Forex FOREX PRO WEEKLY, July 18 - 22, 2022

Sive Morten

Special Consultant to the FPA
Messages
16,471
Fundamentals

This week we think that CPI/PPI numbers are very important, especially their structure. It gives us the fresh view and better understanding on how inflation spreads the whole economy. Political events are important as well but has less effect on currency markets by far.

Today, guys, as usual we show you a lot of interesting charts. First is, lets briefly take a look at inflation and make the major conclusion - while inflation is slowing in energy and food sector - it transfers upside momentum to all other spheres of economy. Here is the CPI numbers that we've got. Obviously, gasoline and heating oil stand among most highest numbers, but take a look, inflation is spreading over other spheres:
Heating Oil+98.5%
Gasoline: +59.9%
Gas pipelines: +38.4%
Electricity: +13.7%
Food at home: +12.2%
New cars: +11.4%
Consumer Price Index : +9.1%
Transportation: +8.8%
Food outside: +7.7%
Used cars+7.1%
Home Rent+5.6%
Clothes: +5.2%
Medical Services: +4.8%

As the momentum of growth in energy and food is exhausted, further price increases will be supported by a wide range of goods - their costs are gradually spreading into the final cost of goods and services and put on consumers' shoulders, as usual...

PPI numbers also hardly could be called as positive. It is 23.4% YoY basis, but not the absolute number is interesting by comparison to the history. Thus, in two years the PPI has raised for ~50%. The same growth was in 2002 -2008 when PPI has jumped for 57%, but for the six years, not for the two ones. Growth in agricultural sector very similar to high inflation growth in 1970's. No one generation ever met such strong inflation. Situation is gradually out of control.
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But you also should know that in 1980 the algorithm of inflation calculation was significantly changed. If previously inflation was treated correctly, as money supply expansion, later, in 80's it was replaced for "price growth". Now, if we turn to original calculation way - you could see that CPI is not 9.1% - it is about 17%:


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The inflationary situation in the United States is close to disaster. Over the past 100 years, there have been literally seven (!) months when prices in the US have been growing stronger than in June 2022 - September 1947 (+1.96% mom), August 1973 – price growth by 1.81% mom, January 1951 (+1.6%), February 1951 (+1.77%), December 1950 (+1.55%), December 1947 (+1.52%) and January 1980 – an increase of 1.43%.

At the same time, stable and directed inflationary pressure was only in the 70s and 80s, so there are only two precedents of price growth above 1.4% mom over the past 100 years. Comparable growth was in September 1974 (+1.4% YoY), in March 1980 (1.39%).

There are no signs of stabilization of the situation, it is contrary - there is a consistent deterioration across the board, when a wide range of goods and services seize the "initiative" in inflationary pressure.

Recent data just confirms our suggestion that rate hike doesn't help as inflation has non-monetary reasons and you can't control it with pure monetary tools, such as rate change. But it seems that the majority of market society still do not understand it. Take a look what expectations are announced by Fed representatives and big banks, such as BofA.

The U.S. Federal Reserve should target a policy rate in the range of 3.75% to 4% by the end of this year in light of this week's hotter-than-expected inflation data, St. Louis Fed President James Bullard said on Friday,

"I would now revise up the policy rate moves," Bullard said at an event organized by the European Economics & Financial Centre in London. Bullard has previously advocated for interest rates in the region of 3.5% by the end of 2022. The Fed has to react...charting out a course that is somewhat more aggressive over the second half of this year."

But most interesting stuff he said later:

"...accordingly, we should have a stronger path…We need to act quickly to try to suppress inflation as soon as we can. If the Fed plays its cards right, inflation can drop relatively quickly to 2% over the next 18 months. (!!!)"

The same expectations come from Bank of America and other investment banks. As a lot of goods prices dropped out from 2022 year highs for ~20% on average, it suggests that the economy is turning to recession and is slowing down.

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Consensus view suggests that Fed rate activity should lead to slowdown of inflation and economy closer to the end of the year, which should make Fed to stop rate tightening. Thus, market right now prices - in full 0.25% step of rate cut in the beginning fo 2023:
1657970810253.png


Goldman Sachs also hints on recession, showing that everything turns to downtrend.
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But I would like to ask you - who said that with recession starting inflation should slowdown? You could argue that it always happened in the past as consumers' activity is decreasing and this pushes prices lower. Yes, this might be true when your supply and demand is balanced. But currently we have quite different situation - the overblown demand has not even started to contracting. It means that while the US economy starts showing recession - inflation should remain high. If they try to cut the rate in this situation - the structural disbalance pushes inflation up again, and it start moving to EU numbers around 20%.

