Forex FOREX PRO WEEKLY, June 07 - 11, 2021

Sive Morten

Special Consultant to the FPA
Messages
14,704
Fundamentals

This week everything was turning around ADP and NFP reports. Since the beginning of the week investors have pointed their high expectations and increasing demand for US dollar, putting pressure on currencies and gold. Although usually ADP 80-85% correlates to NFP but sometimes big difference happens. This was last month and this month, despite that difference is not large but still, it exists. NFP was mostly in a row with expectations, while earnings have shown faster growth, meaning that inflation is rising. We're satisfied with numbers as they stand in a row with our long-term view. This is the new brick in the wall that presses on Fed, making it acting quicker and maybe earlier. We will see...

Market overview

First is, I would like to briefly take a look at aussie dollar as we also have it in consideration and following its long term bearish setup. Technical analysis works properly by far. The Australian and New Zealand dollars were locked within tight ranges on Wednesday as upbeat domestic data and strength in global commodity prices failed to break the forex market’s recent lethargy. News that the state of Victoria had extended its coronavirus lockdown for another seven days also overshadowed the better data and came as a blow to the Aussie.

Traders said large option positions seemed to be boxing it in as investors wagered on more sideways drift. Australian figures showed the economy expanded by a healthy 1.8% in the first quarter, taking gross domestic product (GDP) back above pre-pandemic levels. It also sets up the current quarter for annual growth of 10% or more.

That is welcomed by the Reserve Bank of Australia (RBA) but was already built into its forecasts on Tuesday when it reiterated that no rate hike was likely until at least 2024.

“As shown by the lockdown in Victoria, there is still some way to go to claim victory,” said Craig James, chief economist at CommSec. Stimulus must remain in place until it is clear that a sustainable recovery has been achieved,” he added. “Measures to suppress the virus need to be reinforced and vaccination rates need to accelerate.”

The RBA’s steady outlook kept yields on 10-year bonds at 1.65%, well within the 1.579% to 1.767% band of the past couple of months. The spread over U.S. Treasuries is at a meagre 3 basis points and has been a drag for the Aussie.

Analysts did note that the RBA policy statement omitted a line that it was “prepared to undertake further bond purchases”, suggesting some risk it would not extend bond buying at the next policy meeting in July.

“It is clearly are more hawkish sign as we head into the July meeting,” said Damien McColough, head of rates strategy at Westpac. “Perhaps the market is already prepared for a taper, however we think that would inevitably lead to a steeper curve and a wider Au-US 10-year spread.”

Now let's go back to EUR...

The dollar came under pressure on Monday and was heading for its second consecutive monthly loss against the euro and the pound, as traders assessed the impact of a surge in U.S. inflation before monthly jobs data later this week. On last Friday, data showing a key measure of U.S. inflation at a 29-year high briefly boosted the dollar to a two-week high.

The core PCE price index vaulted 3.1% on Friday, the largest annual gain since July 1992, due to a recovery from the pandemic and various supply disruptions.

The market considers current inflation levels in the U.S. to be transitional. Next year's U.S. inflation will remain at 2.5%, Ulrich Leuchtmann, Commerzbank’s head of FX and commodity research wrote in a note. That does not make it any easier pricing USD," he said. "Until we have more clarity the dollar is likely to have found a good balance at current levels".

Speculators increased their bets against the dollar last week with U.S. dollar short positions hitting a 2-1/2 month high.

1622885562066.png


"It's basically showing that a huge amount of the recovery trade is baked into the cake at this point and the whole recovery curve may be a lot slower than people anticipate," Schlossberg said of the data.

Producer prices in the euro zone rose more than expected in April, boosted by a surge in energy costs, data showed. But the European Central Bank, which wants to keep consumer price growth close to 2% over the medium term, said that while inflation may temporarily rise above its target this year, anemic wage growth will likely keep it in check for years to come

The dollar rose to a three-week high on Thursday, bolstered by stronger-than-expected U.S. jobs data that suggested an improving labor market and reinforced signs that the world's largest economy was on its way to recovery from the COVID-19 pandemic.

U.S. private payrolls increased by 978,000 jobs in May, the ADP National Employment Report showed, the biggest increase since June 2020. Economists polled by Reuters had forecast private payrolls would increase by 650,000 jobs. At the same time, U.S. initial jobless claims dropped below 400,000 last week for the first time since the pandemic started more than a year ago.

You have to give the U.S. dollar merit because the economy behind it seems to be coming out of the pandemic mode and now indicators are giving us signs of clear momentum," said Juan Perez, FX strategist and trader at Tempus Inc in Washington.

The Fed is also starting to unwind some of its asset purchases, which some analysts said is a likely precursor to the central bank eventually tapering its quantitative easing. On Thursday, the New York Fed said it would start to gradually sell its portfolio of exchange-traded funds that invest in corporate bonds on June 7, the first step in unwinding corporate bond holdings acquired during the pandemic.

