Forex FOREX PRO WEEKLY, June 01 - 05, 2020

Sive Morten

Special Consultant to the FPA
Messages
13,627
Fundamentals

This week is not as overload with the news and driving factors as previous one. In fact, in passed five days there are only two major topics - EU supportive measures and rising US-China tensions on multiple objects, including Covid spreading, HK protests and long lasting mutual trade tariffs.

EU recovery measures

The euro headed towards a two-month high on Wednesday after the European Commission proposed a coronavirus economic recovery package worth in total 1.85 trillion euros ($2.04 trillion). The euro has struggled since falling in March, when investors rushed for the safety of dollars. But analysts say the recovery fund proposals, if they can win over EU members sceptical of an earlier Franco-German plan, could push the euro higher.

Should the European Commission approve the new proposal, “it would reduce the risk of a slump in peripheral Europe, notably Italy, and increase the likelihood of a synchronized recovery across the Continent,” said Marshall Gittler, an investment analyst at BDSwiss Group. “It would be positive for the euro.”

The euro’s price action continues to be driven by global risk sentiment, even as market participants remain deeply skeptical that the EU recovery fund proposal will navigate the bureaucracy unscathed, said Simon Harvey, FX analyst at Monex Europe. “We expect EURUSD volatility to remain well supported in the coming months,” Harvey said.


Overnight implied volatility gauges inched up to hit a one-month high above 8%, suggesting investors were prepared for unexpected moves in the common currency.

“The Commission’s plan is decent, but the leaders’ meeting on 18-19 June will be key to determine whether there is the political willingness to move forward with it,” Nicola Mai, lead sovereign credit research analyst in Europe at PIMCO, told the Reuters Global Markets Forum.

On Thursday after the Labor Department reported another 2.1 million people filed for unemployment benefits in the week ended May 23, down 323,000 from the prior week.

“It’s still an extremely large number, but if the number of people continuing to file for unemployment benefits is decreasing then this should be viewed as a positive for the economy,” said Chris Zaccarelli, chief investment officer at Independent Advisor Alliance.

By Fathom consulting view, as the peak of the crisis passes in Europe, with infection rates slowing and pressure on health systems easing, countries have begun to focus on the recovery. Euro area GDP contracted by 3.8% in 2020 Q1, with France, Spain, and Italy all contracting by more than 5%. And, that is just the start — economic activity probably troughed in April, with the second quarter’s GDP print likely to reveal an unprecedented fall in output. As a result, national governments have announced large-scale spending to support their economies, assisted by the ECB’s easing of monetary conditions. The European Commission has now joined the cavalry.

Following on from the historic Franco-German debt mutualisation proposal, Commission President Ursula von der Leyen announced plans for a €750bn recovery fund, involving €500bn worth of grants and €250bn worth of loans, with money allocated to the economies that have been worst hit by COVID-19 crisis. While the specifics are yet to be finalised (and are likely to be watered down to please more frugal members), the political capital generated by a deal could be immense. Having lost its second-largest economy as a member state six months ago, the EU will be keen to prove its worth during times of crisis, especially in countries such as Italy. As seen in the chart below, the market-implied probability of sovereign default for both Italy and Greece has risen significantly since the end of 2019, both now sit above 10%.

1590828536371.png


Fathom has long argued that the lack of fiscal transfers makes the euro area an imperfect monetary union, but that a permanent mechanism for debt mutualisation would be a game changer. Politicians are keen to stress that this is a one-off resulting from the unique circumstances that they are facing. However, as we saw with QE in the last crisis, policies designed to be temporary can be hard to dispose of. The proposed sum is small compared to overall EU GDP. But if this is just the beginning of a much larger EU debt-issuance programme, it could spur pro-growth government spending in sluggish economies, bringing euro area inflation closer to 2%, helping an ECB that is desperately out of ammo.

The ECB is one of few central banks to have held interest rates despite its economy being hit badly by the virus, as it was already at the effective lower bound. Furthermore, it is worth remembering that the coronavirus crisis is not a closed case. Should a second wave of lockdowns be required, the ECB will have little choice but to expand a purchase programme that is already vast, or take interest rates further into negative territory, which until now they have seemed reluctant to do.

