Forex FOREX PRO WEEKLY, July 26 - 30, 2021

Sive Morten

Special Consultant to the FPA
Messages
15,061
Fundamentals

This week we mostly were watching for some statistics and ECB meeting that has not shown any surprising. But all eyes mostly are on coming Fed meeting next week. Beyond the statistics some important researches are published, showing that recovery should be faster. It looks significant because it denies suggestions that new variants of virus could become the headwind with recovery.

Market overview

The U.S. dollar climbed to a three-month peak on Tuesday in a flight-to-safety bid, as investors remained anxious about a fast-spreading coronavirus variant that could throttle global growth.

Commodity currencies tied to risk appetite such as the Australian and New Zealand dollars struggled, with investors opting for safety or staying on the sidelines amid renewed fears about the highly contagious Delta variant, now the dominant coronavirus strain worldwide.

U.S. infection shave surged, especially in areas where vaccinations have lagged.

The dollar rose as yield differentials have moved against it. Benchmark 10-year U.S. Treasury yields dipped to a five-month low below 1.20% on Monday on renewed skepticism about a strong economic rebound from the pandemic.

"Shifts in relative growth rate expectations are weakening capital flows out of the U.S. and heightening the appeal of dollar-denominated investments," said Karl Schamotta, chief market strategist at Cambridge Global Payments in Toronto. At the same time, an unwinding in speculative positions is forcing a short squeeze in currency markets - driving the dollar upward," he added.

Data showing U.S. housing starts rose 6.3% to a seasonally adjusted annual rate of 1.643 million units last month had little reaction from the FX market.

Market participants though remained bullish on the dollar's outlook, at least over the next few months.

"Between yield differentials and COVID-driven safe-haven demand, the U.S. dollar has been the proverbial belle of the forex ball this week," said Matt Weller, global head of market research at FOREX.com and City Index. These themes should continue to support the dollar in the coming weeks, but a recovery in the market's risk appetite, especially if driven by additional monetary or fiscal stimulus from the U.S., would undercut the nascent trend of strength in the greenback," he added.

The Federal Reserve's stimulus measures or quantitative easing have restrained the dollar as it increased the currency's supply in the financial system.

"Currently, we have high inflation in the U.S. which is keeping the door open for the Fed to taper stimulus," said Joe Manimbo, senior market analyst at Western Union Business Solutions in Washington, a scenario that's positive for the dollar.

"The U.S. dollar does seem to have quite an undertow of support," said Westpac analyst Sean Callow in Sydney. The dollar's rise has been driven mostly by expectations that U.S. economic strength could prompt interest rates to rise, but has recently been helped a bit by risk aversion, he said. The general mood on the dollar looks as though it would take a lot to derail the basic narrative of the dollar being in fairly good shape from here to the Jackson Hole conference," he added, referring to the August symposium in Wyoming where the Federal Reserve may announce tapering of its bond purchases. For the time being you'd probably just prefer to keep long dollars for the next few weeks."

The dollar edged higher overall in choppy trading on Thursday, moving with the ebbs and flows of risk sentiment, while the euro fell as investors digested the European Central Bank statement and comments by its president. Despite the pullback in the dollar from 3-1/2-month peaks, it remains in demand among investors, analysts said.

"There is a lot of uncertainty whether you're looking at U.S. markets, global macro, COVID concerns, or whether you're looking at political risks," said Simon Harvey, senior FX market analyst at Monex Europe in London. I don't think this dislocation is going to clear in the short term, so I see the dollar remaining buoyant over the next few months," he added.

Earlier in the session, the greenback slid in the wake of higher-than-expected U.S. jobless claims data that raised concerns about the world's largest economy's recovery from the pandemic. The euro, on the other hand, was firmer early in the day after the ECB met expectations by pledging to keep interest rates at record lows for even longer.

Data showed initial claims for state unemployment benefits increased 51,000 to a seasonally-adjusted 419,000 for the week ended July 17, the highest since mid-May. Economists polled by Reuters had forecast 350,000 applications for the latest week.

ECB President Christine Lagarde, in her media briefing, did not say anything to change the market's cautious outlook on the euro zone. She said a fresh wave of the coronavirus pandemic could pose a risk to the region's recovery, although she did offer a more balanced economic outlook.

The ECB's dovish pivot - which follows its recently released strategy review - at a time when many peers are mulling exiting pandemic-era stimulus is expected to keep the single currency under pressure.

Karl Schamotta, chief market strategist at Cambridge Global Payments in Toronto, said the data risks pushing the Federal Reserve's tightening plans well into the future, putting further pressure on bond yields.

