Forex FOREX PRO WEEKLY, July 20 - 24, 2020

Sive Morten

Special Consultant to the FPA
Messages
14,041
Fundamentals

Well, guys, this week we've got few events and one of them is still lasting. I mean EU summit, that should be over today. It is important as EU countries discuss rescue fund value and the way how contributions will be made to it. Among others we have some statistics, as usual, and ECB meeting, that has made no significant impact on the assets prices across the board.

EU data and ECB

Euro zone consumer prices rose slightly in June, while core measures of inflation which exclude volatile components eased, the European Union statistics office Eurostat said on Friday, confirming its earlier estimates. Eurostat said annual inflation in the 19 countries sharing the euro rose by 0.3% in June after a rise of just 0.1% in May, in line with the agency’s earlier estimates released on June 30. Despite the uptick, inflation is still far below the European Central Bank’s target of below but close to 2% over the medium term.
Excluding energy and unprocessed food prices - a measure the ECB calls core inflation and watches closely in policy decisions - prices grew 1.1% in annual terms, easing from 1.2% in May, Eurostat figures showed.

The euro zone economy may contract less this year than the European Central Bank had forecast and its recovery could also be quicker, the bank’s Survey of Professional Forecasters showed on Friday. The quarterly survey sees the economy shrinking by 8.3% this year, a downgrade from its May projection for a 5.5% drop but a more benign outcome than the ECB staff’s own estimate for an 8.7% drop. For next year, growth is seen at 5.7%, above the ECB’s staff’s 5.2% estimate in June.

Although the euro zone suffered its biggest recession in generations, recent data suggest the economy bottomed out in April or May and a recovery is now underway, even if it is bound to be choppy, uneven and prone to setbacks. The survey was also more optimistic about inflation as it sees 2020 price growth at 0.4% against the ECB’s 0.3% projection while inflation in 2021 is seen at 1% as against the ECB’s 0.8% prediction.
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Growth projections for 2025, deemed as the “longer-term”, were left unchanged at 1.4% but the longer-term inflation forecast was cut to 1.6% from 1.7%, short of the ECB’s target for inflation at just below 2%.

The European Central Bank left policy unchanged on Thursday, pausing after taking a series of unprecedented measures over the past four months to salvage an economy that is fighting its biggest recession in living memory due to the coronavirus.

The European Central Bank will use its stimulus firepower fully even as the euro zone economy shows some signs of rebounding from its pandemic-induced recession, ECB President Christine Lagarde said on Thursday.
Lagarde said economic activity in the 19-country euro zone had shown signs of a “significant, though uneven and partial recovery” but the outlook remained uncertain amid risks of a second wave of infections. “Uncertainty over the scale of the rebound remains high,” Lagarde said. “The balance of risks remain on the downside.”

Accordingly, the central bank sees no reason to hold back when deploying a 1.3 trillion euro ($1.49 trillion) envelope it has earmarked for buying financial assets under its Pandemic Emergency Purchase Programme (PEPP), Lagarde said. “Unless, and we don’t see for the moment frankly, but unless there are significant upside surprises, our base line is that we will need the entire envelope of PEPP,” she added.

ECB policymakers may have also wanted to keep up pressure on European Union leaders to finally agree on long-delayed fiscal support, thus reducing the burden on monetary policy alone.

“It is important for European leaders to quickly agree on an ambitious package,” Lagarde noted on the eve of a Brussels summit where leaders will attempt to bridge national differences on a new 750-billion-euro scheme of EU grants and loans.

A looming second wave of the pandemic is raising doubts about the speed of the recovery, a point highlighted by ECB chief economist Philip Lane, who argues that Europe faces a “two step forward, one step back” recovery. That could mean better data now provides little guidance about the path ahead. Rising coronavirus case numbers around the globe are also likely to weigh on consumer and business confidence, holding back spending and investment and raising the chance that any recovery would be slow, uneven and prone to interruptions. With exports, industrial production and confidence indicators still muted, economists say the ECB’s pause is only temporary and that more action could come this autumn.

Lagarde said
that despite evidence of a “bottoming out” in April, there remained high uncertainty about the ability of authorities to contain the spread of the virus and to counter the impact on incomes, employment and consumer demand. PEPP purchases are due to continue until at least June 2021, with proceeds from those purchases to be reinvested until the end of 2022, she said.

“In our view, the euro can sustain its move beyond $1.1400 if all EU leaders agree on the proposed EU-wide recovery fund,” said Commonwealth Bank of Australia FX analyst Kim Mundy.

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Outside the EU


PMI data took a bit of a backseat lately — essentially Q2 figures were dismissed as reflecting, first, the activity collapse sparked by lockdowns and then, a rebound as restrictions lifted. But upcoming July releases will draw attention as investors seek clues on the outlook.