The Labor Department's closely watched report showed nonfarm payrolls increased by 559,000 jobs last month, helped by vaccinations and a reopening economy, following an unexpected slowdown in the labor market in April. Economists polled by Reuters had forecast 650,000 new jobs in May.

"It signals the economy continues to recover, but not too quickly to get the Fed to begin either curtailing (bond) purchases or raising rates," said Michael Arone, chief investment strategist at State Street Global Advisors in Boston.

Worries that a robust economic rebound could lead to a prolonged period of inflation and prompt the Fed to contemplate paring back its crisis level support have weighed on investors' minds recently.

“The fact that the number is a bit below expectations underscores this idea that getting these economic numbers right coming out of the pandemic is nearly impossible. Directionally, having this number of jobs created is a positive.

The number of jobs previously reported in March and April was revised up, that’s a good signal. Finally, the leisure, hospitality, and education categories were the biggest in terms of job gains. That suggest to me the economy continues to open further from the pandemic. All three of those things are positive about this report.

“The market will receive this favorably for the following reasons. It continues to suggest the labor market is improving, but not too quickly. Therefore, the Fed still has the ability to suggest that we have a way to go in terms of the labor market slack improving. It’s the best of both worlds. It signals the economy continues to recover, but not too quickly to get the Fed to begin either curtailing (bond) purchases or raising rates.”, said Michael Arone, chief investment strategists from State Street Global Advisors, Boston

Hotels, restaurants and other businesses are boosting pay as they try to rebuild their staffs and meet increasing demand from Americans ready to venture out as pandemic-related restrictions are lifted and more people are vaccinated. But it is unclear if the increases will be sufficient to entice enough workers back to close the employment gap remaining in the sector hit hardest by COVID-19 job losses.

Average hourly earnings for workers in leisure and hospitality rose to $18.09 in May, the highest ever and up 5% from January alone, according to Labor Department data released on Friday. Pay rose even faster for workers in non-manager roles, who saw earnings rise by 7.2% from January, far outpacing any other sector.

But it is too soon to know whether the boost will be enough to help speed up hiring at a time when many workers are still facing other obstacles, including health concerns and having to care for children and other relatives.

Some 2.5 million people said they were prevented from looking for work in May because of the pandemic, according to the Labor Department. And just about 40% of Americans are now fully vaccinated, meaning that many workers may still be concerned about the health risks they might face on the job.

Employment in leisure and hospitality is still in a deep hole when compared with pre-pandemic levels. The industry added 292,000 jobs in May, with about two-thirds of that hiring happening in restaurants and bars. But overall employment is still down 2.5 million jobs, or 15% from pre-pandemic levels, more than any other industry.

About Recession (by Fathom consulting)

The recession from which most major economies are now emerging was unlike any other. Here we present just one example of the many different charts we could use to illustrate this point. Owing to the scale of the fiscal support packages put in place by authorities in the US, not only did household incomes not suffer a sustained fall during the deepest recession on record, they actually began to rise at a more rapid rate. Consumption of goods fell a little in the early months of the pandemic, but has subsequently recovered to such an extent that it is now above its pre-COVID trend. With ballooning incomes but limited opportunities to spend, particularly in the all-important services sector, US households had, by the end of 2021 Q1, built up excess savings worth close to 10% of US GDP. We expect to see around a quarter of these savings spent during the remainder of this year, boosting consumption of services as households effectively make up for lost time. If we are right, we are likely to see a material, cyclical pickup in inflation, posing a challenge for the FOMC, which has signalled that it does not intend to raise the Fed funds rate until at least the end of 2023.

1622886632670.png


COT Report

This week CFTC data doesn't include yet the impact of ADP and NFP reports that we will see only on next week. That's the reason why this week we see almost no changes in net position. Mostly it indicates investors' expectations on coming employment numbers - bearish positions were partially closed:

1622886863098.png



Next week in focus

#1 ECB meeting


The ECB meets Thursday. It has to find a balance between the need to support the euro zone recovery through emergency stimulus and accepting a brighter outlook means its PEPP scheme may not be needed for much longer.

Dovish comments suggest the ECB will continue buying bonds at close to the current pace. This view has pushed sovereign bonds yields down from May's multi-month highs, the euro is steady, having risen since April.

A modest slowdown in purchases is not ruled out, especially as the quiet summer period approaches. And any signs from ECB chief Christine Lagarde that the taper debate is underway will end the calm in bond markets.

1622887078101.png


# 2 US CPI Report

A critical view into inflation comes with Thursday's May U.S. consumer price index.

It is shaping up as one of the most watched numbers for some time after consumer prices jumped by the most in nearly 12 years in April and a debate rages over whether a pick-up in price pressures is fleeting or more sustained.