The U.S. dollar on Friday notched a second week of gains, after a few volatile days when currencies moved with shifting risk appetite, as the market shifted focus to next week’s Federal Reserve meeting. Some analysts wondered, though, whether the dollar’s recent rally might be losing momentum.

But that was off a 3-1/2-month high of 93.194 hit on Wednesday, bolstered by strong Wall Street earnings that helped investors regain some confidence in the midst of worries that the Delta coronavirus variant could derail the global recovery. Risk appetite remained high on Friday, with the rise in U.S. stocks, the sell-off in Treasuries, gains in most commodity currencies, and the greenback coming off its peaks.

“Medium-term oscillators and momentum are in sync on the upside suggesting potential higher highs to come, such as 94.30-94.72 (on the dollar index),” said Dave Rosenberg, chief economist and strategist at Rosenberg Research. He also cited the potential of a “Golden Cross” in the dollar index, a chart pattern in which the 50-day moving average crosses above the 200-day moving average, a bullish signal. Overall, the dollar(index) leans toward further upside which could add to recent pressure in commodity prices and other currencies. Support is at 92.00-91.50,” said Rosenberg.

Erik Nelson, macro strategist, at Wells Fargo Securities in New York, however, was not convinced the dollar could hold its gains in the coming weeks given the decline in U.S. yields.

“The dollar looks tired especially after the rally of the last few weeks,” he said. “It seems to be running out of steam both from a fundamental and technical perspective.”

Since the beginning of July, U.S. benchmark 10-year Treasury yields have lost 18 basis points, their largest monthly fall since March 2020. The dollar typically moves in tandem with U.S. yields.

Nelson also believes the Fed is going to be a laggard among central banks in normalizing monetary policy.

U.S. business activity grew at a moderate pace for a second straight month in July amid supply constraints, suggesting a cooling in economic activity after what was expected to have been a robust second quarter. Data firm IHS Markit said on Friday its flash U.S. Composite PMI Output Index, which tracks the manufacturing and services sectors, fell to a four-month low of 59.7 from 63.7 in June. A reading above 50 indicates growth in the private sector.

Investors’ next major focus is the Fed’s two-day policy meeting next week. Since the June 16 meeting, when Fed officials dropped a reference to the coronavirus as a weight on the economy, cases have risen. Many economists still expect the meeting to advance discussions for a tapering of stimulus.

Meanwhile, the euro showing little reaction to the purchasing manager surveys coming out of France, Germany and the euro zone as a whole. Euro zone business activity expanded at its fastest monthly pace in over two decades in July as the loosening of more COVID-19 restrictions gave a boost to services, but fears of another wave of infections hit business confidence.

Borrowings by U.S. companies for capital investments rose about 17% in June from a year earlier, the Equipment Leasing and Finance Association (ELFA) said on Friday. The companies signed up for $10.4 billion in new loans, leases and lines of credit last month, up from $8.9 billion a year earlier. Borrowings rose 28% from the previous month.

“Despite slower-than-desired vaccinations in certain parts of the U.S, consumer spending is accelerating, markets remain strong and unemployment continues to slowly abate, all of which are contributing to a strong economy,” ELFA Chief Executive Officer Ralph Petta said. These trends serve as a good indication for the equipment finance sector as it moves into the second half of 2021.

The index is based on a survey of 25 members, including Bank of America Corp, CIT Group Inc and the financing affiliates or units of Caterpillar Inc, Dell Technologies Inc, Siemens AG, Canon Inc and Volvo AB. The Equipment Leasing and Finance Foundation, ELFA’s non-profit affiliate, reported a monthly confidence index of 72.9 in July, up from 71.3 in June. A reading above 50 indicates a positive business outlook.

The global insurance industry is poised to recover more quickly and forcefully from the pandemic than it did after the 2008 financial crisis, despite such obstacles as low interest rates and inflation risk, insurer Swiss Re AG’s chief Americas economist said on Friday.

Unlike the prior crisis, the pandemic did not weaken insurers’ overall capitalization or financial strength, which allows companies to write new coverage and increase revenue, economist Thomas Holzheu told Reuters. We see a much stronger, more resilient demand for insurance - last year, this year, and we expect for the next few years - compared with the financial crisis, when the industry was a part of the financial markets issues,” he said.

Swiss Re’s view aligns with other bullish signs. Global commercial insurance prices, for example, rose 18% in the first quarter of 2021 from a year earlier, on average, insurance broker Marsh McLennan Cos Inc said in May. Rates have risen since late 2017.

