Forex FOREX PRO WEEKLY, June 27 - 01, 2022

Sive Morten

Special Consultant to the FPA
Messages
16,256
Fundamentals

This week we have few fundamental events, not so much as in some previous weeks. PMI numbers were mixed, making no serious impact on markets. And J. Powell speech to lawmakers has become the most important event.

Market overview

The U.S. dollar slipped on Friday and posted its first weekly decline this month, as traders pared back bets on where interest rates may peak and brought forward their outlook on the timing of rate cuts to counter a possible recession. A significant factor this week has been the fall in oil and commodity prices, which has eased inflation fears and allowed equity markets to rebound. This has eroded the safe-haven bid that has been boosting the dollar against major currencies.

U.S. fed funds futures on Friday priced in a 73% probability of a 75 basis-point increase at the July meeting. But for September the market has fully factored in just a 50-bps rise. The market has also priced in a fed funds rates of 3.31% on Friday, from 3.51% a week ago.

The safe-haven greenback slipped further after data showed new home sales jumped 10.7% to a seasonally adjusted annual rate of 696,000 units last month. May's sales pace was revised higher to 629,000 units from the previously reported 591,000 units.

The University of Michigan consumer sentiment survey showed mixed results, with sentiment worsening in June to 50, from a final reading in May of 58. But the reading on five-year inflation expectations eased to 3.1 from the preliminary 3.3% estimate in mid-June

The dollar, up around 9% this year, has lost some of its shine since investors started betting the Fed could slow the rate-tightening pace following another 75 basis-point increase in July. They now see rates peaking next March around 3.5% and falling nearly 20 bps by July 2023

For now though, Fed Chair Jerome Powell stressed the central bank's "unconditional" commitment to taming inflation. Fed Governor Michelle Bowman also supported 50 bps hikes for "the next few" meetings after July. Analysts noted terminal rate repricing across the developed world as recession fears grow.

"The Fed has said it will do its best to bring down inflation without dealing a significant blow to the economy," said Joe Manimbo, senior market analyst, at Western Union Business Solutions in Washington. But if a soft landing should ultimately prove elusive, then the Fed would likely have to change course and start to slash rates. So while the rate debate remains fluid, for now inflation fears have given way to hopes of looser policy if things really deteriorate."

The euro slid across the board on Thursday as weaker-than-expected German and French PMI data showed that the euro zone economy is struggling to gain traction, prompting traders to trim bets on big rate-hike moves from the European Central Bank. Higher prices in the euro zone meant demand for manufactured goods fell in June at the fastest rate since May 2020 at the height of the coronavirus pandemic. The S&P Global's headline factory Purchasing Managers' Index (PMI) fell to a near two- year low of 52.0 from 54.6

"The (PMI) manufacturing/services ratio tends to be a good barometer for pro-cyclical currencies. The ratio has sharply dropped relative to the U.S.," said Mazen Issa, senior FX strategist in a research note. "This dynamic is typically consistent with further U.S. dollar resilience. This could be bolstered as recession fears mount."

Following the data, money markets priced in about 30 basis points (bps) of ECB rate hikes in July compared to 34 bps on Monday. Traders also trimmed expectations of how much the ECB will hike rates by the end of 2022 to 161 bps, compared to 176 bps on Monday.

Fed Chair Jerome Powell said on Wednesday a recession was "certainly a possibility," reflecting fears in financial markets that the Fed's tightening pace will throttle growth.

The Fed is not trying to engineer a recession to heel inflation but is fully committed to bringing prices under control even if doing so risks an economic downturn, Powell said at a hearing of the U.S. Senate Banking Committee.

Fed Chair Jerome Powell had cited the initial read of 3.3% -- a possible early warning that months of 8%-plus consumer price inflation were beginning to undermine public faith in the Fed's ability to contain price pressures -- as one reason policymakers supported the big rate increase in June.

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U.S. initial jobless claims fell to a seasonally-adjusted 229,000 for the week ended June 18. Claims have been treading water since tumbling to more than a 53-year low of 166,000 in March.

