Forex FOREX PRO WEEKLY, June 13 - 17, 2022

Sive Morten

Special Consultant to the FPA
Messages
16,256
Fundamentals

The amount of economic information that we have to consider is growing like a snowball. And I'm really don't know how I put everything in 1-2 weekly reports that we prepare with FPA. If I put everything here - you either fall asleep or keep reading it through the whole next week (LOL). May be we should start FPA Telegram channel...In fact, the US energy situation demands separate consideration, because at final point it makes impact on households' wealth and has direct impact on our forecast and currency rate. CPI that we've got this week, is just a top of the iceberg, guys. Recent data, speeches confirm our initial view - Fed expectations of 2% inflation are naive and rate change doesn't help him to normalize situation. We warned about it 2 months ago. From time to time I'm watching Tucker Carlson on Fox news and think that you should try either. He tells correct things and explains same subjects simpler than we do, because we try also to show you numbers and provide economical background.

Market overview

President Joe Biden cautioned that U.S. inflation could last "for a while" after data on Friday showed that politically sensitive price pressures unexpectedly accelerated in recent weeks. The wary comments at an event hosted by billionaire media magnate Haim Saban came as the administration faces increasing pressure ahead of Nov. 8 midterm elections, where Biden's fellow Democrats' control of Congress is on the line.

"We're gonna live with this inflation for a while," Biden said at a Democratic fundraising event in Beverly Hills. "It's gonna come down gradually, but we're going to live with it for a while."

J. Biden has invented the special term - "Putin tax". This is great idea that supposedly should explain everything to the people and make them relax and enjoy life. But somehow it doesn't happen and maybe be people could be ingenuous but definitely not an idiots. Not Putin has printed 4.5 Trln EUR in the EU and $5-6 Trln. in the US last year. And not Putin has exposed import sanctions on all goods that America needs. If Putin does set the prices in the US - why J.Biden is still needed on the President's post? It is time to make T-shirts and place the stickers "Putin is our president" on cars and trucks. But, jokes aside, guys.

The dollar climbed to a near four-week high against a basket of currencies on Friday, after data showed U.S. consumer prices accelerated in May, strengthening expectations the Federal Reserve may have to continue with interest rate hikes through September to combat inflation. In the 12 months through May, the CPI increased 8.6% after rising 8.3% in April. Economists had hoped that the annual CPI rate peaked in April.

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The inflation report was published ahead of an anticipated second 50 basis points rate hike from the Fed next Wednesday. The U.S. central bank is expected to raise its policy interest rate by an additional half a percentage point in July. It has hiked the overnight rate by 75 basis points since March.

"Inflation is now at a 40-year high with little evidence that it has peaked," said John Doyle, vice president of dealing and trading at Monex USA. "Stocks are extending losses on the expectation the Fed could find the scope to speed up rate hikes. The greenback is gaining on policy divergence and risk-off trading," Doyle said.

The European Central Bank's 'whatever it takes' commitment to bind the euro zone is wearing thin as it tries to 'normalise' monetary policy and give inflation hawks more say in how it goes about it. Warning that inflation is unacceptably high and that it would remain above the 2% target over a three-year forecast horizon, the ECB on Thursday flagged a first interest rate rise in more than 10 years next month, after the end of new purchases on its long-running bond-buying programme from July 1st.
Although ECB chief Christine Lagarde stressed that the central bank was 'committed' to avoiding so-called 'fragmentation' of borrowing costs between euro zone members as bond buying ends, financial markets were far from sure. Many investors doubt Lagarde's developing approach to ECB policymaking - which appears to give greater voice to national central banks and countries with a more hawkish monetary stance that those at the centre - will allow the same sort of open-ended commitment to rein in debt costs at the periphery as given by her predecessor Mario Draghi.

As worrying, the risk premium on Italian 10-year bonds over Germany's moved to 225 bps - its highest since the onset of a pandemic that forced multiple fiscal rescues and pushed Italy's debt to a record 160% of gross domestic product. The same destiny supposedly should come up with the Greece.

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With inflation at a record-high 8.1% and still rising, the ECB now fears that price growth is broadening out and could trigger a wage-price spiral, heralding a new era of stubbornly higher prices. While ECB chief Christine Lagarde had already flagged a series of rate hikes in recent comments, the tone of the ECB's comments on Thursday took markets by surprise. And that triggered a further ratcheting up of rate-hike bets in financial markets, which were already aggressively priced.

Deutsche Bank now expects the ECB to deliver two, hefty 50 basis point rate hikes this year after kicking of a tightening cycle with a quarter-point move in July.