The reading is also one of the last key pieces of economic data before the Federal Reserve's June 15-16 meeting. The Fed's Randal Quarles believes a recent jump in inflation will prove transitory. Another strong inflation print that lifts Treasury yields could pressure valuations on tech and other growth stocks.

1622887152980.png


#3 Election fever

Germany's ruling Christian Democrats face a key election test before September's federal election.

Chancellor Angela Merkel's would-be successor, Armin Laschet, desperately needs his party to win Sunday's regional vote in Saxony-Anhalt to fend off doubts about his ability to deliver success in September.

Laschet's party is neck-to-neck with the surging Greens in national polls, both holding around a quarter of the vote.

The left-leaning Greens, meanwhile, kick off their party conference on June 11 and will formally declare Annalena Baerbock their first ever chancellor candidate. Less of a formality will be finalising the ecologist party's election manifesto - a guide on what might lie ahead for policy in Europe's largest economy.

1622887235561.png


So, ongoing events mostly suit well to our long-term view. A month ago it was a riddle still, how it is possible to see 87.40 target to be hit by Dollar Index while we see strong US economic recovery. Now picture is becoming more clear. First is, recent US data shows (as we see from comments above) that despite strong inflation numbers from CPE, CPI and hourly earnings numbers - other data is rising moderately, employment in particular. Currently the new idea on the market that we see an inflation of "newbie" effect, when economy just turns to growth. It happens because of spheres that were not working now are turning back to functioning. That triggers demand for goods and services, that leads to inflation. Fed stubborn position also plays in favor of this scenario and keeps US dollar under pressure, making markets to show very short-term reaction on any dollar supportive data.
Although this is not very critical to us, but let's keep fingers crossed to hear something hawkish from Lagarde on coming week. This could set better shape for EUR bullish trend within few months. Because whatever Fed tells - as it is mentioned by Fathom above, inflation becomes obvious sooner rather than later and you can't hide an awl in a sack. Major reversal is coming, and now we already have the divergence of DXY price and net dollar short positions on the chart above.

Technicals

Monthly

As market was standing in tight range for the whole week, June month barely impacts on long-term picture by far. We carefully hope that ECB brings some hawkish notes in rhetoric next week and Fed stands on its own a week later. Previously we said that Canada already starts tightening policy, BoE on the way and June might become a clash of the titans - ECB vs. Fed. Early verbal action from ECB might push EUR higher, if Fed will keep its "accommodative rhetoric", and probably it will, as we see by recent NFP report and reaction on PCE and CPI data as well.

EUR keeps bullish long term trend. MACD stands bullish. From technical point of view, this is good sign that price is jumping up from YPP.

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.

eur_m_07_06_21.png


Weekly

This chart reflects all information that we have by this moment. First is, trend stands bullish and market is forming triangle consolidation after monthly COP and just under strong 1.25-1.26 resistance area. Market is not at overbought. Although we have some hopes that ECB supports EUR appreciation but for the truth sake, this is optimistic scenario that EUR shows direct upward breakout. More probable that ECB also will be "betwix and between", that could trigger some downside action as investors' hopes will be missed. So, some deeper retracement inside the triangle could happen.

That's why most probable scenario is the one that I've put on the chart that should let as dollar index as EUR to hit major targets before major reversal. The major question for us is where the right wing's bottom will be formed. Currently I choose the level of previous top but any level inside the triangle is acceptable.

Another, "low probability" scenario is downside breakout. This could happen if Fed starts action earlier, which we treat as less probable.
eur_w_07_06_21.png


Daily

So, based on all the stuff that we've discussed above, major task on daily chart is to catch proper level for long entry. It is not necessary that it should the only one. Here we have to recall our previous setup with reverse H&S on top. It is perfectly fits to weekly picture. Take a look - previous top stands at the same level as left arm's lows and around major 5/8 Fib support on daily chart. So, this scenario is absolutely evident to us and we just keep it in mind to ready trade it if EUR will keep dropping.

Still, despite of nice harmony of H&S scenario, we should not ignore other trading setups that we could get. Besides, 1.1935 level is not valid yet as it stands deep under oversold level. And on coming week, 1.2050 K-support is more interesting to us. As we already mentioned it - there we could get nice buying opportunity as EUR could show healthy bounce up from there at the first touch, despite possible downside continuation later:
eur_d_07_06_21.png


Intraday

So, reaction on support area that we've specified on Friday has happened. Technically, 1.21 is solid support area and Agreement. As NFP data was shallower than ADP it was supportive to the pullback. Those who have taken long positions now could move stops to breakeven. At the same time, based on fundamental background and market preparation to ECB and US CPI (which probably will be strong again), we treat direct upward breakout as not very probable.
Technically price stands at K-resistance, which also is not good point for taking new long positions. Thus, here we're mostly watching for the same 1.2050 support, as intraday targets also stand around it.
In the light of daily/weekly analysis, we do not consider now any short positions.

eur_4h_07_06_21.png
 

Sive Morten

Special Consultant to the FPA
Messages
14,704
Morning guys,

Despite that EUR has moved slightly higher, we still suggest that 2-leg retracement is possible to happen, because of two factors - anemic ECB statement and strong CPI number. Besides, technically market has not passed yet to "point of no return".

