approximately agrees with 3/8 Fib resistance.
As market has minor drivers, situation changes only on lower time frames - daily and below.
Weekly
Here we have two potential patterns. The short-term "Evening star" pattern is interesting with two nearest weeks, as it is mostly tactical and doesn't suggest big price swings. On coming week we get two good drivers - Retail sales on Tue and Michigan on Friday. They could be strong enough to complete the target of this pattern. In general, "Evening Star" suggests downside continuation, which usually takes the shape of AB=CD pattern on daily/4H chart.
But it is not everything clear with the second pattern, which is reverse H&S. It is just two weeks - two candles, till the end of July, but chart tells that it should be much more to complete the shape of the pattern. Currently it is unclear how to combine this facts. Either it will be upside reaction to 1.15 as a result of Fed meeting, then downside retracement later. Or H&S will be erased by downside breakout of 1.1150 area.
For us any direction will be good, as specific of H&S pattern is its dual character. It keeps door open for both scenarios. Upside scenario is based on reverse H&S while downside scenario could be confirmed by its failure, which happens around Right arm bottom.
Daily
On Friday, we've made cross market analysis, involving DXY chart, as usual. Picture on Dollar Index stands a bit more clear, showing the same pattern on weekly chart, but on daily one the shape of H&S pattern looks better:
Following to pattern's harmony, it seems that USD should drop a bit more, to reach 96 Fib support level, which agrees with the bottom of right arm. Drag&drop this situation on EUR - it suggests some upside continuation to 5/8 Fib resistance before reversal.
Daily chart tells that weekly "Evening star" pattern takes the shape of H&S on daily chart, and action to the target will take the shape of AB=CD pattern, based on the head and right arm points, as usual. This is at least something that we could use as a background for trading.
Intraday
Keeping the logic of daily chart, here, on 4H we could suggest the first stage of our trading plan. EUR has to reach and form the top of right arm. Our last week setup is done well, as EUR has shown ab=cd reaction on K-resistance. Now we have "222" Buy pattern here, "C" point is also an engulfing pattern. It is interesting guys, that you could find cross-market divergence on 4H chart with Dollar index. As on EUR as on DXY - it was downside AB-CD reaction on K-area, which stands supportive to upside EUR action.
This situation tells that we should not search for deep retracement on 1H chart and focus just on minor pullback as upside action could continue. We do not exclude the chance that it again could be minor reverse H&S on top:
Conclusion:
So, on coming week we continue our "tactic" trading with weekly pattern.
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.
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