Swiss Re said it expects annual growth for all premiums, not just commercial, to reach 3.3% this year and 3.9% in 2022, after falling just 1.3% last year. That compares with a 3.7% decline in 2008, during the financial crisis, and a slower rebound of 0.5% and 2.1% in 2009 and 2010, respectively.

Coming Fed Meeting

The U.S. Fed meets on Tuesday and Wednesday and looks set to debate when and how to kick off a bond taper, even as a surging Delta variant caseload revives economic risks from a pandemic many policymakers had hoped was drawing to a close.

In June, officials launched the discussion over when to start cutting monthly purchases of $120 billion of Treasuries and mortgage-backed securities - it's unlikely they will put that on ice even though the rate of new daily U.S. infections has doubled since.

The Delta surge is too new to show up in data, but figures reflect a growing conundrum: inflation running much hotter than expected and job growth still well short of the "maximum employment" goal.


Meanwhile a partisan fight over raising the debt ceiling has erupted in Congress, with the Treasury Department on July 31 technically bumping up against its statutory debt limit.
1627117321106.png


Within the next month or two most major economies are likely to have offered their adult population at least a first dose, which by itself appears highly effective in preventing severe illness if not infection from the Delta variant. Several major economies that were able to keep the virus at bay last year, including Australia, New Zealand and South Korea, have been slow to purchase and deliver vaccines to their population. These countries remain at risk from both the Delta and future variants, as do many emerging economies.

Where do we go from here? Fathom expects to see a period of very strong economic growth through this year, as a portion of the pandemic savings — worth close to 10% of GDP in several major economies — is spent. Survey evidence from the US and UK central banks suggests around a quarter of excess savings will be spent. In our judgment this will, in turn, produce a sustained period of above-target inflation. The flipside of high pandemic savings in the major economies is rapid growth in the broad money aggregates. The chart below shows that, after adjusting for inflation, US real broad money balances increased by more than 20% last year. Over the past 150 years real broad money growth has been more rapid on just one occasion, and that was in the aftermath of World War II.
1627117607827.png


It is becoming increasingly apparent that the pick-up taking place in inflation, particularly in the US, is cyclical, and not just a consequence of base effects. Traditionally, any cyclical pick-up in inflation has required a monetary policy response — and yet that is not the intention of policymakers at present. The FOMC continues to believe that the pick-up will be transitory. At Fathom, we have our doubts. Inflation overshoots driven by circumstances such as a spike in the oil price or a change in tax rates tend ultimately to subtract from household real incomes. In that sense, they can be self-limiting, and deflationary in the long run, and it is often appropriate for policymakers to look through them. But that is not what we are seeing here. Only in the unlikely event that higher product prices do not feed through at all to higher wages, which would require a very strong degree of faith in policymakers’ ability to rapidly bring inflation back to target, would a cyclical pick-up in inflation be self-limiting.

1627117625738.png



Prior to the crisis, the FOMC’s projections were consistent with it expecting to follow a Taylor rule. That ended as the pandemic took hold. In its latest projections, the FOMC expects inflation back at target and the economy to be operating at full employment by the end of next year. And yet it also expects the Fed Funds rate to remain close to zero. US policymakers are relying on their hard-won credibility to do the heavy lifting. In these circumstances, and given the build-up in pandemic-related savings, Fathom sees a 60% chance that inflation expectations slip their anchor. If that happens, the Fed must choose whether to deal with it (and induce a recession) or roll with it (and opportunistically raise the inflation target).
1627117475914.png


The costs of dealing with it are significant, with asset prices — including those of government bonds — underpinned by an expectation that policy rates will remain close to zero. Should the Fed raise rates, the risk of a market correction would be high. That is why Fathom sees rolling with it as a more likely scenario. In such a world, policymakers might respond to higher inflation by moving the goalposts and opportunistically raising the inflation target.

CFTC Report

Despite EUR flat standing through the whole week, its background is gradually deteriorating as investors increase shorts on EUR. In general, net long position is dropping since June-20. This week changes are not too strong, but still, speculators have increased net short position for 13K contracts, while hedgers reduced hedge against EUR appreciation for 18 K contracts. Open interest has dropped again:
1627117809830.png


As a result net long position keeps downside trend:
1627118176767.png

Source: cftc.gov
Charting by Investing.com



This week we do not need to make some strategical conclusions as they mostly are done previously, and information this week agrees with our major outlook. Leasing as a great barometer of economy and insurance sector shows that recovery stands underway and should accelerate further. Despite growing cases of CV-19 the deaths drops in developed countries (in UK in particular), suggesting that it should not become strong barrier on the way of recovery. Inflation keeps showing strong pace and now in EU - recent PPI data shows 8.5% YoY change. All these moments tells that starting of tightening period should happen as it is planned and supports US Dollar. Later, if Fed will set higher inflation targets, as Fathom consulting suggested, it could bring some adjustments to our view, but right now, on the first stage we expect dollar growth.

