Forex FOREX PRO WEEKLY, June 21 - 25, 2021

Sive Morten

Special Consultant to the FPA
Messages
14,878
Fundamentals

It's a Fed this week. As we've mentioned few times in daily updates, reaction seems too strong to what Fed has said concerning rate hike in 2023. Fed actually told this earlier, and not just once. Besides, Fed fund futures also shows that rate should be changed somewhere in 2023. It means that Fed statement was not something absolutely unexpected. But what's the reason for so strong reaction in this case? We talked about this 3-4 weeks ago that Fed could deny inflation as long as it wants, but it doesn't mean that there is no inflation. You are not healthy if you're just ignore your disease. It will catch up with you in the end. And if entity (FED) suddenly tells that they start preparation to rate hike cycle, while they have told just yesterday that it is not necessary - it means that situation is serious. We and all market expect hints only in September. Besides, this announcements means not just one time action, but suggests that Fed has concern. This is the same to suggest that they have changed their mind about "transitory" feature of inflation jump. So, the Fed economy forecast and policy is changing...

Market overview

As Fathom Consulting writes, In May, US consumer prices increased 5% over the same period twelve months ago, the fastest rate of increase since September 2008. While an increase in headline inflation was to be expected as rising commodity prices fed through into energy prices, the movement in core inflation, which strips out the effects of food and energy prices, was more interesting. It rose 3.8%, the fastest rate of growth since 1992. Most Federal Reserve officials still believe this surge in inflation will be transitory, in part because some of the rise is due to ‘base effects’. Prices fell in the comparison period one year ago at the onset of the pandemic, which makes current prices look relatively higher. A disproportionately large share of core price pressures comes from a relatively small number of reopening-sensitive sectors. The index is being pushed up by a 30% surge over the same period a year ago in the prices of used cars and trucks, as a semiconductor shortage has impacted new car production. While some of the key drivers of the rising inflation rate are transitory, it remains to be seen how supply shortages and potential rising demand could affect prices in the medium term.

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It is too wide statistics indicators report on inflation growth, that can't be write-off to just "transitionary" factor.

One factor driving the move is the idea that a Fed more strongly focused on preventing the economy from overheating may begin unwinding easy-money policies sooner than previously expected. On Friday, St. Louis Federal Reserve President James Bullard said the central bank’s shift was a “natural” response to economic growth and inflation moving quicker than expected, bolstering that view.

Investors will be keeping a close eye on next week’s economic data for clues on whether the recent surge in inflation -- which saw consumer prices accelerate at their fastest pace in 12 years last month -- will persist. New home sales and mortgage applications are due out June 23, while May consumer spending numbers are expected on June 25.

The Federal Reserve on Wednesday brought forward its projections for the first post-pandemic interest rate hikes into 2023, citing an improved health situation and dropping a longstanding reference that the crisis was weighing on the economy.

New projections saw a majority of 11 Fed officials pencil in at least two quarter-point interest rate increases for 2023, even as officials in a statement after their two-day policy meeting pledged to keep policy supportive for now to encourage an ongoing jobs recovery.

The Fed also made technical adjustments to prevent its benchmark interest rates from falling too low. It raised the interest rate it pays banks on reserves - the IOER - held at the U.S. central bank by five basis points, and also lifted to 0.05% from zero the rate it pays on overnight reverse repurchase agreements, used to set a floor on short-term interest rates.

In a question and answer period after the statement, Chairman Jerome Powell said the Fed will provide advanced notice before changing asset purchases and that considering tapering of these purchases at coming meetings would be appropriate, if progress allows.

The projections showed the outlook for inflation jumping this year, though the price increases were still described as "transitory." Overall economic growth is expected to hit 7%.

"The interesting thing is that the Fed has gone beyond simply acknowledging that inflation is rising and that the U.S. economy has a lot of momentum, and it has essentially shifted to a much more hawkish stance in this set of projections," said Karl Schamotta, chief market strategist at Cambridge Global Payments in Toronto.

The dollar, which slumped through much of 2020, staged a rebound earlier this year, but that relief rally appeared to run out of steam through May as investors remained convinced that the Fed will keep interest rates lower for longer as it seeks to support the economy.

While the Fed's new language does not mean a change in policy is imminent it does provide more support for the greenback, analysts said.

"I think we're back to talking about a mild rally in the U.S. dollar and the data becoming very important over the summer period prior to Jackson Hole and September's meeting," said Simon Harvey, senior FX market analyst at Monex Europe.