US-China tensions

Worries about the U.S. response to China’s proposed security law for Hong Kong injected a more cautious tone into foreign exchange markets. U.S. President Donald Trump said on Tuesday the United States would announce before the end of the week its response to China’s planned security bill for Hong Kong.

The elephant in the room is the standoff between Washington and China over Beijing’s new security legislation for Hong Kong, which many lawyers, diplomats and investors fear could erode the city’s freedoms.

The weekend is packed with action: Hong Kong braces for more street protests, the U.S. administration reviews the city’s special status and President Donald Trump preps a response. Whether he goes so far as to scupper his 2019 Phase 1 trade deal with China or merely takes some symbolic steps around sanctions and visas for Hong Kong citizens could determine how long the latest global stock market rally will last.

CFTC Report

Speculators’ net bearish bets on the U.S. dollar increased in the latest week, according to calculations by Reuters and U.S. Commodity Futures Trading Commission data released on Friday. The net short dollar position was $8.60 billion for the week ended May 26, compared with a net short position of $7.66 billion for the week before that.

In a wider measure of dollar positioning that includes net contracts on the New Zealand dollar, Mexican peso, Brazilian real and Russian ruble, the U.S. dollar posted a net short of $7.82 billion, up from $6.58 billion a week earlier.

The U.S. dollar index, which weighs the currency against a basket of six rivals has fallen 1.47% this week as risk sentiment has improved, sending U.S. stock indexes higher, and denting the greenback’s safe-haven appeal. The biggest daily drop this week was recorded on Tuesday, the end of the seven-day period from which the CFTC drew this week’s data.

On EUR we also see positive dynamic as net long position has increased, as well as open interest, but changes are moderate showing that overall sentiment stands at the same level.

1590829432175.png


Recent changes on the market lets suggest that "V" shape of recovery is getting more points. The global outlook has improved slightly over the last week or two as restrictions on movement have generally eased in advanced economies, while the number of new cases and of deaths has continued to fall (notwithstanding some disturbing news from a few US states where the number of new cases appears to be rising again). It is not just the trajectory of the virus across advanced economies, but also some early signs of a bounceback in confidence and in activity (new job openings have risen sharply across most US states so far in May, albeit from a very low base in April), and continued bullishness in equity markets that supports our slight change of view, shifting more weight into the V-shaped scenario to 55% and out of the L. In our view, a V is now more likely than not.

1590829633457.png


NEXT WEEK

The growing divergence between an increasingly dire economic landscape and a roaring U.S. stock market
will be on display on Friday when May non-farm payroll employment data is reported.

The rise in weekly jobless claims since the April survey week points to another grim payroll figure for May. A Reuters poll showed economists expect U.S. employers to have cut 7.45 million jobs in May, compared with the record 20.5 million jobs lost in April.

While some encouraging signs in the employment picture have emerged in recent weeks as some workers rejoin jobs with businesses starting to reopen, these changes are unlikely to be reflected in the May data.

Any positive surprise, however, is likely to be cheered by stock market bulls eager to grasp at signs of a rebound from the coronavirus induced economic slump.

1590829972191.png


On the surface, the 750 billion euro European Union plan to prop up economies hammered by the coronavirus pandemic eases pressure on the European Central Bank which has long urged Europe’s leaders to do more to strengthen the bloc’s economy.

So, ECB rate setters meeting on Thursday could well hold back until the EU deal is done, right? Well no, argue many economists, who believe fresh stimulus in June is more likely than not. After all, the EU recovery fund will take time to set up and will likely face hurdles on the way, they say.

In addition, the ECB is burning through its emergency asset purchases, which will likely run dry by October - unless expanded. And the unprecedented nature of the COVID-19 shock means the economic outlook remains far from certain.

Fresh ECB stimulus would likely fuel gains in southern European bonds and the euro, basking at two-month highs on the recovery fund optimism. If further ECB stimulus is matter of when not if, the key question for the ECB is, why wait?

1590830071860.png


Finally, Britain heads into another round of Brexit talks ahead of the June 18-19 European Union summit by which time London needs to make up its mind about asking for an extension to the transition agreement.