The International Monetary Fund on Friday slashed its U.S. economic growth forecast as aggressive Federal Reserve interest rate hikes cool demand but predicted that the United States would "narrowly" avoid a recession. In an annual assessment of U.S. economic policies, the IMF said it now expects U.S. Gross Domestic Product to grow 2.9% in 2022, less than its most recent forecast of 3.7% in April. For 2023, the IMF cut its U.S. growth forecast to 1.7% from 2.3% and it now expects growth to trough at 0.8% in 2024.

"We are conscious that there is a narrowing path to avoiding a recession in the U.S.," IMF Managing Director Kristalina Georgieva told a news conference, noting that the outlook had a high degree of uncertainty.

Georgieva said the responsibility to restore low and stable inflation rests with the Fed, and that the fund views the U.S. central bank's desire to quickly bring its benchmark overnight interest rate up to the 3.5%-4% level as "the correct policy to bring down inflation." The Fed's current policy rate ranges from 1.50% to 1.75%.

"We believe this policy path should create an upfront tightening of financial conditions which will quickly bring inflation back to target. We also support the Fed's decision to reduce its balance sheet," she said.

Two cents on real estate market

As it is mentioned above, the sales of new homes have increased this months and many investors become inspiring with this moment, suggesting that everything stands on a right way. Here we show you few charts that identifies coming disaster in a near term perspective. First is, due to significant mortage rate rising to 5.8%. According to Insider's calculations using data from the US Census Bureau, the Department of Housing and Urban Development, Freddie Mac, and the National Association of Realtors, the average mortgage payment is $2,064 on a 30-year fixed mortgage, and $3,059 on a 15-year fixed mortgage i.e. households pay 2500$ monthly, on average. In general, you could see that the rate is coming to the threshold level of subprime crisis in 2008:
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Although we see May increase for new home sales, but this is just a single number. New homes might be bought by real estate companies, funds for re-selling later. At the same time we see that existing home sales are dropping stably and already at 2-year lows:

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this leads to disproportions on real estate market. Historically, the real estate loan rate and the price are moving in the same direction. Take a look at this chart:
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Here we could see two things. First is, the spread is already two times greater than before 2008 subprime crisis. Second - the pace of real price growth is faster than at the eve of 2008. As you understand, it is poor relief that new sales have risen in May. With slowdown and demand collapse on mortgage market - the building sector could get the deadly hit.

What J. Powell has said

The major news of the week has become the head of the Fed with his speech to Congress - whe he has disavowed the connection between the Russia's war special operation in Ukraine and inflation in the United States. And the reason is absolutely not in relation between the United States and Russia, but the situation per se, when the head of the Central Bank does not agree with the logic of the President, suggesting that the US monetary authorities can't provide any clear public explanation of the causes of the current inflationary catastrophe. It should be noted that the situation in EU is similar, as ECB is not able to present any more or less distinct strategy as well. At the same time, the feeling of catastrophe is growing, especially if we take into account the relationship between the money supply and stock indices:

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Other word speaking, if Fed tightening continues - the markets will begin to fall. Actually, they are already declining, but this is just the beginning. At the same time, aggregate demand and household savings are already falling, and their debts are growing:

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But the decline in consumer demand automatically means the decline of GDP. So the picture becomes even more gloomy. As we already mentioned many times here - a full-fledged structural crisis since the fourth quarter of last year is began, which is similar to the crisis of 1930-32, and it should last for quite a long time, at least 5 more years.

Based on recent Fed members speeches, including JP, they already understand this. Although they could not understand the mechanics of the crisis, but they have realized already that the standard tools of "economics" have limited application to resolve the problem. And today, the main task of all politicians and experts is not economic policy, but attempts to absolve themselves of personal responsibility for the circumstances.