China’s manufacturing PMI is already back above 50 — the line dividing contraction from expansion — and the euro zone is not far behind. Any signs of recovery taking hold will boost investor sentiment. Then again, unease could follow as investors fret that the fiscal and monetary life support of the past few months could start to be unwound.

China’s 3.2% economic growth last quarter easily beat market expectations for 2.5%. But an unexpected drop in retail sales - for a fifth straight month - was an unwelcome harbinger of possible problems ahead for the rest of the world as more countries relax lockdowns and allow businesses to reopen.

“That cautiousness is something the market is looking at in terms of countries where the consumer plays a bigger role, so that’s obviously relevant for the U.S. as well.”

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Surging U.S. virus cases also dampened sentiment and weighed on equity markets as focus shifts to Europe, and the region’s recovery plans, as well as rising global tensions.

Global coronavirus infections passed 14 million on Friday, according to a Reuters tally, marking the first time there has been a surge of 1 million cases in under 100 hours. The United States, with more than 3.6 million confirmed cases, is still seeing huge daily jumps in its first wave of COVID-19 infections. The United States reported a daily global record of more than 77,000 new infections on Thursday, while Sweden has reported 77,281 total cases since the pandemic began.

The greenback’s fall against rival safe-havens may suggest its appeal, even in times of crisis, has been waning given the resurgence of coronavirus infections in the United States. That resurgence eroded consumer sentiment in mid-July, the University of Michigan consumer sentiment index showed on Friday, threatening the nascent housing and economic recovery. Some areas in virus hot spots in the populous South and West regions have either shut down businesses again or paused reopenings.

Other hard-hit countries have “flattened the curve” and are easing lockdowns put in place to slow the spread of the novel virus while others, such as the cities of Barcelona and Melbourne, are implementing a second round of local shutdowns. The number of cases globally is around triple that of severe influenza illnesses recorded annually, according to the World Health Organization.

Britain on Wednesday ordered that equipment from China’s Huawei be purged from its communications network by 2027, prompting a warning from Beijing, while China and the U.S. are at loggerheads over issues from trade to technology.

President Donald Trump has not ruled out additional sanctions on top Chinese officials over Beijing’s crackdown in Hong Kong, a White House spokesman said on Tuesday.

The New York Times also reported his administration is considering a sweeping ban on travel to the United States by Chinese Communist Party members, citing four unnamed people with knowledge of such discussions.

EU summit
European Union leaders are started meeting on Friday to bridge differences and agree on a 750-billion-euro recovery fund deemed a “game changer” to lift the bloc out of recession. The spending plan, which brings the EU closer to a fiscal union by introducing shared debt liability and mostly grants rather than loans, has been instrumental in beefing up confidence in the region. The outcome of the Friday-Saturday summit in Brussels is expected to set the direction for markets over coming months.

EU leaders’ views on a mass stimulus plan remained “diametrically different”, Czech Prime Minister Andrej Babis said on Friday. The 27 EU heads are struggling to reach consensus on the 2021-27 budget, proposed at above 1 trillion euros, and a linked new recovery fund worth 750 billion euros, meant to help rebuild southern economies most affected by the pandemic.

“A positive outcome by the end of the EU summit Saturday could potentially be the euro’s ticket to fresh highs for the year,” said Joe Manimbo, senior market analyst at Western Union Business Solutions. If progress is made, the euro could break through the technically significant $1.15 level, which has not been touched since February 2019. “Conversely, a disappointing outcome that merely kicks the fiscal can down the road would risk an unwinding of recent euro gains,” Manimbo said.

Implications for the euro should the EU go ahead with its plan would be long-lasting, Marshall Gittler, head of investment research at BDSwiss, told his clients. A deal “would make the euro more attractive as a reserve currency” by “establishing a central fiscal capacity that can respond to adverse shocks, which would make monetary union more stable”, he said.

It is clear what will happen if consensus will be achieved, but what will happen if it will not. In this case of "no deal" but high hopes on breakthrough - analysts believe markets could tolerate a few days’ or weeks’ delay with EU leaders confident an agreement will eventually be found.

“If EU leaders were to schedule an August summit, this would help alleviate any disappointment,” said Jordan Rochester, a currency analyst at Nomura.

If no deal will be achieved at all, perspective also is relatively clear:

Given the recession they face and with Germany and France pushing for a deal, EU leaders are expected to avoid another political crisis but this can’t be ruled out.

“Let’s suppose we get something much weaker or they don’t agree, euro/dollar could go below $1.10,” said Athanasios Vamvakidis, head of G10 FX strategy at Bank of America.