In shorter-term, despite EUR tries to hold existing levels, with melting open interest and net long position, sentiment stands not in favor of upside reversal. It means that downside drop and reaching of our 1.1625 daily target is just a question of time. Commerzbank expects approximately the same, suggesting 94.30-94.70 by dollar index.


Technicals
Monthly


It is just single week till July end but take a look at trading range - it is very narrow. Monthly chart stands the same. The one thing is worthy to mention here additionally - monthly Pivot. It agrees with daily AB=CD target.

Technically we have bearish tail close in June and unconfirmed bearish trend on monthly chart. Monthly action makes no impact on long-term direction by far, as price mostly stands in wide 1.16-1.23 consolidation. But breakout in any direction could become a decisive. In general, with June performance, it is difficult to count on sharp reversal in July.

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

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

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

eur_m_26_07_21.png


Weekly

This week market has closed below the trend line. Price is coming closer to the 1.17 lows and butterfly has just theoretical chances to survive. Situation stands evident, at least from technical point of view. Bullish trend will be over for EUR, once it breaks below 1.16 K-area, forming bearish reversal swing and out of triangle consolidation. Hence, until it holds inside - it keeps chance to proceed higher. Of course, it is rhetoric question whether EUR is possible to complete butterfly. Now it looks more like theoretical scenario.

K-support of 1.1620-1.1690 looks especially sweet as we could get DiNapoli "Oops!" direction pattern. Just to remind you - "Oops" every time gets chances to come, when strong support stands near pattern. IT might be any of them - H&S, Double Top or, as in our case - triangle. Idea of the pattern suggests that market forms fake breakout when meets K-support and returns back inside the pattern. Usually it triggers strong opposite action.

This is the reason, why tactically, it is attractive to consider long entry around K-area, at least for the bounce, which might become significant as it stands on weekly chart.

Speaking on position taking with butterfly - it is not as attractive setup. Mostly because of strong sell-off and smaller chances on success. With the sentiment that we have right now, I like more K-support area.
eur_w_26_07_21.png


Daily

It is rare happens but today is nothing to discuss as market shows no activity. On daily chart picture smells like downside breakout, as EUR was not able to show reasonable bounce within few weeks, even whet it had supportive fundamental background, like JP speech in Congress. Bearish dynamic pressure here stands in place as well here. Most probable driver is Fed meeting of course.
Still, once OP will be hit - we need to keep an eye on bullish patterns around it, as healthy bounce could start, according to our weekly analysis.

eur_d_26_07_21.png


Intraday

It is difficult to find some sense with intraday action as well. A kind of H&S pattern that we were watching here, shows signs of weakness. After the drop on ECB meeting, it turns to consolidation instead of upward reversal. Thus, shoulder's harmony exists, but price performance is different. This is also not in favor of the bulls. With this chaotic action, it would be better to stay aside as we do not see any good setup for long entry here. And prefer to stay aside from bullish positions by far - as technical picture as sentiment are not in favor of upward action.

For bearish positions - it seems that using of Stop "Sell" order could become the proper approach to current situation. Because right now, it is difficult to find the point where to enter and place stop. Finally, take a look that last week we were talking on the same shape consolidation that could be formed again. And last week it has been broken down...
eur_1h_26_07_21.png
 

RahmanSL

Major
Messages
2,848
Hi Sive.... another great reporting & analysis.
You got that right as it is difficult to find some sense in the market these days.

Take care and continue to stay safe.
 

Sive Morten

Special Consultant to the FPA
Messages
15,061
Morning everybody,

So, chaotic action continues on the EUR and hardly picture changes until Fed meeting. By technical picture I wouldn't consider any long positions because recent strong sell-off and existence of OP target just 150 pips under the market means more than phantom hopes on Fed statement. By fact we do not have clear bullish setup here. And I prefer to wait for 1.1620 Agreement and K-support area to consider long entry.

It is nothing bad with idea to bet on Fed results, but it is not technical, this is more event trading that has big component of gambling.
eur_d_27_07_21.png


Still, for those of you who are ready to take some risk (for the truth sake it is not too large) and be involved in Fed results... For bearish position it is more simple - try to use Stop "Sell" order just below current lows, somewhere at 1.1745 or lower. The major risk is spikes during Fed commentaries.