"The Fed's super hawkish pivot should reinforce the lows and offer further near-term USD support," TD Securities analysts wrote in a research note. A double-whammy of higher rates and wobbly risk sentiment would result in a positioning squeeze and the start of a new narrative," possibly resulting in a 2% dollar rally through the summer, the note said.

"The USD is in a much healthier place now that the Fed is inching toward the exits," Westpac analysts wrote in a client note, predicting the dollar index would test 92 in coming days. The Fed’s pivot will likely make for a challenging backdrop for risky assets, and there’s enhanced prospects for more interest rate support for the USD, all of which spells good news for the currency."

The dollar was headed for its best week in nearly nine months on Friday as investors have scrambled to price in a sooner-than-expected ending to extraordinary U.S. monetary stimulus in the days after a surprise shift in tone from the Federal Reserve.

In the two sessions the greenback has busted from recent ranges and surged about 1.8% against the euro, even further against the Aussie and more than 1% against sterling and the kiwi. The dollar index has zoomed above its 200-day moving average to hit a more than two-month high of 92.010 and is on track for a 1.5% weekly gain, its largest since last September.

"The Fed sent a very crucial message, that the days of plentiful, abundant, unlimited liquidity are drawing to a close," said Richard Franulovich, head of FX strategy at Westpac in Sydney. We can now see an end point to zero rates ... and they've told us in very plain-speaking English that they've commenced the conversation on how to commence tapering," he said. That signal has precipitated a dramatic position unwind, because U.S. dollar shorts were based on that unending liquidity tap from the Fed, and zero rates."

Treasuries sold heavily - especially at the five- and 10-year tenors - but the U.S. yield curve has flattened overnight as traders seem hopeful that a more aggressive Fed could move more quickly to head off inflation.

"For us the key take-away ... is the market's preconceived idea of a fixed timeline for tapering is the wrong way to think about it," said Elsa Lignos, global head of FX strategy at RBC Capital Markets. Perhaps collectively we talked ourselves into the idea that the Fed is so keen to avoid a taper tantrum, that 'they'll be forced to follow the market consensus' – (Wednesday) shows that is wrong," she said. Every meeting is now live for a taper discussion."

"I think this is a direct echo of the 2013 taper tantrum. You are seeing a perceived shift in the Fed's reaction function driving investors into the safety of the U.S. dollar," said Karl Schamotta, chief market strategist at Cambridge Global Payments in Toronto. Essentially, the entire world was short the dollar going into this, everyone from speculative traders to corporates to investors," Schamotta said. You are seeing a wholesale unwind here," he said.

With investors pricing in a sooner-than-expected tapering of extraordinary U.S. monetary stimulus, the euro and the yen have come under selling pressure over the last few trading sessions.

The unwind of sizeable bearish bets against the dollar is expected to provide support for the greenback in coming days, investors said

Goldman Sachs Asset Management's head of currency, Arnab Nilim, who had been short the U.S. currency headed into the June Fed meeting, told Reuters he has reduced the position and expects the U.S. dollar to perform well, especially against the low-yielding currencies.

With a dovish European Central Bank seemingly far behind the Fed in the monetary policy cycle, traders will be reluctant to buy euros against dollars.

"The U.S. central bank is one step ahead and as a result USD is likely to remain well supported against the EUR," Commerzbank strategists said in their daily note.

Betting against the dollar has been a popular trade for months, as the Fed’s insistence that it would maintain its ultra-dovish stance despite rising inflation drove the currency to a near 3-year low earlier this year.

The slightly hawkish shift in Wednesday’s statement appears to be changing that calculus: the prospect of a sooner-than-expected rise in U.S. rates boosts the dollar's attractiveness to yield-seeking investors over currencies such as the euro and yen. Both Goldman Sachs and Deutsche Bank, for instance, after the Fed meeting recommended investors cut their bets on the euro rising against the buck.

"I think FX markets have finally awoken to the idea of earlier normalization from the Fed,” said Simon Harvey, senior FX market analyst at Monex Europe.

Large bets against the U.S. currency may accelerate the recent move if the threat of more gains pushes investors to reverse their bearish positions. Net bets against the dollar in futures markets stood at nearly $18 billion last week, a three-month high, according to data from the CFTC.

“In the coming weeks and months, the short-dollar thesis that has been so dominant and popular for much of the past year will be severely tested,” said Stephen Jen, portfolio manager at hedge fund Eurizon SLJ.

Momtchil Pojarliev, head of currencies at BNP Asset Management in New York, bought the dollar against the Japanese yen after the Fed meeting. The Fed has been patient, but we all know the Fed is going (to turn hawkish) at some point,” he said. “I didn't think that it was going to be now.”