Besides, have you ever thought about the US budget deficit that has to be financed somehow. At first glance it shows curious performance, as it has dropped drastically in recent year, two times on average, comparing to the previous years. 1.05 Trln in last 12 months compares to ~4 Trln in March 2021. In last 6 months the deficit has dropped almost 10 times to 137 Bln, compares to 1.66 Trln in 2021. This is approximately the same deficit that was in 2015 - the minimum in 15 years.

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At first glance it sounds good - decreasing of the deficit. But, we need to know the source. First is the stagnation on Treasuries market. Nobody buys toxic bonds with negative interest rate. Second - stop of different Covid stimulus expenses for $668 Bln. Finally - contraction of subsidized loans for $330 Bln. Totally it stands around $990 Bln. And the same time - households have guaranteed income from income taxes, thus income have increased from 3.05 to 3.84 Trln.

Current expenses contraction means that no more contraction is possible. But to compensate the inflationary pressure - they have to increase spending, i.e. budget deficit will keep growing. With total collapse on the US bond market, the major question is - how they will finance them? Whether they start household wealth deterioration at the eve of November elections? Hardly. But what's then? Printing? And what about inflation decreasing by idea of BofA and Mr. J. Bullard?

The budget deficit is just a half of the story. The Dollar strength is based on foreign investments that let US to finance record high negative trade balance and budget deficit. This is the major background of dollar's strength and the US will do everything to support it. The major policy here is to initiate geopolitical instability everywhere except the US to attract investments from the whole world. But here they have big problems:

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There is no doubt that the US will extinguish competitive currency zones, clinging to the status of the main reserve currency. This primarily concerns the Eurozone, as the main competitor of the United States. Because, over the past 4 years, the net negative international investment position of the USA has reached $18.1 trillion, i.e. the USA has 18 trillion more liabilities than assets in all instruments and types of investments (direct, portfolio and other investments).

This is due to a radical decrease of international investments in other countries and the acceleration of the inflow of non-residents. Almost 75% of GDP is the negative net investment position – there is no such thing in any major country in the world. Thus, the US has a record trade deficit, a record current account deficit, executed the budget with a record deficit a year ago and has now reached an absolute record of net negative investment position. Stunningly...

The absurdity of the situation is that Europe, being the main supplier of capital to the United States, should look terrible enough to not create competition for financial flows to the dollar zone, but at the same time relatively stable in order to generate a positive cash flow. The problem is practically unsolvable. As we've mentioned previously - situation is deteriorating fast since March, as major investments suppliers - EU and Japan start drawing into deficit as well and now has no free money to send them to the US. Treasuries market is stagnating. The world does not have enough resources to fit the appetite of parasite.

And what is EU? The trade deficit of the EU-27 countries with the outside world over the past 5 months amounted to a record 163.3 billion euros for the first time in the whole history. On average before the crisis, the EU-27 trade surplus averaged 22-24 billion euros each month, while now the average for six months brings out a 30 billion trade deficit, which is almost three times higher than the worst period of 2008-2009. I.e., the balance shifted /worsened by almost 55 billion euros (660 billion euros per annum). So, the price of geopolitics for Europe is 600-700 billion euros, without internal losses. Here is the result in monetary terms, what it means to sell sovereignty by playing 3rd side "projects".

As a result cross-border financial flows and international investment position - EUR/USD hits parity due to the different way of the monetary policy of the Fed/ECB and the very poor state of the European economy, which is losing heavily to the American one.

For a long time, the cash flows of non-residents to the Eurozone and the United States were comparable, but since mid-2018, investments of non-residents in the United States have sharply accelerated, reaching a gap of $ 15 trillion by the beginning of 2022 in favor of the dollar. Competition for the right to be a "special one" has intensified.
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In the context of declining financial globalization and the global trend of compression of cross-border financial transactions, the problem of financing double deficits (current account and budget) It is becoming more and more acute for the USA. Among all currency zones, the main competitor of the dollar is not the yuan (this is a long-term topic), but the euro, which has a comparable financial infrastructure, a range of financial instruments, a legal basis, market capacity and liquidity.

The Eurozone is the first to replace the dollar zone, so the United States is certainly interested in creating unacceptable conditions for functioning in Europe, in which, in relative comparison, the United States will look advantageous. In this logic, most of the financial, economic and political decisions of recent months become clear, given the complete absence of European sovereignty.