For long position - the only way now is to buy against recent lows. It seems that market holds them pretty accurately by far. Divergence and the shape that reminds the cup maybe works, if Fed will be dovish. Risk now is around 30-40 pips, not too much.
eur_4h_27_07_21.png


On 1H chart some harmony in price swings exists as well. So, you could try to catch the deep around one of the Fib levels to consider long entry. Risk probably will be even smaller in this case:
eur_1h_27_07_21.png


For others, who are not ready to dive into Fed's doom & gloom - let's wait for 1.1620 on daily chart or some other result.
 

Sive Morten

Special Consultant to the FPA
Messages
15,061
Morning everybody,

So, to not talk about the same mess on EUR, that we've discussed yesterday, let's take a look at GBP now. In general sentiment on the market stands weak and net position turns negative last week for the first time within a year probably. Although England gradually removes Covid barriers, situation in economy is difficult.

On daily chart market has formed bearish reversal swing, meets strong K-support area and now is showing upward bounce. This reaction could be extensive that usually happens after reversal swings formed:
gbp_d_28_07_21.png


On 4H chart it is easy to recognize potential H&S pattern and MACD Divergence. Now market is going to neckline and has OP right around it. Once right arm will be formed - it could become the point to consider for long entry. Upside target approximately should be around 1.41 area. At least this setup is much clearer than choppy action on EUR. Hopefully Fed will not damage setup too much.

gbp_4h_28_07_21.png
 

Sive Morten

Special Consultant to the FPA
Messages
15,061
Morning guys,

So, as it was widely expected JP said nothing new and keep the same statement as before. This was treated as "dovish" as markets now have more time till tapering that provides background for upward action. The value of this meeting not in the statement, but because it provides short-term direction finally.

If you've taken part in trading recently and opened Long positions on EUR - consider 1.19-1.1915 level as a target. Here, on daily - this is Fib level and OB area:
eur_d_29_07_21.png


For the bears - it is time to be patient. We have valid bearish setup on daily chart and current upward action is temporal. Very soon coming Wyoming meeting and September Fed meeting start to press on EUR and other markets, forcing them to turn down again. Current rally is an excellent gift that we could sell later and get better entry point.

On 4H chart we could see that 1.19 area is also the K-resistance:
eur_4h_29_07_21.png


While on 1H chart we have two XOP's. First one is 1.1870 that is almost done, but another one has the target at 1.1912 that perfectly agrees with daily resistance. This supposedly is the ceil for current week:
eur_1h_29_07_21.png
 

Sive Morten

Special Consultant to the FPA
Messages
15,061
Morning everybody,

Fed provides enough impulse to help EUR to reach first resistance area of 1.19 level. Here is still the major question - whether we get more extended upward action of optimism exhausts fast.

eur_d_30_07_21.png


On 4H chart price hits Agreement resistance and K-area that we've discussed recently. So, this is definitely not a good moment for new long positions - wait for pullback, if you want to buy EUR. And, as today's Friday - its' time to think about protection if you hold any long positions right now.

Usually combination of K-area and target leads to retracement.
eur_4h_30_07_21.png


On 4H chart we still have different XOP that could be reached later, but at the same time now we have DRPO "Sell" that suggests pullback to 1.1840 area. Here we need to keep an eye on how market responses on major support levels. This should shed some light on bullish perspectives and chance on higher retracement on daily chart.
eur_1h_30_07_21.png
 

gpeter991

Private, 1st Class
Messages
45
Hi Sive, can you give us some hints on AUD/USD long term bearish setup maybe next week if possible?
 

Sive Morten

Special Consultant to the FPA
Messages
15,061
Hi Sive, can you give us some hints on AUD/USD long term bearish setup maybe next week if possible?
Hi mate,
Well, in long term I'm watching for something like this:
AUDUSDMonthly.png


I suppose that Australia should be among the leaders who joins Fed in rate hiking cycle. Once this will happen - it should turn up. Until this moment, we should get right arm on monthly chart. Approx., 0.69-0.70 area by current situation.
Or you need shorter term picture?
 

gpeter991

Private, 1st Class
Messages
45
Hi mate,
Well, in long term I'm watching for something like this:
View attachment 67343

I suppose that Australia should be among the leaders who joins Fed in rate hiking cycle. Once this will happen - it should turn up. Until this moment, we should get right arm on monthly chart. Approx., 0.69-0.70 area by current situation.
Or you need shorter term picture?
Perfect - then I am on track. Thank you very much Sive!
 
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