Because of the dollar's central position in the global financial system, its fluctuations tend to ripple through a wide range of assets.

A stronger dollar tends to weigh on the balance sheets of U.S. multinationals, making it less favorable for them to change foreign earnings back into their home currency.

A rising greenback could also help tame a blistering rally in commodity prices that has helped boost inflation this year, as many raw materials are priced in dollars and become less affordable to foreign investors when the buck appreciates.

“With our view of rising rates, risky assets and equities will have difficulties,” said Kaspar Hense, a portfolio manager at Bluebay Asset Management, which oversees $60 billion. Hense went short the euro after Wednesday’s Fed meeting.

Some market participants, however, are maintaining their bearish views on the dollar, noting that the Fed’s easy money policies, which include the purchase of $120 billion a month in Treasuries, remain in effect. Other central banks are likely to follow the Fed’s lead in slowly normalizing monetary policy, potentially narrowing the gap in rates between the U.S. and other economies.

Goldman Sachs believes a global recovery will weaken the dollar over the longer term, while a report published by Societe Generale on Thursday showed a year-end price target of $1.27 for the euro, from $1.19 on Thursday.

"Clearly there has been technical, fundamental damage to the bearish dollar story, but I would like to see how the dust settles before determining if the dollar bear story is behind us," said Paresh Upadhyaya, director of currency strategy and portfolio manager for Amundi Pioneer Asset Management. Now a lot of it is going to hinge on… what do other G10 and emerging market central banks do in response."

Upadhyaya reduced his short dollar position heading into the Fed meeting but believes the currency will eventually head lower. Harvey, of Monex Europe, wants to see whether the next few weeks' data will bolster the case for a stronger-than- expected recovery.

Others, however, think there could be room for more dollar gains.

Shorting the dollar “has been a popular trade for both discretionary and systematic managers,” said David Gorton, chief investment officer at hedge fund DG Partners. The “hawkish surprise from the Fed has perhaps exposed just how extended some of those short positions were.”

COT Report

Recent data doesn't include yet the reaction on Fed statement, but already reflects some preparation to it as it was showing decrease of long speculative positions and open interest. It is interesting to see that hedgers were closing positions in both directions.

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Previously, in recent 2-3 weeks we've talked about this phenomenon that upside action on EUR is not strongly supported by COT report, showing that rally is fragile as not enough new long positions were opening. The same story stands on Gold market, by the way. Next week, I suppose there will be sharp drop in net long position here...

Next week to watch

#1 Home Inspection

New home sales and mortgage application numbers on Wednesday provide a view into U.S. housing - a standout in the post COVID-19 recovery that has shown some weakness lately. U.S. homebuilding rebounded less than expected in May as the high price of lumber and shortages of other materials hindered builders' ability to take advantage of an acute shortfall.

The focus on lumber prices is a window into inflationary pressures just as the Federal Reserve projects a faster timetable for rate rises and mulls how to end crisis-era bond-buying. The PHLX housing index of homebuilders and other housing-related stocks has retreated recently but remains one of this year's outperformers.

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#2 Bank of England meeting

The Bank of England meets on Thursday, and sterling bulls are hoping chief economist Andy Haldane's last meeting will provide another boost for the pound.

Haldane has warned of inflationary pressure that might force the BoE to turn off its monetary stimulus taps. Indeed, May inflation zipped above its 2% target for the first time in two years.

Analysts expect no changes to policy after the BoE last month said it would slightly slow the weekly pace of its bond purchases. Britain's decision to delay the full reopening of its economy by a month may be seen as a reason for caution.

Some don't rule out a discussion around tapering, however, with other central banks starting to consider exiting emergency stimulus. Money markets price in more than 9 bps of BoE rate hikes by May 2022 - doubling from the start of the week.

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#3 PMI readings

The United States, Australia, Britain and the euro area will kick off global June flash purchasing managers' index (PMI) readings. The forward-looking economic indicator should confirm a solid outlook for manufacturing, but also divergences opening up.

A swift roll-out of COVID-19 vaccines, economies reopening from lockdowns and hefty stimulus mean PMIs in major economies should remain comfortably above the 50-mark dividing expansion from contraction. The May euro zone composite PMI hit its highest level since February 2018.

