Forex FOREX PRO WEEKLY, June 10 - 14, 2024

Sive Morten

Special Consultant to the FPA
Messages
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Fundamentals

A lot of events but minimum surprises. I would describe this week in this manner. Right till the Friday - no big action happened, despite that we've got ECB decision and comments, BoC slightly surprising decision and... bingo - Denmark, also has cut the rate from 3.6 to 3.35%. This is 5th bank that softened policy. But among all of them - BoC decision seems most important. First is - they are more close to the US and the Fed, second - at 99% this decision was agreed with the Fed. Indirectly it points on the US economy situation, that somewhere near Canadian one. This sheds some light on a true standing of affairs there.

At the same time, the true focus among business elites is shifting from common things, such as data releases, Central Banks comments etc. to near politics topics and some hidden driving factors that could come on the first stage really soon. Besides, investors (or at least we do) start to pay more attention to secondary or derivative indicators that could open the real situation in the economy. Mostly because the US statistics authorities, its Central Bank are loosing faith, due too often manipulation with primary data - GDP, NFP, CPI etc. So investors have to watch for its components to understand what is really going on... In last few months, when these manipulations have become more evident we also showed big mismatch in data, such as inflation, jobs GDP etc. This is important, because it could explain why, for example, the Fed could cut rate in July, although "official" data shows no reasons for that.

Market overview

The U.S. dollar rebounded on Friday after data showed the world's largest economy created a lot more jobs than expected last month, suggesting that the Federal Reserve could take time in starting its easing cycle this year. The dollar index rose 0.8% to 104.91, its best daily gain since April 10. For the week, the index was on track for a 0.2% gain, with the strong jobs number offsetting a run of weaker macro data that had earlier prompted investors to put two quarter-point Fed rate cuts back on the table in 2024.
U.S. nonfarm payrolls expanded by 272,000 jobs last month, data showed, while revisions showed 15,000 fewer jobs created in March and April combined than previously reported. Economists polled by Reuters had forecast payrolls advancing by 185,000. Average hourly earnings rose 0.4% after having slowed to a 0.2% rate in April. Wages increased 4.1% in the 12 months through May following an upwardly revised 4.0% annual rise the prior month. The unemployment rate, however, edged up to 4% from 3.9% in April, breaching a level that had previously held for 27 straight months.
"The markets and the Fed bow down to the holy grail of one number, and it is the payrolls report. Of course, it is not just about that headline print but also the higher-than-expected wage number," said David Rosenberg, founder and president of Rosenberg Research in Montreal. "But as they say — 'it is what it is.' And because we know what the Fed is laser-focused on, and how the Fed is so omnipresent when it comes to market activity in stocks and bonds, consider this to be a bearish report because it simply will embolden the hawks on the FOMC
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The FOMC is not expected to make any change at its policy meeting next week, Following the jobs data, the rate futures market has priced in just one cut of 25 basis points this year, either at the November or December meeting, according to LSEG's rate probability app. The chances of a rate cut in September declined to about 50.8% post-jobs, from around 70% late on Thursday.

The Fed looks certain to hold rates steady when it ends a two-day meeting on June 12. Inflation has cooled after aggressive rate hikes starting in 2022 but has not yet fallen to its 2% target. May inflation figures are released just hours before the Fed statement. Further signs of inflation easing could cement expectations for rate cuts, especially given signs of economic weakness. Wall Street, boosted by cooling inflation, will be watching closely. Traders continue to price in some monetary easing this year, with even some slim hopes of a July cut. A bad inflation miss could spook investors and bring back recession fears that have laid dormant for months. No doubt, the data could fire markets up ahead of Fed Chair Jerome Powell's post-meeting press conference.

The ECB had just gone ahead with its first interest rate cut since 2019 despite higher inflation expectations, partly to keep a pledge that many policymakers had made in public after agreeing it behind closed doors. But the message came with caveats about domestic inflation and wages staying strong, and when Lagarde was asked whether more cuts would follow, she gave an answer that confused some market participants.

Her caution illustrates the challenge facing Lagarde as she tries to maintain unity among the ECB's 26 rate-setters - some of whom regretted committing to Thursday's rate cuts several weeks in advance - and communicate their view. A few conservative European Central Bank policymakers expressed regret on Thursday about signalling too explicitly that a rate cut was coming and some even said they might have otherwise voted for holding rates, four sources told Reuters.
"Governing Council members are all over the place, they can't agree on the details so she probably had no alternative," said Erik F. Nielsen, UniCredit's chief economics advisor.