British officials have repeatedly said they won’t do so, but the clock is ticking and there’s not much time left until the end of December when Britain and the EU part ways - with or without a trade deal. Negotiators have not made much progress. Britain says an agreement on fisheries might not be ready by July and it is down to Brussels to break a fundamental impasse. The EU urges Britain to make a bigger effort and be more realistic about what it can achieve in these talks.

All this toing and froing keeps the pound close to its lowest in nearly three decades. And as if a potentially messy Brexit was not enough, the British currency is also grappling with the prospect of negative interest rates, a deep recession and a growing pile of debt.

Technicals
Monthly


So May is over and here we get another pattern - 3rd bullish grabber in a row, but this time it has short-term positive sentiment and we hope that EUR could hold it till EU meeting in 18-19 of June.

Technically EUR direction still depends on breakout of the 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. Still the major question of EUR driving factor stands on the table. It is difficult to find something inside EU that could drive EUR up to 1.23, or at least to 1.15. Thus, in turn, something should be in US that should weaken US Dollar.

In a few weeks traders keep an eye on whether EUR finally finds power to jump up from 1.08-1.09 area. NFP release on Friday could play significant role and make impact on EUR as well.
eur_m_01_06_20.png


Weekly

Here EUR has completed minimum bullish conditions that we've specified few weeks ago. By our view EUR should had to move above 1.10 area, erasing grabbers and turn trend into bullish. All these conditions are done right now. If EUR holds existed bullish sentiment and traders inspiration till the middle of June, it should keep chances on upside action right to major resistance of 1.1450 area, inside of our pattern.

Still, on coming week we should not count on too strong upside continuation because of 1.12 weekly Overbought area.
eur_w_01_06_20.png


Daily

In addition to weekly overbought area, we have strong resistance cluster on daily as well. We've talked about it on Friday as well. Take a look - beyond 1.12 Fib level, we have daily Overbought around 1.1260, AB-CD target @1.1240, target of rectangle breakout and few minor intraday targets also stand in this area:
eur_d_01_06_20.png


Intraday

On 4H chart market hits AB-CD target. XOP stands at the same 1.1260 area and agrees with daily resistance cluster. Since major breakout just has happened, reaction on OP target should not be too deep and setup that we've discussed on Friday is still the same. We could accept any pullback till 1.10 area but preferably, if it would be shorter. Butterfly also shows minor 1.1175 target:
eur_4h_01_06_20.png


Here is the tree of Fib levels that we have. Price here could form AB-CD retracement to 1st K-area, making Agreement with it. Thus, setup is mostly the same as on Friday - consider 1st K-area for entry with stop below 2nd K-area around 1.10 level.
eur_1h_01_06_20.png


Conclusion:

So, everybody gives positive assessment to EU measures on providing liquidity with humble hopes that they continue to support economy. This keeps EUR in positive mood and we hope that EUR will keep it till EU meeting in the mid June. If EU bureaucrats miss to provide more supportive measures in June, EUR rally could fizzle, and probably will.
Other driving factors that are longer term remain uncertain. It is interesting what NFP data will show by the end of the week and what real shape of global recovery will be. Not everything is clear yet on pandemic and potential 2nd wave in the autumn, uncertainty exists on US plans against China - these uncertainty keep markets in tension.
 

Sive Morten

Special Consultant to the FPA
Messages
13,627
Morning everybody,

Yesterday EUR was coiling around the top and our retracement has not started, but today the Brexit round of EU/UK talks is starting and market probably will stay caution on any results. This could trigger the minor pullback that we would like to get.

On daily chart market stands near 1.11 resistance, trend is bullish, our major targets are the same - around 1.1230 area:
eur_d_02_06_20.png


On 4H chart we have intermediate target - butterfly 1.618 extension around 1.1174. If you plan to make scalp bearish trades, be aware of its target. Either wait when price hits it, or put the stop above it, because EUR could reach it before retracement starts:
eur_4h_02_06_20.png


On 1H chart we have the same Fib Tree. Our basic scenario suggests entry around 1st K-support with initial stops below the 2nd one. Currently we should do nothing and watch for the shape of downside action. Time to act should come tomorrow probably.
eur_1h_02_06_20.png
 

Sive Morten

Special Consultant to the FPA
Messages
13,627
Morning guys,

Today we take a look at cable as EUR goes well and almost has reached our daily target cluster. We said the ceil should be around 1.1230-1.1260 area due multiple extensions' target and weekly OB area. EUR should hit all of them till the end of the week.