Conclusion

First thing that we wold like to say - don't be deceived by temporal pullbacks on any market, especially on stock market. This is the trap, if even sometimes they could look reliable. Stock market is turning to long term bearish trend, but big banks need to make illusion of bullish reversals from time to time to trigger the rallies that they later will use to close their long positions. One the pullbacks has happened on Friday. Real reversal is possible only when economy becomes healthy and strong. Now it is not the case - the US Consumer Sentiment stands worst for the whole history of observations, and the same situation on other indicators, such as economy conditions etc., and not only in the US:
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Thus, we see tectonic transition of monetary (and political) authorities to the acknowledgement of deep and ongoing crisis. As this process should keep going - as internal political showdowns, as serious economic conclusions will take place. The latter supposedly inevitably triggers as hysterical and inadequate policy fluctuations (for example, if some or few Central Banks start or keep the rate hike and money printing at the same time). if hidden QE (i.e. money printing) resumes in the EU or the USA, the stock markets could show solid rally, but it becomes the swan song of final paroxysms before a colossal collapse. This irrational steps might be combined with absolutely correct actions on reducing the debt burden. Simultaneously Brussels could cut the donation of highly indebted eastern and southern members of the European Union.

EU by far stands as major loser of ongoing crisis, caring the bulk of the sanctions burden. The major countries have awful trading balance in recent months that they have to close somehow, as they need to finance the deficit. With thin debt market they could either cut budget spending, which has a direct hit on social sphere or... right - printing and printing more...

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With the previously mentioned other EU problems, we do not see reasons to change our long-term view, that EUR should feel worse than USD. Thus, we keep two our downside targets valid - 0.97 and 0.9 that could be reached within 3-6 months. Geopolitical risks also is a big component but we will consider it in our Gold market report tomorrow.

Next week, Friday, July 1, will bring latest euro area inflation readings, which in turn could determine whether the ECB will deliver bigger interest rate hikes after a quarter-point move flagged for July. Second important data is the US consumer confidence. Monday's pending home sales and Tuesday's Case-Shiller home price index should show how much rising mortgage rates are biting, while the May personal consumption expenditures price index – an inflation indicator watched by the Fed – is due on Thursday.


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To be continued.
 

Sive Morten

Special Consultant to the FPA
Messages
16,256
Technicals
Monthly

We do not see any drastic positive shifts on fundamental background for EU, thus there are no reasons to change long-term view on EUR. Market is not at oversold. Our major AB-CD pattern here shows clear acceleration of CD leg to OP target, market already stands below YPS1 which is strongly bearish.
This significantly increases chances on downside continuation in medium term perspective. 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.

Meantime, we're mostly dealing with attempts to show short-term upside pullback on weekly and daily chart and this scenario is not cancelled yet. The new moment that we have on monthly chart, that might be also supportive pattern for this scenario - is potential tweezers bottom. It is not perfect, but recognizable.
eur_m_27_06_22.png


Weekly

Grabber that we've discussed last week starts showing the performance and it is a holding factor to keep us aside from short position by far. Bullish invalidation point stands around the pattern's lows. Pattern itself suggests action back to the K-resistance area, in a way of flat AB-CD pattern.

eur_w_27_06_22.png


Daily

Although, as we've said, EUR performance looks not very impressive - it is stable. And it is difficult to call it as bearish right now. Price shows consolidation right under strong resistance area. This increases chances that EUR could make attempt, at least, to break it, whether it will be successful or not.

Trend has turned bullish here as well:
eur_d_27_06_22.png


Intraday

So, as we've said - we do not consider taking of new short positions for trading on daily/intraday basis. But for long entry there are few options exist of a different degree of aggression. If we would calculate the swings on 4H chart - we see that after COP reaching market has shown the pullback already. In most cases, if market strong enough, the pullback after COP stands small. It is possible AB-CD pattern down, back to near-"C" point lows and 5/8 support, but it is not common for after-COP action. Thus, normally market should keep standing on upside extension.
eur_4h_27_06_22.png


So, the first scenario of long entry that you could consider is conservative enough - wait for another leg down to take position around 5/8 major Fib support. C - point has to stay untouched. The adv. is obvious - you get the chance to place tighter stop and minimize the risk. Disadv. - this action might not happen.

The more aggressive way is to stick with pennant, take position inside and hide stops just below its lows:
eur_1h_27_06_22.png


...suggesting that if bullish market fails to make a upside breakout - bullish scenario will become doubtful.
And most conservative way to act is to stick with weekly grabber, placing stop below weekly lows and use any way of position taking, mentioned above.
 