The immediate upshot is that the ECB has doubled down on its "data-dependency" mantra: the notion that it will not provide guidance about future policy moves but decide at each meeting based on incoming information. That is easier said than done with around a dozen national central bank governors and board members airing their opinions and preferences on a near-daily basis, as Lagarde acknowledged on Thursday.
"I'm sure that you will hear some of my excellent colleagues take their view," Lagarde said. "It (the rate-cutting cycle) will 'take such time', or it will 'move at such speed'. I would caution against any such conclusion."
Only hours after the meeting, some policymakers speaking on condition of anonymity said rates would most likely be held steady at the ECB's next meeting in July, with the focus now shifting to September. Downside inflation progress has now stalled and rising wages threaten to push up inflation again, making the ECB's rate cut on Thursday harder to defend and putting a question mark over future moves. The U.S. Federal Reserve, facing similar "stickiness" in inflation, has already delayed its rate-cutting plans and strong U.S. jobs growth in May is likely to keep them on ice until September at the earliest.

This is what you could find in media. But here we need to add another important fact - ECB starts closing its PEPP programme. Starting in July, the balance sheet of securities purchased under the anti-crisis programs in COVID (PEPP with a volume of 1.62 trillion euros) will begin to decrease by 7.5 billion per month (now matured bonds are reinvested). And here is a few stats for update. Charts show that crisis is not gone. High rates will kill hard-breathing industrial sphere...
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Short comments about unemployment, which is more conservative and harder-to-manipulate data, especially U-6 longer-term and wider number that also has increased for 0.1% to 7.4% level:

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Before Covid, unemployment was 3.5%, and in this cycle the minimum value was 3.4%. So everything is definitely not very good. If you look at the trends since the 90s, you can see that there has never been such a thing that in the middle of the cycle the trend changed and the growing unemployment began to fall.

Second is - wage data turned out to be more aggressive, with hourly wage growth accelerating to 0.4% m/m and 4.1% y/y. Salary growth for non-managerial personnel accelerated to 0.5% m/m and 4.2% y/y. Moreover, the three-month growth impulse of the salary fund accelerated to a record 6.8% for the year (saar), which is significantly higher than what the Fed would like to see. Although the report is ambiguous, it rather suggests that the labor market is still overheated, which is why the financial market is a little sad, again overestimating the prospects for a Fed rate cut.

NEAR-STANDING AFFAIRS

If we take a look at employment from a bit different angle, using "independent calculations, then we see two new releases on this subject this week. First is, according to the Quarterly Census of Employment and Wages (QCEW), real average monthly job growth in 2023 was only 130 thousand - about 100 thousand less than the reported 230 thousand:
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Maybe this one is the reason as well as the drop of number of job openings in the United States to its lowest level since February 2021, makes GS suggests that the Fed will act not from the inflation side but from the position on job market. In his latest Macro Roadmap note, Goldman trader Cosimo Codacci-Pisanelli wrote that “the path to near-term rate cuts by the Fed is likely to be through a worsening U.S. labor market rather than an inflation mandate.”

️He’s not the only one who thinks so. Fed Chairman Powell himself, answering the question after the May 1st FOMC what factors might force officials to cut rates earlier than planned, Powell referred to the “unexpected” deterioration in the situation in the labor market. ️After recent unexpectedly weak vacancy report from JOLTS, there are more and more reasons to implement the scenario. ️And while various Fed officials have gone on record in recent days as saying that the labor market remains strong, some experts noted back in March that the Philadelphia Fed's calculations of U.S. jobs were overstated by at least 800,000. This was very resonance news and we've considered it as well in our report.
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Let's go further. The report on business activity in US industry, apparently, is quite typical for the current situation: industrial activity and new orders fell below 50, which is more likely in favor of deteriorating economic activity, but price indicators, although they decreased, remain at the level of 57, which indicates to maintain increased price pressure. Apparently, we should expect a deterioration in economic activity in the coming quarters, but with still high price pressure.

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And the cherry on the pie is recent Atalanta Fed economy forecast shows that the US economy has passed its peak and is rapidly weakening.️The Atlanta Fed's GDPNow forecast model shows a slowdown from a peak of 4.2% on May 8, 2024. ️May 1st and June 3rd there was a sharp drop in the base forecast from 3.5 to 2.7, and then to 1.8. It is important to note that on those same days the RFS fell from 2.9 to 2.1 to 1.8. ️
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So what do we have in a dry residual:

The most scary/important charts for the US economy at the moment. The growth rate of real disposable income - the main driver of consumer spending - fell to +1% y/y in April and at its lowest since the beginning of 2024:
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Households began spending less on cars, restaurants and entertainment; retail sales also stagnated in April. Why did this happen? The answer is obvious - savings have run out, the labor market is so-so, and credit conditions have tightened. San Francisco Fed:
“The latest estimates of the total excess savings remaining in the US economy during the pandemic have turned negative. American households have used up all of them as of March 2024.
Since September 2021, they have fallen (from a peak of $2.1 trillion) by an average of $70 billion per month, although this decline has accelerated to $85 billion per month since last fall. However, consumer spending has remained strong in recent months, raising an important question: what next?
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2. Measurements of American GDP from the FBI in Atlanta now, suddenly, show a collapse after the abnormal “overheat” in May. In the II quarter 2024 economic growth in two weeks (!) decreased from 4.1% to 1.8% . Jitter. We expect quick hysterics and screams: “Powell, you’re giving a rate cut!”