On GBP we have important price action right now telling us that price finally stands in extension mode. No more retracement will be and we have CD leg of huge weekly engulfing pattern that stands in a core of our setup. Nearest target on daily chart is 1.2830, major target is OP around 1.33 but it is long run to it. Around COP we also have daily OB area:

gbp_d_03_06_20.png


At the same time we have to recall that previous tops, including "B" point was formed as a reaction on weekly K-resistance area, and price now is coming to it again. This area has not been broken yet. It means that again some reaction could happen, before market proceeds directly to COP, at least I hope that it will happen. Direct action to COP makes difficult to us to find new good entry setup if you've missed Monday entry.

So, if still pullback will happen - we could get either H&S or butterfly or both together. In case of the former - retracement should be somewhere to 1.23, in case of latter - it could not as deep. Both patterns have the targets that agree with daily COP:
gbp_4h_03_06_20.png


Of course, we can't totally exclude chance on immediate upside continuation to COP, but it is not comfortable, because we have to place too far stop. And this is not suitable for most of us. I suggest that we could consider 1H XOP target. It coincides with H&S neckline. Market reaction on this target will show us what will happen. Appearing of reversal pattern, thrusting action down tells that we're right on retracement. In this case we consider two levels - K-support and major 5/8 1.23 area:
gbp_4h2_03_06_20.png


Direct action to COP gives us no choice but search entry on a retracement after COP and prepare to action to OP. But, I hope that some reaction on weekly K-area still happens.
 

Sive Morten

Special Consultant to the FPA
Messages
13,627
Morning guys,

So EUR has completed our targets for this week. Now we have by-products of this event - additional minor setups that could appear today-tomorrow. Here price stands not only at OP, but also at weekly Overbought. As we said 1.1230-1.1260 should be the ceil for the week and not it seems that it is true.
Of course, tomorrow NFP release could shake the boat a bit, but in general we're in place. On daily chart we could consider B&B "Buy" trade.
eur_d_04_06_20.png


On 4 H chart we're mostly interested in 1.11 level. Because it is 3/8 major level and suitable for daily B&B and because this is K-support as well.
eur_4h_04_06_20.png


Bears could consider scalp short trade if clear bearish reversal pattern will be formed, say H&S:
eur_1h_04_06_20.png
 

Tryingtrader

Sergeant
Messages
177
Wow! That's now 1.35 Trillion Euros of funny money- created out of thin air - that is being injected into the European economy. All the previous injections of funny money, USD, Pound Sterling, Japanese Yen, Chinese Yuan et. all, really made a difference... not! But here we go again, more insanity and meddling by the authorities. It's really messing up the real economy big time, but Hey Ho... last one into the hand cart to hell is a sissy :)
 

Sive Morten

Special Consultant to the FPA
Messages
13,627
Morning guys,

While EUR shows unstoppable rally, GBP is coming to important resistance and today we intend to check our reverse H&S (or Cup& handle) theory. On EUR nothing has changed particular for us. Yes - rally is impressive, but EUR was at overbought even yesterday. Today it creeps in more overbought area. Thus, our position on EUR is the same - wait for the pullback.

Cable, in turn comes to previous tops and weekly K-resistance that already has been tested. Today we will get NFP release, and maybe it will become the driving factor:
gbp_d_05_06_20.png


Here is the pattern that we're watching right now. It is few pips till the target and then, at least theoretically, we should get some reversal action. Harmony of this pattern suggests deep retracement to 1.23 area:
gbp_4h_05_06_20.png


Here is the target that we're watching - XOP, that agrees with weekly K-resistance area. Bulls are waiting for pullback to the levels, while bears have to wait clear reversal pattern before pull the trigger. As overall momentum is strong, markets are exciting, so it might be unsafe to sell just because we're at resistance. Clear bearish pattern is needed as well. May be it will be H&S... Many things also depend on NFP as well.
gbp_4h1_05_06_20.png
 
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