Antoine Bouvet, senior rates strategist at ING, warned about a potential “toxic cocktail” if talks are indefinitely postponed and the ECB signals its intention of limiting emergency bond purchases.
A Bank of America index shows long positions on the euro are already over-stretched:

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So these are scenarios, but how we're going through them. European Union leaders ended their first day of discussions in Brussels over an economic recovery fund with no agreement as talks ran into difficulty late on Friday. Negotiations are at an impasse because of differences over the conditions for access to the scheme, EU officials said. That's all by far...

COT Report

CFTC data shows light increase of net long position without drastic impact on situation. Mostly we could say the EUR keeps the same sentiment with no big changes in one or another direction. Net position has increased for ~ 7K contracts, open interest rises for 21.5 K contracts.

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Source: cftc.gov
Charting by Investing.com


The bottom line
So, it seems that some gap opening will be waiting for us on Monday as todays is a final session of the summit. Somehow I feel that they have to agree and find consensus. This is the result that will have long-term positive impact on EU in many spheres. To be honest, I'm surprised a bit that they discuss just 750Bln. Investors take significant long position in anticipation of this event, many of them probably know more than we do, so it is "highly likely" that we'll get positive result.

Second issue, I do not know guys, whether you've signed this or not, but it seems that mass media starts to prepare world population to relapse of pandemic whatever scale it will be. It is clearly seen more and more headlines that here and there new cases are rising, even there when they have not seen for long time. Above we've mentioned the quote of EU politician who talks about this:
A looming second wave of the pandemic is raising doubts about the speed of the recovery, a point highlighted by ECB chief economist Philip Lane.
Lagarde also hints on this, but not as evidently - "there remained high uncertainty about the ability of authorities to contain the spread of the virus"

Chinese economy after first jump of rebound fizzles a bit, tensions between global leaders are growing. All these moments forces Central Banks to keep existing stimulus and do not stop them, or better, to increase. And all Central banks governors understand this, I suppose. Besides, currently it is some struggle for domination between them and rivals should extract bonuses from temporal US weakness due difficult domestic situation and president's run. That's why I suggest that today EU will approve this rescue fund.

Longer-term perspective depends on domestic financial structure and who will be better prepared for economy recovery. My suggestion that EU has good chances to be ahead of US. Despite who will win on US elections - this will delay US progress in economical sphere. D. Trump wins - it will be a lot of screams and noise around, a lot of new fraud probes, elections intruding (Russian did it) etc. Democrats will not leave them alone. If J. Biden wins - US will have to re-build political system and this will take some time that will not let US government to focus on economy. That's why I suggest that EU is in better shape for recovery right now. ECB just has to keep and increase stimulus programme.



Technicals
Monthly


Market was watching for ECB and EU summit so tightly that no significant price action happens. But now we could suggest with high degree of certainty that we will get one next week. Technical picture on monthly chart suggests positive result of EU summit on rescue fund approvement. Nearest target we have around 1.1550 MPR1, while initial, large grabber ultimately suggests action above 1.26 in long-term perspective, although now it seems unbelievable.

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.

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

Here price is breaking through the tails of the previous weeks that it was not able to overcome previously. Price is not at Overbought now and the only barrier is strong K-resistance area that has been tested once already. If EU will approve the fund - price might appear above the K-area on Monday's open and it could be good area for long entry on a pullback to it.
If EU will fail to provide positive news - K-area could bring negative surprises and push price lower. Still, situation is a bit simpler than usual as we do not need to unscramble chart signs but follow the result of summit. Information already will be on the market on Monday. In this case, take a look - EU still will get chance to provide longer-term reversal shape as wide reverse H&S pattern could be formed. Right arm bottom stands around 1.09-1.10 - this is an area where EUR could drop in case of no rescue fund approvement.

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Daily

While we have some interesting stuff on higher time frames, here on daily barely has changed something. Our butterfly still stands in focus, no signs of cancellation of this pattern yet and we're still watching for 1.1550-1.16 target. All that we could say about it - we already said in previous updates through the week.
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Intraday

On Friday we've specified the crucial level for short-term bullish context and EUR was able to hold above it (even in advance). On 4H chart market keeps accurately harmonic retracement swing and yesterday it has kept it again, turning to the upside from 1H K-support area. Butterfly provides minor target as well around 1.1475-1.15 area:
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Here, on 1H chart, we do not know where market appears on Monday morning. Still, recent price action tells us something. First of all, recall downside AB-CD pattern that we've discussed on Friday and its OP and XOP target point on two strong support levels. Now, price has rebound from the first one and upside swing exceeds the "C" point top. It means that downside pattern is erased, and market stands in new upside action. This is the reason why we're interested only with most recent upside swing and its Fib support levels. Maybe our plan here will be in vain as price probably will open either far above or below this levels, but, this particular chart suggests considering of long entry against the lows around K-area support. Market stands in new upside swing. If this swing will be cancelled, it means that context is broken and sentiment has changed. Logic is simple. That's why we do not need any other support levels now.