It is not a surprise why JPY and Citi talk about July Fed's action. JPMorgan economists retained their July rate-cut call based on April inflation readings that — though still higher than the Fed favors — at least moved in the right direction, Michael Feroli, chief US economist at JPMorgan, and colleagues said in a May 15 note.
“But we probably need to see some further cooling in labor-market activity for that to play out,” they said. JPMorgan estimates payrolls increased by 150,000 in May.
Citigroup’s forecast for a July rate cut — the first of four this year — “depends on softer labor market data including on Friday,” Andrew Hollenhorst, chief US economist at the bank, said on Wednesday. His team looks for nonfarm payrolls to increase by 140,000 and an unemployment rate of 4%, up from 3.9%.

True, both set forecast in relation to recent NFP that was stronger than they thought. But what particular numbers did they mean - officials or real? Besides, Citi was spot on about unemployment.

Another "indirect" indicator is the sentiment. We find recent data quit important. Almost two-thirds of Americans considered middle class said they are facing economic hardship and don’t anticipate a change for the rest of their lives, according to a poll commissioned by the National True Cost of Living Coalition. The official statistics data "of a strong economy" don’t capture the financial insecurity of millions of households who worry about their future and are unable to save, according to the group, created this year to come up with cost-of-living tools that help gauge economic well-being.

In the large poll of 2,500 adults, 65% of people who earn more than 200% of the federal poverty level — that’s at least $60,000 for a family of four, often considered middle class — said they are struggling financially. A sizable share of higher-income Americans also feel financially insecure. The survey shows that a quarter of people making over five times the federal poverty level — an annual income of more than $150,000 for a family of four — worry about paying their bills.
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Overall, regardless of the income level, almost 6 in 10 respondents feel that they are currently financially struggling. About 40% of respondents were unable to plan beyond their next paycheck, and 46% didn’t have $500 saved. The February poll found that more than half said it’s at least somewhat difficult to manage current levels of debt.

CONCLUSION:

So, by looking at "near official" news and data we suggest that scenario of July rate cut is reasonable. Indeed, from purely economical approach It is necessary to raise the rate, since inflation is rising (and the real one far exceeds all the standards set by the Fed). But this will kill an already declining industry and the economy as a whole. In addition, the need to stimulate private demand requires additional money, which can only be taken from the printing. Thus, taking into account the election year, the monetary authorities are forced to listen to purely political expediency. And we already hear the first echo of this idea - Key Square Group LP founder Scott Bessent, a prominent Donald Trump fundraiser, sharply criticized Treasury Secretary Janet Yellen, accusing her of using the department to bolster President Joe Biden by juicing the economy ahead of the election.
“Yellen in October changed the cadence of the composition of the Treasury issue which eased financial conditions substantially,” Bessent said during a wide-ranging Bloomberg roundtable on Friday. “You had this incredible loosening of financial conditions.”
Yellen, in congressional testimony earlier this week, denied a claim from US Senator John Kennedy, a Louisiana Republican, that she was trying to induce a “sugar high” in the economy before the election. So, politics come on the first stage and intrudes to economy affairs.

The political pressure on the ECB is weaker than on the Fed, so you can hold on as much as possible. But the economic situation in the European Union is significantly worse than in the United States, which is clearly seen above. In general, the idea is to check here what the effect will be. As it is shown above savings have been vitally reduced. This means that you will have to compensate household expenses from the budget — there are no other options. With all the ensuing consequences, since there is no more free money on the market. It means the printing, QE or whatever. The question is only tomorrow or the day after tomorrow.

That's being said we suggest that July Fed's meeting will become the major event of the summer that could trigger outstanding action on all markets across the board. Mostly because almost nobody expects any action from the Fed. At the same time we do know that ECB takes the pause at least until September with the rate change. If we will be right, this combination could significantly boost EUR in short-term as technical picture with monthly bullish grabber hint on. Despite whether we will be right or wrong but this setup is definitely worthy to be tracked and be in focus... The tricky moment here that we've mentioned last time is political credo of J. Powell. He is Republican. As well as J. Dimon by the way. They could play more subtle game and could frame J. Biden and his gang in most unsuitable moment... So, it is difficult to make reasonable forecasts, but it is very interesting...
 