For daily picture, we're still watching for nice 1.2050 support area, if downside action takes AB-CD shape:
eur_d_08_06_21.png


On 4H chart market shows reaction on 5/8 major resistance area, that has special meaning. In case of upside breakout and price moving closer to 1.2230-1.2260 area - direct upward continuation becomes more probable. In this case ECB/CPI impact could trigger drop to just 1.2150 and appearing of reverse H&S pattern, but not to 1.2050:
eur_4h_08_06_21.png


On 1H chart, based on trendline analysis - 1.2210-1.2215 area seems vital that splits two scenarios - of direct upward continuation and deeper retracement:
eur_1h_08_06_21.png


At current moment it is too much risk to buy, IMO - no clear patterns, no supports, ECB/CPI ahead, daily trend stands bearish...
 

RahmanSL

Major
Messages
2,820
Hi Sive.....as usual, very concise analysis. Thank you.

I have given up trading EUR/USD for now as its like beating a dead horse :p.
It's much better to trade gold and WTI oil as, barring any sudden unexpected events around the world, price movements are pretty much predictable and we all should be focus in making money trading the forex market.

Cheers and all the best and, of course, stay safe!
 

Sive Morten

Special Consultant to the FPA
Messages
14,704
Good morning,

As EUR shows anemic performance and probably it lasts till ECB meeting, we could update our GBP view. As we've said in the beginning of the month, GBP shows bullish context on daily chart and prepares for upside breakout to 1.44 target. Now this context becomes more evident with bullish dynamic pressure and tight consolidation right under the top on the back:
gbp_d_09_06_21.png


On 4H chart market stands in rising channel with some minor targets that in general agrees with the daily ones. Based on the picture that we see here, breakout could be triggered by butterfly pattern:
gbp_4h_09_06_21.png


Butterfly, in turn, also includes 1H reverse H&S pattern. So, maybe if you search chance to buy GBP, this setup could help a bit...
gbp_1h_09_06_21.png
 

Sive Morten

Special Consultant to the FPA
Messages
14,704
Morning everybody,

So, as EUR as GBP yesterday have failed an attempt to follow up, although overall bullish sentiment holds. It seems that investors think in the same way as we do, starting preparation to ECB statement and CPI report later in the session, suggestion anemic ECB statement and good CPI numbers. Although situation totally depends on these factors, technically, it suggests deeper retracement. Thus, we hope that EUR hits 1.2150 support area that very attractive for long entry:
eur_d_10_06_21.png


On 4H chart price has formed reversal candle, making challenge of 5/8 Fib resistance and reversed down. Trend here has turned bearish as well:
eur_4h_10_06_21.png


From the trendline analysis - recall our 1.2207 cross area that market failed to break. So, investors are not ready to challenge new tops before data release:
eur_1h_10_06_21.png


Since we're mostly focused on long entry, and price currently shows inability to proceed higher immediately - let's be patient and wait for clarity on CPI and ECB. If we're correct, then we should get great chance around 1.2150...
 

Sive Morten

Special Consultant to the FPA
Messages
14,704
Morning everybody,

So it seems yesterday we've got nothing but volatility, as market returns back to the same area despite CPI and ECB. CPI in general was dollar supportive and above expectations, but if Fed said that there is "no inflation" - it means "no inflation" indeed, despite what CPI and PCE show. Markets forget very fast dollar supportive numbers right now.

ECB said nothing interesting, as we've expected... So, what we could do here. Unfortunately, we do not have clear patterns to trade today and could make conclusion on sentiment by indirect signs. For instance - EUR, GBP and AUD are forming tight consolidations near the top. EUR, in particular, has triangle shape that doesn't correspond to bearish sentiment. In fact, we start to see some signs of bullish dynamic pressure as MACD trend is bearish, while price action is not quite:
eur_d_11_06_21.png



On 4H chart we do not see something special, while on 1H we've got few bullish grabber based on volatility. Thus, we could say that if you trade on weekly/daily basis, it is possible to consider long position with upside breakout perspective within 1-2 weeks, maybe due coming Fed statement next week. For intraday trading, we have grabbers, but nothing else, so I'm not sure that this is good setup, especially on Friday. It would be better to wait for more clarity here:
eur_1h_11_06_21.png
 
Top