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As a bottom line:

So, overall situation rises no questions, I suppose. We've talked about it many times, explained why it should happen and what effect it makes on the market - everything happens in a row with classic scenario of long-term bullish economy cycle starting point. The thing that Fed starts a bit earlier doesn't matter, this is minor nuance that makes absolutely no impact on the core. The major achievement to us is Fed confirmation of our fundamental view by real action - the hawkish statement.
From this point of view, perspective is more or less clear - dollar should start rising. The trend speed depends on Fed aggression and becomes the factor of how soon Fed starts tapering (we suppose it should start in Jan 2022), who fast this tapering will be, when it stops, when first rate hike happens and how many hikes will be in 2023. These factors will form the shape of the trend but not the direction. Direction supposedly is set. Based on the comment of big companies - they treat this as changing of the long-term Fed policy, the stating point.
Personally I have concern on a different issue. Why Goldman and SG still suggests that dollar keep rising in 2021:


Goldman Sachs believes a global recovery will weaken the dollar over the longer term, while a report published by Societe Generale on Thursday showed a year-end price target of $1.27 for the euro, from $1.19 on Thursday.

Technically they are right. Take a look at Dollar Index. Personally I feel not quite comfortable if dollar ignores long-term target. Supposedly, if we would take a look at anonymous chart with the question " where supposedly we should buy?" I would say - wait for AB=CD completion and butterfly pattern. Indeed, early reversal keeps major target untouched and steals important bullish patterns, such as W&R of "88" lows around "B" point. Besides, here upward action also starts without W&R. Price action is strong, but could market return back, erasing this rally and what factors could make it to do this? It is hard to say. Here I would say that the break above "94" and erasing of butterfly pattern could become an important bullish sign. Besides, 92-94 area is strong natural resistance, that hardly could be passed just occasionally.
s0H9v3lA


Thus, although our long-term view seems to be correct, the price shape has few ways of progress. As we haven't got yet the final confirmation of bearish trend crush, let's treat it as retracement by far and keep watching.

Technicals
Monthly


On EUR monthly chart we have similar picture as on DXY (EUR takes 70% of DXY). In particular, before making decisive conclusion I would wait for June close and possible bullish grabber here, and 1.16 lows.

As we warned previously, with big gap in ECB statement and expectations on Fed policy in perspective of 6-12 months, EUR/USD now stands at the fragile way.

EUR keeps bullish MACD by far. 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. This is the same target that Societe Generale talks in their comments above.

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

Jut theoretically for now, and talking about very long-term perspective, if EUR fails to break "B" point top - we can't exclude chances to see huge downside butterfly with left wing is already in place and target far below the parity, that in general agrees with big term gap of Central Bank policies (ECB plans no action until 2023, while Fed should act earlier)...

Actually both butterflies are possible. Current "BC" leg also could be the left wing. In this case, if, say EUR drops to YPS1 - it might the bottom of the left wing. From fundamental point of view, it might become the point when ECB changes the policy. But this is too long-term perspective that is not as interesting right now.

eur_m_21_06_21.png


Weekly

Here EUR still keeps bullish potential, but it has become weaker since the last week. MACD has turned south and downside action mostly stops because of weekly OS level. Price drops below the previous top, that is also not good sign for the bulls. Our "perfect" bullish scenario , that could let EUR to climb immediately, is destroyed. Still, market stands inside the triangle and keep theoretical chances on reversal.

1.17 lows here corresponds to DXY 94 level. In a case of breakout, weekly butterfly pattern will be erased and it might become the decisive moment, opening EUR the way for more aggressive downside action. YPS1 of 1.09-1.10 area appears on the table in this case:

eur_w_21_06_21.png


Daily

On daily chart picture barely has changed. Context has turned into bearish by few reasons. First is MACD stands down, and despite OS level, market dives deep below it, which is not typical for financial markets. Usually it happens only with some serious background. Second - major 5/8 Fib support is broken, and finally, chances on H&S pattern mostly are lost. Fast acceleration on right arm, breaking of H&S harmony and drop below previous top gives anemic chances to bullish reversal.

The new thing that we could consider here, as the continuation of H&S failure, is a drop below the head's lows in medium term perspective. IT could happen in a way of AB=CD pattern. It brings EUR to another support area of 1.16 that is perfectly visible here.

The new reality tells that context is bearish and we do not consider bullish positions on daily chart. For short entry we need oversold relief and moderate bounce, as price stands oversold not only on daily but on weekly time frame as well.
eur_d_21_06_21.png


Intraday

Since market is strongly oversold and this is first sharp drop after bullish tendency, market could show more or less deep retracement. From that standpoint, 1.20-1.2025 area looks like most probable candidate for testing. Also it coincides with former lows.