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Thus, it is difficult to estimate at what degree we could rely on short-term analysis as everything depends on political event. But, maybe, at least weekly chart will be useful as a trading plan in new environment.
 

Sive Morten

Special Consultant to the FPA
Messages
14,041
Morning guys,

So, historical event has happened (we knew! LOL), but it seems that EUR can't believe and is lagging a bit from gold and GBP that turns to rally. Thus, it seems that we have nothing to add to EUR analysis by far.

Thus, let's take a look at GBP. Previously it was complicated background and few times cable was on the edge of failure of bullish context but was able to hold on the way. Now theoretically we should be in extension leg that should last to 1.32 OP target. Still, on the way up we have K-area barrier that market hits already. It means that today-tomorrow some retracement is highly likely. At the same time, as we already have got major pullback down from COP, this time retracement should be smaller:
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On 4H chart GBP was able to hold above crucial 1.25 area as well. Now it hits OP target that is accompanied by MPR1 and butterfly. This is good background for pullback. But this pullback has to stay inside the butterfly swing. This is the only depth that we could accept. Otherwise it hurts bullish context. Next target here after pullback is XOP:
gbp_4h_21_07_20.png


There are two levels that we could consider for pullback. Retracement should stuck somewhere inside former triangle consolidation and price has to not drop below it:
gbp_1h_21_07_20.png
 

Sive Morten

Special Consultant to the FPA
Messages
14,041
Morning guys,

EUR also has started up, with some delay to GBP and Gold. Now we stand 50 pips from the target. On daily chart we do not have any barriers and EUR freely could reach the target - no levels, no overbought ahead.
Further action is a subject of longer-term analysis. Now we need to see reaction to the target and weekly K-resistance. Second we need to see effect of adopted rescue fund - whether it will be short-term or longer term. Then we could set new targets:
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On 4H chart market has passed through 1.27 butterfly extension and our XOP target without any reaction. This confirms the idea that EUR should go higher and hit daily target.

Thus, we keep existed long positions. Additionally, today we see only single setup for scalp long trade. It is possible to try to catch minor pullback on 1H chart and take position with final 1.1580 daily target. It seems that we get 1.15 retracement at the best, although it might be very small. So, it makes sense to split entry 30/70. That's all for now.
eur_1h_22_07_20.png
 

Sive Morten

Special Consultant to the FPA
Messages
14,041
Morning guys,

So, we finally there - XOP and butterfly target completed. Today we could discuss situation in common as it is not clear yet what reaction will follow on the targets, if any. In general, on daily chart we could consider another target that stands at 1.1730. This is 1.27 extension of XA swing. But the problem is weekly overbought level that stands at 1.1640. Thus, although major resistance has been broken, active action probably will happen only next week.
Besides, odds suggest some reaction, minor one at least, on daily target:
eur_d_23_07_20.png


On 4H chart we could consider two retracement levels. First one is 1.1513, but next one is more important - 1.1450. This is not just K-support here. This is former weekly K-resistance that now also will work like support and this is also previous top area on daily chart. Thus, it would be perfect if market will be able to hold above it. In this case we would have no question on context at all. If this level will be broken down - then another scenarios will become possible.
eur_4h_23_07_20.png


That's being said, overall context is bullish. We're watching for reaction on daily target and consider long positions around support areas.
 

Sive Morten

Special Consultant to the FPA
Messages
14,041
Morning, everybody,

As we've discussed everything about EUR recently, today, I think we need to take a look at AUD. Here we have a long term setup that finally comes to decisive moment. Here it is. On monthly chart we have background for B&B "Sell" trade with potential result of 10 points around 0.61:
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Those who trades AUD probably remember this daily picture. Last time we said that B&B could be triggered as soon as market hits XOP target. Now it has happened. Also we have rising bearish divergence with MACD and butterfly "Sell". The one thing that brings risk here is acceleration to the butterfly target. It means that ozzy could climb slightly more, to 0.7240 1.618 target. Keep this in mind if you plan to trade the setup:
aud_d_24_07_20.png


On 1H chart let's suggest that downside action is started already. Currently market stands at minor support area and theoretically we could use resistance levels for position taking. If AUD still will climb above 0.7140 then indeed price is coming to next daily butterfly target. Otherwise, AUD should start to sleep down. Potentially, we should get here large H&S pattern...
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