Let's taking it all together

The US has record deficit everywhere - international trade, investments and budget. World has no more money to finance it, but they need to increase budget spending to reduce inflationary pressure on households. They can't do it with the bond issue anymore. Additionally, with rising interest rates the Fed government expenses are growing and now 31 Trln Debt burden needs ~700 Bln for interest payments.

Fed Pivot indicator shows that historically we're at the point where Fed usually turns its policy down. But they already are prepared to 75 basis points hike in a couple of weeks, that deliberately destroys the system. The system would collapse even without raising the rate, because it is not possible to raise it to match inflation level and the point of no return has already been passed. As we've said - inflation will win, we still think that Fed will switch the backpedal, but it doesn't relief the inflation as GS and BofA think...
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And watch this -

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Treasuries market is paralyzed, Fed also should start selling bonds with QT programme while foreign investors also leaving this market, decreasing their positions. To get the tactical relief the best thing the Fed can do now is to announce that it is raising the rate by 75 basis points, keep trash talking about a strong economy and say that this was the last increase. In this scenario, the markets will tighten their belts, tight buns, but sigh with relief. Buy popcorn guys...

The Fed can raise the rate as much as it wants. But soon they will face reality: the US DEBT of $31 trillion and the global debt of $300 trillion need to be refinanced and serviced. But soon there will be no one left who wants to do it. So we suggest that Fed stop rising rates closer to the end of the year and start printing money again - either publicly (with some QE programme) or in secret with pushing inflation higher to 20% area. At the same time, it triggers deterioration of households' wealth, unemployment and massive bankruptcies in corporate sector.

At the same time we suggest no reversal on EUR/USD yet, as ECB with its 0.25% rate change looks anemic and mediocre comparing to the Fed.

To be continued...
 
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Sive Morten

Special Consultant to the FPA
Messages
16,471
Technicals
Monthly

Although we have outstanding, I would say epic events in the world - technical picture is changing slowly. Mostly we stay focused on the same targets that have discussed previously, at least on long-term charts.

With the drop below OP, it is the only direction to XOP, as market enters new extension mode. Our major target that we could calculate is 0.9, nearest local target is 0.9750, which is 1.27 butterfly extension.

Downside action shows good thrust and appearing of B&B "Sell" here, despite the possible background is definitely welcome. On rising concern of possible intervention, fears of the US recession and theoretical possibility of 0.5% rate change by ECB - we see minor pullback, started on Friday.
eur_m_18_07_22.png


Weekly

Trend stands bearish at all time frames, but the oversold is only on the weekly one. We have the reason to expect the pullback. Still, last week there was absolutely similar situation but no pullback has happened.
If ECB fails with 0.5% change and upset investors, pullback hardly happens. Otherwise, some technical bounce to 1.03-1.04 area is possible as 0.5% rate change is not fully priced-in yet.

eur_w_18_07_22.png


Daily

Here market is coiling around butterfly target. Recent swing down is a good thrust. Thus, if EUR hits 1.02-1.0270 resistance area - it might be good potential B&B "Sell" setup. This is also the target for those who intends to make scalp long trades on intraday time frames.

Right now it would be better to not consider the new entry on short side by far, as uncertainty is rising and chances on pullback, at least short-term and tactical increase.
eur_d_18_07_22.png


Intraday

Here, as usual we have nothing to do but wait for the pattern. Supposedly it might be 1.27 H&S one. Using the harmony we could suggest theoretical targets that more or less but corresponds to resistance levels on daily chart. OP here is around 1.0175, while XOP is 1.0280. "C" point is potential area for long entry, as usual.
It is tough challenge to trade EUR long right now. While it is not forbidden, of course, still, it might be applied for bearish scenario as well, as it could point on the level where daily B&B "Sell" could start.
eur_1h_18_07_22.png
 

FreddyFX

Sergeant
Messages
413
It feels to me like heavy manipulating of prices, one moment we are below parity, then somebody opens a valve and we pop up again to almost 1.01
If one does not have enough liquidity, you could easily get a margin call with these moves.
 

Sive Morten

Special Consultant to the FPA
Messages
16,471
Morning everybody,

So, it seems that market is inspiring with coming ECB decision. Today we also get EU CPI data, although hardly it brings any surprises.