"Our new ECB hiking baseline is +25bp in July, +50bp in September, +50bp in October and +25bp in December," Deutsche Bank analysts said in a note released late Thursday. "The deposit rate will be 1% by year-end, lifting it to the lower end of the range for estimates for the nominal neutral rate."

Morgan Stanley said that following Thursday's ECB meeting, it had revised up the size of the tightening expected at the September meeting to 50 bps, while adding an additional 25 bps hike in October to its new rate call.

Money market futures now suggest that almost 150 bps worth of ECB tightening is priced in by year-end, up from 140 bps just after Thursday's ECB statement and around 135 bps on Wednesday.

Investors continued to pull out money from European equity funds while adding exposure to U.S. stocks as global markets recovered from the lows hit at the end of May, BofA said on Friday in a research note citing EPFR data for the week to Wednesday. Overall, the asset class saw $12 billion worth of inflows. But it was the 17th week in a row of outflows for Europe with $2.1 billion leaving the space. By contrast, U.S. equity funds saw a fifth week of inflows worth $13.2 billion. BofA analysts also said their 'Bull & Bear' indicator, which seeks to track market trends, had moved deeply into "extreme bearish" territory.

The EU situation outlook. What is about gas?

According to Spydell Finance look, the ECB turns off QE in July, but earlier ECB has bought over 4.2 trillion euros (i.e. just printed it) on the balance sheet from February 2020 to June 2022, which two times exceeds the accumulated budget deficit of all Eurozone countries. While ECB was printing money - they could spend them on bonds back-buying, keeping rates low and providing stability of the debt market

Since July, the printing press should be turned off. At the same time, record inflationary pressure in Europe makes disaster effect on the debt market. It is impossible to count on steady cash flow into the debt market when negative real rates are expanding. Capital is running out of debt markets not only in the US but in EU either. At the same time, the strongest combined energy and food crisis, and coming migration crisis should lead to the wake of hunger riots and political destabilization in Africa towards the end of 2022-the beginning of 2023.

Current account in EU drops to the zero level, which means that they can't provide more capital to the US, and now they also have to think how they will finance the budget deficit:
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Finally, we're coming to most "thin" place in the EU structure - energy demand. As you know EU stops buying crude oil from Russia and contracted gas purchases for 30-40%. But what country replaces Russian supply? The answer is - the US. All free LNG volumes are set to the Europe. The US LNG gas industry works at full capacity now, but these power can't be increased right now, because of vital under-financing in previous years due ESG (Green Energy) policy.
Freeport LNG to shut down for at least three weeks after incident at Texas Gulf coast facility. Freeport produces 20% of all LNG in the US. This is tactical pitfall, and it is not a disaster as now is a summertime. Still, the US is releasing oil from strategic reserves as never before. Interestingly that the pace of reserves reduction of oil are comparable to the increment of net exports, which are now sent to Europe.

The situation is similar with gas. the United States supplies gas to Europe at the highest rate in history, as absolutely as relatively in the structure of total LNG exports. At the same time, gas reserves in the USA at a minimum for 5 years, and the vulnerability of the power system is the maximum for several decades. By closing energy shortages in Europe, the United States is "exposing" its own energy system.

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The entire net increment of gas exports in 2022 relative to 2021 is formed from reserves! Gas exports from the United States increased by 10 billion cubic meters in 6 months compared to the same period a year ago – that's 10-12 billion cubic meters of gas reserves decreased. This is, in fact, one of the reasons for the increase in gas prices in the US domestic market (more than three times a year).

And what's next? Super expensive gas in Europe, the prices of which were 6-8 times higher than domestic American ones. This led to the fact that gas producers sent for export everything they could send to the physical limits of the infrastructure of LNG terminals and available gas carriers. They managed to triple LNG exports in three years – plus 70 billion cubic meters per year for export compared to 2019 and plus 35 billion cubic meters per year by 2021.

Now the price gap is naturally leveling off.

However, in all this, it is important that the United States generates gas exports through the closure of the energy deficit in Europe after the imposition of sanctions on Russia - this is the first. Secondly, exports to Europe come from oil and gas reserves, because they cannot increase domestic production of either oil or gas. Thus, the declared state of emergency of the US power system is a consequence of accumulated imbalances.

US shale gas production is stalled. It was possible to increase production by only 3-4% over the year, compared to the 4th quarter of 2019, progress by 4-5%. In the first 3 months of 2022, the United States produces the same amount of shale gas as in the first quarter of 2020.