Sive Morten

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

Today we have minimal changes compares to weekend. It seems that our suggestion on upside performance is correct. As EUR has weekly bullish grabber, it keeps theoretical chances to reach local top around 1.08 area. Meantime, price is coming to K-resistance area:
eur_d_28_06_22.png


On 4H chart EUR follows our central scenario - single leg retracement after COP and upside reversal. Price has erased previous black nasty candle, which is also could be treated as a bullish sign. By swings' structure, EUR stands on an extension swing to OP, at least if it is really bullish. OP makes an Agreement with daily K-area.
eur_4h_28_06_22.png


Thus, for bears - it is nothing to do, as we need to wait either bullish setup failure or its completion. For the bulls, if you just consider to go long - it is not needed to watch for very deep levels, as major retracement is done. For position taking you could consider nearest levels of most recent upside swing on 1H chart:
eur_1h_28_06_22.png
 

Sive Morten

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

So, EUR performance shows the first crack. It is not yet the final break of bullish context, but intraday performance is irrational for bullish market. On daily chart, formally, the context still stands bullish, as we have bullish grabber, MACD up and we have weekly grabber as well. But, few moments shows that the bullish party might be over.
eur_d_29_06_22.png


First is, on Dollar Index we have opposite pattern on daily chart, suggesting that USD should rise. Second, on 4H chart we not occasionally have said - watch for the most recent upside swing. Bullish market should not erase it, because this is extension to OP and retracement after COP is done already. But here we see that price returns back, erasing supposed extension swing. This is bad sign:
eur_4h_29_06_22.png

More confirmation happens, if price drops below the "C" point, forming bearish reversal swing and erasing AB-CD pattern. The consolidation on 1H chart is also broken down:
eur_1h_29_06_22.png


Still, we suggest to not run ahead of train, as theoretical bullish context has not been erased totally by far and wait for more confirmation of weakness. In current situation it would be better to stay on hold with any long positions as well...
 

Sive Morten

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

It seems that we have not occasionally worried - EUR has been crushed by terrible US statistics. Just take a look at this. As we've expected - GDP is negative, inflation is higher, consumption is two times lower!

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And it is necessary to ask JP - where is the strong economy? How GDP could be negative with strong consumption and low unemployment? But Fed has no answer. If you've read our weekly reports for recent 2-3 weeks, at least, this is no the surprise to you either.

Now we still do not have yet the total crush of bullish context, as weekly grabber is still valid. But, additionally to yesterday's doubts - today we've got bullish grabber on dollar Index and bearish trend on daily EUR:
eur_d_30_06_22.png


On 4H chart market has completed both bearish conditions - erased upside AB-CD pattern and formed bearish reversal swing.
eur_4h_30_06_22.png


Now price stands at 5/8 support and completed steep 1H AB-CD pattern:
eur_1h_30_06_22.png


You know our opinion about bullish position here. Still, if you would like to try - wait, at least, for some bullish reversal pattern around current support area before pull the trigger. This could safe a lot of money. First is, I suppose that no pattern will be formed at all. Still, if miracle happens and it will be formed - it could help a lot as you could place very tight stop and do not take a lot of risk.
But somehow I suggest that we should start looking for intraday resistance areas and think about short entry again.
 

Sive Morten

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

So, it seems that we could start watching for the same pattern as on gold market - downside butterfly with the first target around 1.0230. Major action should start next week probably, but become starting point for action below the parity. ECB policy absolutely doesn't matter - whether they change rate for 0.25, 0.5 or even 2% - it doesn't improve the situation.
The same story on GBP - be prepared for the big fail of monthly reverse H&S pattern...
eur_d_01_07_22.png


Today, lets focus on PMI and EU CPI data. Something tells me that hardly it becomes better. Still, as EUR shows nice upside bounce on intraday chart - it could take the shape of AB-CD. Once the "C" point will be set, we could estimate OP target and maybe Agreement with some Fib level - that potentially is an area for short entry next week.
eur_1h_01_07_22.png
 
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