Technicals
Monthly

So, our grabber on monthly is officially confirmed. You also could see it on CME Futures EUR chart. Since this is monthly time frame, here is never something happen occasionally, obviously there will be some background for rally (or for failure, right?). Minimum target is 1.10 minor top to the left on the chart, but it is more probable that if rally starts, EUR will try to re-test 1.13-1.14 area.

Traders who work on monthly/weekly basis have bullish context, long position with stops under the grabber's lows. The reason is twofold - first is, grabber will be erased, second - monthly trend will turn bearish below this area, i.e. bullish context will be destroyed.
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Weekly

On a weekly chart we do not have any special patterns. Here we want to know only on thing - the breakeven point for trend. Because this is important for daily time frame and long position taking framework. Broker chart shows breakeven point 1.0703, while CME Futures suggest 1.0743.

This level is vital because until EUR stands above it, we could keep watching for long positions on daily chart around big support areas. Once it will be broken - long position will be restricted.
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Daily

So, plan with the grabber was not bad, although it has not given us any profit, but we also have escaped loss, because of some upside action after it has been formed. Anyway, we're turning to the next page of daily trading. If we consider weekly/daily basis - our context is bullish because of weekly trend direction. We have no bearish directional patterns. It means that until EUR is above 1.0703 area we have to watch over strong support areas for potential chances to take long position.

Here we return back to our 1.0740-1.0760 support area and idea of the reverse H&S pattern. Besides, this level is accompanied by oversold this time.
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Intraday

Intraday traders have bearish contex, because daily trend is bearish. It seems that we were correct, speaking about EUR weakness on Friday, warning to better wait for NFP report (say Hi to 4H bearish grabber - we do not ignore it!) ... Anyway, now intraday traders could watch for upside action to consider short entry. Action could take the shape of 1.27 H&S, for example:
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On 1H chart 1.0850-1.0860 area is of a special interest. Recall that this is former K-support area. So if EUR will re-test it somehow, it might be interesting. "Very scalp" traders also could keep an eye on downside Thrust for possible B&B or DRPO patterns.
Most simple way for short entry as we always talk about - using scale-in approach, selling a little around major levels, forming average position. Downside target now seems the same - 1.0750 area, daily right arm's bottom.
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Morning everybody,

So, EU has got stunning elections results. So, Monday open was even with the gap down. But, this has helped EUR to complete our trading plan - market now at predefined 1.0740-1.0760 support area and daily oversold. Now we could think about long entry. We have unfilled gap, oversold (i.e. bullish daily Stretch pattern) and reverse H&S. True is, bulls stand at the edge. If all this stuff collapses - context will turn to bearish. So, as I call it - this is a kind of culmination point. Either EUR will turn up or bullish context will be destroyed...
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On 1H chart we do not have any patterns by far. Theoretically if you want to make fine tuning entry - you could wait for some. For now we do not consider any bearish positions here because of the same reasons - gap and oversold.
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Morning everybody,

So, understandably but here is nothing going on by far. Everybody are waiting for CPI and the Fed. EUR is still coiling around 1.0740 area. So, bulls have nothing to do but just wait on how this story will be over. All that we could do - we've done. As we said, current 1.0740 area is vital for EUR by multiple reasons - H&S validity, potential weekly bullish grabber, trend direction etc.
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Those who have decided to wait yesterday for particular pattern today could consider potential 3-Drive "Buy" on 1H chart. Later it could turn to 1.27 H&S as well if some extra positive news will be for EUR (or bad for dollar). Today probably we will get the clarity about our major setup:
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Morning everybody,

So, we correctly have identified 1.0740-1.0760 entry point for weekly/daily basis. But this is only the half of the story. The next thing that we have to control is a daily trend change. Normal bullish market should keep moving higher, following weekly direction. Thus daily trend should turn bullish.

Now weekly potential grabber feels much better. We have just two sessions till the end of the week. So, chances to get it are not bad.

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If you have missed entry yesterday, but would like to take long position on EUR - now market is forming another chance. We have tactical pullback after Fed's jump. So, you could use one of these levels to step in. It would be perfect if we get a kind of downside AB-CD into 1.0780 area:
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Morning everybody,

So, really dramatic action this week. Recent upside action was not enough to EUR to hold bullish context. We've identified correct entry area, got bounce. But still have to out at breakeven... Now it seems high chances that next week we will start on the dark bearish side. Because week close at current levels means crush of H&S pattern here, weekly bearish trend. Still, we prefer to not take position right now and wait for official weekly close price. Because just 40 pips rally could drastically change the context and return it back to bullish.

Besides, we prefer to not hold new positions through weekend:
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If you still decide to act today, you could keep an eye on following Fib levels. K-area around 1.0780 looks more interesting. Contradiction with gold market is also resolving...
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