The reasons are typical – the specifics of shale projects and underinvestment due to collapse of the market in 2020, when many participants in oil and gas production were washed away. After those events, management conducted an extremely conservative investment policy, fearing a repeat of 2020. The second reason is the toxic ESG agenda.

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The export of American LNG to Europe increased more than 10 times in total over three months (from 2 to 21 billion cubic meters by April 2022).

It was 7.2 bln c.m. in January 2022, 6.1 in February, and 7.5 in March - an absolute record. Thus totally it is almost 21 billion cubic meters for the quarter according to Spydell Finance calculations and reports of the US Department of Energy. For April and May, the data has not yet been disclosed.

Global exports of American LNG by April 2022 reached the highest in history – 29.3 billion cubic meters in 3 months, the share of European exports was 71.6% - there has never been such a thing. The average European share of LNG exports from the United States in 2018 is 13%, in 2019 and 2020 – 36%, in 2021 - 33%.

Now the US is redirecting almost all Asian LNG supplies to Europe. The infrastructure is running at the limit.

You probably start laughing guys, but the same story with the US Crude Oil. Commercial reserves decreased by 9.5 million barrels in three weeks, strategic reserves by 16.4 million in three weeks. It means that the US releases 1.2 million barrels off the reserves daily!

However, net exports from the United States have been balancing around 1.2-1.3 million barrels/d for the last month also.

If we reduce domestic production, consumption, exports, imports and changes in reserves, it turns out that the United States is firing strategic reserves of oil into foreign trade - into exports! If the United States would reduce exports of oil and petroleum products by 1.5 million, they would not have had to reduce strategic oil reserves at a record pace in history.

Judging by the export tracking, all the excess volume is sent to Europe. It turns out that the strategic reserves of the United States are reducing record, closing the consumption deficit in Europe!

Conclusion

So, guys, we could imagine what should happen in the EU economy by example of the US, as EU and ECB is lagging behind the Fed for ~ 6 months. Situation in EU should become even worse by two reasons. First is, EU is not self-sufficient with energy. It doesn't have enough gas and oil to supply own heavy industry and population. The US does. As we've shown above EU energy shortfall is covered by the US supply. But the US energy sphere works at full capacity and can't increase the LNG and oil production. And this is during the summer. Autumn-winter period could bring bad surprises.
Second - EU economy is structurized. It is big different between Germany and Greece, for example. But Brussels have to close gaps around. Finally, EU stands in epicenter of geopolitical tensions and cares the major burden of sanctions. This tells that the US still stands in better situation, although the nature of problems is the same.
As we've said and shown previously - the interest change can't improve the situation. EU will meet the same problems. No relief happens with ECB decision, because they have to hike rate to 8% to get the effect. It means that we should see starting depression on stock market, as gap between DAX/Eurostoxx dividend yield and interest rates starts to narrow. Rising yields negatively impact on weak companies and junk bonds. Exceptional expenses burden could lead to massive bankruptcies, unemployment rising, dropping of population wealth.
Because of ultimate liquidity injections and low interest rates, banks have very low percent margin (difference between deposit rate and loans rate). With rising interest rates, the loan defaults start to increase which makes negative impact on banking sector.
Obviously consumption should start dropping. With this environment it is difficult to count on EUR appreciation. Minimal break of hydrocarbons supply from the US will put EU economy in chaos. This is razor thin way now. Finally, illegal migration - the new wave could start closer to the end of the year because of food problems.

NEXT WEEK
We mostly watch for multiple central banks meeting - Fed, BoE, BoJ etc. It's a central-bank heavy week ahead, with the U.S. Federal Reserve expected to deliver its second straight half-point rate hike to bring inflation under control. Britain and Sweden, too, will likely lift interest rates again, while Switzerland may be getting ready to join the rate-hike club. In contrast, the Bank of Japan should confirm it's ultra-dovish stance remains solid.

#1 Fed

It's time to go big or go home in the battle to curb inflation. So Wednesday will likely see the Federal Reserve hike interest rates by another 50 basis points (bps), adding to the 75 bps of tightening already delivered since March. Also watch the Fed's projections for rate moves in the so-called "dot plot." Unexpectedly aggressive rate-hike projections could pile pressure on U.S. Treasuries, with 10-year yields back above 3%.

#2 US Retail Sales

The jobs market is holding up well and retail sales data on Wednesday could show how consumers are doing as borrowing costs rise. Analysts expect a 0.2% monthly increase in retail sales for May.