Here EUR has completed our last XOP target that we could build based on 4H swings. Downside thrust stands perfect, so we also could keep an eye on intraday B&B or DRPO patterns:

eur_4h_21_06_21.png
 

RahmanSL

Major
Messages
2,845
Hi Sive...as usual, excellent analysis and report which I read with keen interest, Thank you very much.
The way I am going to trade the EUR/USD will be shorting the pair from the 1.26-28 levels for dollar return strength. For now, trading the pair is more towards guess work and gambling then anything else.

Cheers and all the best!
 

Sive Morten

Special Consultant to the FPA
Messages
14,878
Morning everybody,

So, guys, let's keep going with our trading plan. Downside continuation could stand ahead, but, as we've said - now we focus mostly on minor upside reaction as market stands oversold and near 5/8 level. It looks like DiNapoli bullish "Stretch" pattern. So, we've agreed to wait for the signs of pullback and yesterday we've got pretty nice bullish engulfing pattern that suggests pullback at least to 1.1950 or even 1.20 area:
eur_d_22_06_21.png


Intraday setup is very clear and doesn't need a lot of comments - this is H&S pattern around XOP target. To the upside we have two resistance levels - 1.1952 and K-area of 1.2007-1.2024:
eur_4h_22_06_21.png


H&S has the targets that perfectly agree with the same levels:
eur_1h_22_06_21.png


Thus, with the stops under right arm it is possible to consider long position here...
 

Sive Morten

Special Consultant to the FPA
Messages
14,878
Morning everybody,

So, EUR is accurately going with our trading plan. We do not need to make and drastic adjustments. Based on the price shape, it seems that we indeed have a deal with retracement, so we keep our scenario with short position consideration around 1.20 resistance area:
eur_d_23_06_21.png


Still, as intraday performance shows the signs of upward continuation as great W&R on cryptos today makes me think that EUR should reach our XOP at 1.20 area. It also makes Agreement with K-resistance here, on 4H chart:
eur_4h_23_06_21.png


Thus, if you've bought EUR recently, it makes sense to hold position and tight stops to "R" bar lows. Reaction on OP target has already happened, and another reversal will destroy short-term bullish context. EUR has to move higher right from here, if it is still bullish:
eur_1h_23_06_21.png
 

Sive Morten

Special Consultant to the FPA
Messages
14,878
Morning everybody,

Price action stands not too active, so today is just minor update for intraday chart. Recently market has shown pullback, but right now it is not the sign yet of breaking intraday bullish sentiment. Our H&S on 1H chart is still valid.

Downside retracement hits strong support area of K-level and neckline. Our stops stand below "R" lows and untouched. Indeed, downside breakout of this area means that H&S is completed just by OP target and no action to XOP happens. But, right now market still keeps bullish context and chances to move higher to XOP.

Thus, we could keep longs. If you would like to take new position - in this case it would be better to be sure that EUR indeed is moving higher. For example, butterfly pattern could be formed here and its target agrees with XOP. Once butterfly shape becomes evident - you could try to enter. Stops will at the same level - below K-support.
eur_1h_24_06_21.png


Our next setup starts after market hits 1.20 XOP and daily K-resistance. Theoretically it should be good chances for short entry, as overall price action stands slow and gradual, showing mostly the feature of retracement.
 

Sive Morten

Special Consultant to the FPA
Messages
14,878
Morning guys,

So, market stands so quiet that it is almost nothing to discuss here. On daily chart price is coiling around tight range, hopefully we will get something next week, say bearish grabber or something else. I still hope that get 1.20 area from the EUR, lets see.
eur_d_25_06_21.png


On intraday charts EUR shows confronting signs, but keeps bullish context by far. On 4H chart price three times in a row can't break through nearest 3/8 Fib level. At the same time, appearing of bullish grabber here could provide more support to upward continuation. This is the pattern that we could keep an eye on today:
eur_4h_25_06_21.png


On 1H chart the pattern that we've discuss recently is becoming more evident. Currently we have nothing to do - long positions are opened and they are with b/e stops already. Market has to stay above K-area to keep bullish context. Downside breakout means that we will not see 1.20 area.

Among bearish signs I would call too heavy upward action. Personally, I still hope that market is able to proceed to 1.20 and do not consider short entry. But if you have different view - you could consider downside butterfly that is also visible here.

eur_1h_25_06_21.png


In general, for the truth sake, guys, overall situation is not fascinating and context is weak for the trading.
 

RahmanSL

Major
Messages
2,845
Price almost make it to 1.2 at 1.19732 but then retreated.
Oh well, another trading week almost gone and looking forward to next week.

Cheers, keep safe, and all the best my friend...and thank you very much for your invaluable foresight, analysis, and report. I will of course be looking forward to reading your report & analysis for next week.
 
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