In general, our B&B "Sell" setup is coming to final stage. Formally, 3/8 resistance is already touched here:
eur_d_19_07_22.png


But I would wait for a bit deeper upside action, closer to major daily resistance cluster and oversold by multiple reasons. First is B&B has two more sessions for upside action, as it has to be formed within 1-3 days above 3x3 DMA. Second - chance on 0.5% ECB rate change still exists, and this inspires traders to push EUR higher.

Besides, technically, on 4H chart we have DRPO "Buy" pattern that usually has higher target, at least 50% of recent drop. And on 1H chart, despite that EUR hits daily resistance we do not see any reversal patterns around it. It makes us think that it should try to climb higher. So, let's keep watching for 1.03-1.0360 daily resistance cluster for any bearish patterns:
eur_1h_19_07_22.png
 

Sive Morten

Special Consultant to the FPA
Messages
16,471
Morning everybody,

If FX action right now looks clear - it is just trans- Atlantic financial policy re-balancing, while the inspiration on the stock market is not. EUR is rising now just because 0.5% ECB step has higher probability than FEd 1.0% shift. That's all. As you understand, this background is very short-living. But the rally on stock market, especially in EU is a bit riddle to me. Whether they so inspired with re-starting of N. Stream I?

Anyway, EUR is coming to our pre-defined area, where potentially B&B could start. This is the range between 1.0270 and 1.0368 levels, accompanied with daily overbought. Yesterday we've suggested that EUR could climb slightly higher, action was relatively fast and no bearish patterns were formed. Now it comes to 1.0270 level:
eur_d_20_07_22.png


On 1H chart we see that EUR has completed COP target that agrees with the 1.0270 area. Action to COP is relatively fast and again - we have no bearish patterns by far. OP target also perfectly agrees with the 1.0360 resistance, and we can't be absolutely sure that EUR will not reach it. Besides, it is the whole day until ECB meeting still and volatility probably will be high.
eur_1h_20_07_22.png


Thus, in current situation we have few options. First is, and most simple - split position. Take 25-30% now and the rest around OP target, if market hits it. Second option - do nothing and wait for clear bearish pattern in 1.0270-1.0360 area. This is preferable way, no pattern - no position. Besides, pattern usually lets safe money on stop order distance. And finally, third is - take position on minor upside bounce when pattern will be formed and downside action starts. I prefer the second one, but all of them have own adv. and disadv.
 

Vokin

Private, 1st Class
Messages
31
. But the rally on stock market, especially in EU is a bit riddle to me. Whether they so inspired with re-starting of N. Stream I?
These are just the twitches of a sick animal:
from fxlive:
Desperate times call for desperate measures. The German government needs to agree on a rescue package for Uniper by 25 July, otherwise the utility firm could face more dire funding issues due to Russia reducing gas supplies. For some context, Uniper is Germany's largest importer of Russian gas and is bleeding cash in having to source supplies from alternative sources after Russia has reduced deliveries.

The latest report out now suggests that the government is willing to pass on the costs to consumers to save Uniper. That's a heavy toll and doesn't bode well for the outlook of Europe's biggest economy.
 

Sive Morten

Special Consultant to the FPA
Messages
16,471
So,

EUR shows the pullback from our first pre-defined level and lower border of daily K-area - 1.0270. The complexity of situation now is based on ECB decision, which we do not know with precision and mixed patterns on lower time frames.

In favor of downside action we could say that we have similar action on other currencies - GBP is forming our reverse H&S on 1H chart, starting the right arm retracement, while AUD and NZD also turn to some pullback. Second - Dollar index is oversold right now, suggesting the pullback as well...
eur_d_21_07_22.png


On 4H chart trend has turned bearish, EUR stands at K-resistance:
eur_4h_21_07_22.png


By looking at swings structure on 1H chart, current upward action should become the continuation of major upside tendency. Because after COP we already got AB-CD type retracement, and here should be extension again. But, take a look - EUR stops at 5/8 resistance, forming minor reversal bar. Another tricky pattern here is bullish divergence, that suggest upside action
eur_1h_21_07_22.png


That's being said, I would say that if you wouldn't upset too much, if you miss this trade - wait for ECB then and its 0.5% rate decision that supposedly could push EUR to our 1.0360 resistance area, where you could make a decision on short entry.
If you upset and do not want to miss it - then take minor part of your position here, around 30%, and wait for ECB as well. With 0.25% rate decision you get the trade with 1/3 of your position, at least.

Also - keep watching as more clarity could come. For example, we could get bearish grabber on 4H chart, or some other patterns that could make situation more clear...
 
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