#3 BoE
But on June 16, the Bank of England will likely raise rates for the fifth time since December. GDP and jobs figures are also due on Monday and Tuesday. As a reminder, Q1 joblessness touched 48-year lows at 3.7%. But adjusted for inflation, pay was down 2% on year-earlier levels, the biggest fall since 2013.
Meanwhile, Prime Minister Boris Johnson, his authority shaken by a vote of confidence, is forging on with "fiscal firepower" pledges and plans to amend a Northern Ireland trade protocol. The former could exacerbate inflation; the latter will almost certainly stoke tensions with the European Union.

Technicals
Monthly

As market is a bit shocked with the fact that inflation is not going down, this has triggered collapse not only on FX, but on stock market as well. It nature of the action doesn't exclude that it might be long-term downside continuation, according to our monthly picture.

Market is not at oversold. Our major AB-CD pattern here shows clear acceleration of CD leg through the OP target, market already stands below YPS1 which is strongly bearish. This significantly increases chances on downside continuation. Although we have nearest target around 0.9750, which is the butterfly 1st extension, it is more probable that in the case of drop below the parity, EUR should tend to major target cluster of 0.90, including 1.618 butterfly target and two different XOP's, with all-time one.

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Weekly

On Friday we've mentioned 1.0514 last daily Fib support, where, at least theoretically, upside reversal is possible. Because initially we consider two ways of upward retracement, and AB=CD shape was one of them. Still, despite MACD trend is still bullish here, the nature of the action, together with the driving factors keep us aside from taking new long position here. With this "black" nasty week and tail close - it is few stimulus for long entry.
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Daily

Our task on next week is simple, if it could be simple at all during Fed meeting. We need to identify the nature of current action, as it might be direct downside continuation. To understand it we have to watch for price action around final 1.05-1.0515 support area, accompanied with the oversold, by the way. If EUR intends to show upside AB-CD action here - it should show real reversal and move above 1.0780 top.
Still, second way seems more probable now. If EUR shows just minor bounce - this becomes the signal for downside continuation and breakout of recent lows. We consider it as primary scenario and will watch for the bounce for taking the short position. Because it seems, that pullback is over with high degree of certainty.

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Intraday

In general the reaching of XOP here is not a surprise, but it has happened a bit faster than we thought. Here we intend to watch market reaction on daily support area:

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On 1H chart we do not see any reaction yet. Here are two levels to watch for. 1.06 K-area seems suitable for short entry, while 1.0670 is a kind of indicator. If our suggestion on EUR weakness is correct - market should not move above it. Otherwise, with moving back above 1.0670-1.07 area EUR could show CD upside leg on daily chart, although now it seems as hardly possible scenario.

EUR_1h_13_06_22.png
 

RahmanSL

Major
Messages
2,884
Hi Sive...thank you for your analysis and, yes, turmoil everywhere and sanctioning vital & much needed Russian's commodities like oil & gas makes matters worst. Frankly, that was a very dumb move by the U.S.A and the EU who obviously didn't think things through before they acted so hastily. But so here we are, just looking on as the U.S.A & the EU muddle up the world's economy even more almost on a daily basis with no end to the many problems besetting the world.
As I have mentioned before, I will stick to trading silver because I think it will go down to the 20.xx levels just before and immediately after that expected FED's interest rate hike on 14-15 June 2022 and then will probably shoot up to the 24-25.xx levels after that. Then the whole process will be repeated before the next FED's expected rate hike on26-27-July 2022. After that, I have absolutely no idea where precious metals will go.
All the best and stay safe.
 

Sive Morten

Special Consultant to the FPA
Messages
16,256
Morning guys,

So, things that we've discussed few months ago now are turning to reality. Stock market is collapsing, 10-year rate at 3.5%, BTC collapses...

On EUR now we definitely could say that upside retracement is over and no 2nd leg happens as market has broken 5/8 support without any respect, showing no chances even to think about the pullback. Now downside action is stopped just by oversold, which is not for the long time. On a way down we have two nearest targets - 1.04 lows that should be tested soon, even maybe tomorrow and next one is 0.9750, which is monthly butterfly extension:
EUR_d_14_06_22.png


Despite that we at oversold, our trading plan doesn't suggest taking any long positions. On 4H chart we intend to watch for 1.0490-1.0540 resistance zone and possible B&B "Sell" to take short position.
EUR_4h_14_06_22.png


On 1H chart minor bullish DRPO "Buy" might be formed, with 1.0519 target. It stands right in the middle of our resistance zone. So if DRPO starts to work, we could watch for 1.0519 as first approximation for short position taking.
EUR_1h_14_06_22.png


On GBP we have very similar story. Market is oversold, but major target is daily XOP at 1.1987. Thus - there market also should keep going down soon.

And here is September Economist cover - take a look what is dropping into the hole - ETH, USDT, BTC, then stock market, then US Treasuries and finally - the Fed... Luna is already there...
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Sive Morten

Special Consultant to the FPA
Messages
16,256
Morning everybody,

So, EUR mostly stands at the same level, forming DRPO "Buy" on 4H chart. Thus, we're watching for the same resistance levels to consider short entry.

That's why it makes sense to take a look at GBP and update our view. Recently GBP finally hits XOP daily target that is accompanied by oversold. If you take a look at weekly/monthly chart (or just find our old weekly reports), you should recall that we're watching on reverse H&S pattern. Now GBP stands at the edge and it seems that this H&S will fail. So, GBP should drop below 1.14 area first and later to our next monthly target of 0.95. Meantime, we're watching for XOP reaction and short-term patterns:
gbp_d_15_06_22.png


On 4H chart price hits 1.27 butterfly target. Still, as downside action looks strong, GBP should try to reach 1.618 extension @1.1850 as well, after minor pullback. Since we also have good thrust here - the perfect setup would be the B&B "Sell" around 1.2185 and drop to 1.1850 next:

gbp_4h_15_06_22.png


Pullback doesn't seem unreal, because many traders already are possessed for 0.75% Fed move, and when&if it happens - profit booking starts. While only 50bp move pushes GBP higher even stronger.
 

Sive Morten

Special Consultant to the FPA
Messages
16,256
Morning everybody,

So, markets take the rest after thrilling session yesterday. Fundamental results are bad in the US and worse in the EU. This is the subject for our fundamental analysis in weekend.

Tactical pullbacks might happen across the board now. It is started on 10-year yield already, on GBP, also on BTC, as we show in the video today. On EUR chances on 2-leg upside pullback are less, because ECB has said that markets should price-out anticipated rate change and PEPP closing, at least partially. This makes us think that EUR is more probable to stay flat for awhile, and then keep going lower. 97.50 and 95.0 - are nearest targets on EUR.
EUR_d_16_06_22.png


So, if you've sold EUR around K-area, as we've suggested, now you could move to breakeven and just watch what happens next. For new position taking, it makes sense to wait, maybe EUR comes a bit higher, back to K-area with the megaphone pattern that it is forming now. Otherwise stop order seems too far, as we have to place it above the K-area, at least:
EUR_4h_16_06_22.png


on GBP our B&B starts:
gbp_d_16_06_22.png


Once it will be over, scalp traders could consider 1H H&S pattern. Maybe it will be AB=CD upside retracement on GBP. At least, this is another pattern that should be formed (or failed) within 1-2 sessions:

gbp_1h_16_06_22.png
 

Sive Morten

Special Consultant to the FPA
Messages
16,256
Morning everybody,

So, markets show the bounce up across the board, and GBP is not an exception. I just thought that since we have working setup on the GBP, let's lead it to the final. Besides, on EUR is very similar action.

In general, from technical point of view solid upward bounce is not a surprise, as GBP is oversold not only on daily chart but also on monthly. Thus, even stronger pullback will not be something special. At the same time - all trends are bearish, including daily, and price is coming to strong support area around 1.24-1.2450 level. This is K-resistance and overbought. Potentially this could become the level where upside action will be over. Thus, if you're scalp trader and watch for short entry - consider this level:
gbp_d_17_06_22.png


To make stronger upward action of larger scale - market has to prepare larger pattern. So, we have potential divergence on daily (although it is not set yet, as MACD lines are not crossed by far), and on 4H chart we could speak on stronger upside reaction if we get, for example, this H&S pattern:
gbp_4h_17_06_22.png


As you could see - it is still long way to go. Meantime, on 1H chart both our patterns have worked perfect. Downside action was precisely to 5/8 Fib support, where minimum target of B&B "Sell" pattern has been completed, and then upside action based on H&S starts.

Since we have CD leg acceleration, GBP is tending to XOP that perfectly agrees with daily K-area. Currently, I wouldn't consider short positions, at least until price hits daily resistance. If you have longs - you could keep it, just do not forget to move stops with the market.

Another sign that bears should keep an eye on is sudden downside reversal and drop below the neckline here. It might be early signal that retracement is over and downside long term trend continues.

gbp_1h_17_06_22.png
 
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