Forex FOREX PRO WEEKLY, March 15 - 19, 2021

Sive Morten

Special Consultant to the FPA
Messages
14,742
Fundamentals

This week mostly was ordinary, we've got ECB meeting, some statistics. As we've said earlier - it is nothing to expect from ECB right now as their position stands anemic and they are trapped on a dead way. Inflation stands low, no necessity to rise rates, it is impossible to cut rates more - all these things were obvious. The only hope was for some stimulus but Brussels Bureaucrats are too greed and slow on decision making. So, the chance mostly was hypothetical as well. And we've got corresponding result - no reaction on ECB meeting at all.

Market overview

The dollar edged lower on Wednesday following a tame U.S. inflation report and a tepid auction of benchmark 10-year Treasury notes. U.S. consumer prices posted their biggest annual gain in a year, though underlying inflation remained tepid amid sluggish demand for services like airline travel, the data showed. The move was largely in line with economists’ expectations, though core inflation rose 0.1% versus market forecasts for a 0.2% rise.

U.S. Treasury yields slid following the data, as market participants had hoped for a more upbeat outlook on consumer prices. The dollar index has closely tracked a surge in Treasury yields this year, both because higher yields increase the currency’s appeal and as the bond rout shook investor confidence, spurring demand for safe-haven assets.

“The drive of the dollar’s movement since the beginning of the year has been U.S. interest rates, and I just don’t see that scenario changing,” said Joseph Trevisani, senior analyst at FXSTREET.COM.

Bond yields fell and prices rose after an auction of 10-year Treasury notes showed tepid demand with lower than average bid-to-cover ratio. Treasury auctions have been closely watched after poor demand for an auction of 7-year notes two weeks ago sparked a sell-off in government bonds.

“Bonds are getting stronger, which means the dollar relatively speaking, may be less attractive,” said Axel Merk, president and portfolio manager at Merk Hard Currency Fund in Palo Alto California. Bonds had quite a sell-off and many would have argued that it may have been overdone,” he said.

"The CPI was a useful reminder to market participants that U.S. inflation is still quite soft," said Joe Capurso, currency analyst at Commonwealth Bank of Australia.
It's going to take a lot to get it up to the Federal Reserve's target. Mainly, financial markets got too bullish too quickly about the Fed starting a rate hike cycle."


The dollar and U.S. Treasury yields have been rising steadily due to expectations that the Fed's loose monetary policy and fiscal stimulus will stoke inflation. The yield on the benchmark 10-year Treasury was at 1.528% on Thursday after hitting a one-year high of 1.626% last week.

Overall, analysts said sentiment for the dollar remained fairly positive as the U.S. economy recovers from the COVID-19 pandemic and as President Joe Biden's $1.9 trillion stimulus bill won final approval in Congress.

“The market had probably got itself a little bit too over-sensitive about rising runaway inflation - which there isn’t yet,” said Kit Juckes, head of FX strategy at Societe Generale. The soft inflation data “gives us respite from risk aversion and reverses some of the recent currency moves,” he added.

At the European Central Bank meeting, policymakers have expected to send a message that they will prevent bond yields from rising further and harming the bloc’s economic outlook - although SocGen’s Juckes said that, since the rise in yields is led by Treasuries, it is unlikely to be influenced by the ECB.

Analysts at ING wrote in a note to clients that they do not expect the euro to be the focus of discussion, since it has fallen since the previous meeting. The euro-dollar pair is being more driven by dollar-related factors such as Treasury yields, ING said.

“If the central bankers signal that they would not only be willing to exhaust their current asset purchasing programme but to even extend it in reaction to a further rise in yields, this might put a dampener on possible rate expectations thus putting pressure on the euro,” wrote Commerzbank strategist Thu Lan Nguyen in a note to clients. However, I would not expect a significant impact as the market is only expecting rate hikes in the euro zone to occur in the very distant future compared with the U.S. anyway,” she said.

The dollar rose on Friday following a fresh spike in Treasury yields as the prospect of economies emerging from year-long coronavirus lockdowns reignited inflation fears. Market participants have grown wary in recent weeks that massive fiscal stimulus and pent-up consumer demand could lead to a jump in inflation as expanding vaccination campaigns bring an end to lockdowns.

Data on Friday showed U.S. producer prices (PPI) had their largest annual gain in nearly 2-1/2 years, though considerable slack in the labor market could make it harder for businesses to pass the higher costs on to consumers.

Data has shown signs of an economic recovery continuing to gain momentum. The number of Americans filing new claims for jobless benefits dropped to a four-month low last week, while U.S. consumer sentiment improved in early March to its strongest in a year.

A selloff in Treasuries overnight continued into the U.S. session, with the yield on the benchmark 10-year note hitting a fresh one-year high of 1.6420%, helped by optimism around U.S. economic prospects.

“Bond yields have been in a very strong uptrend and with the PPI numbers somewhat higher than consensus, that’s contributing to the rise,” said Kathy Lien, managing director at BK Asset Management. That’s widely positive for the dollar, as the greenback has been taking its cues from yields and these new highs are really encouraging more demand for the greenback, especially at a time when you have the ECB accelerating bond purchases and being a little bit more dovish,” she said.

The European Central Bank said on Thursday that it would increase the pace of its money printing to prevent a rise in euro zone bond yields in support of the economic recovery.

Traders will be looking to the U.S. Federal Reserve’s policy meeting next week for any comments about rising yields. With the benchmark S&P 500 nearing the 4,000 level for the first time, the health of the economy, the pace of inflation and a recent rise in bond yields are expected to be hot topics when the U.S. Federal Reserve meets on Tuesday and Wednesday.

They are also keen for any information on the upcoming expiry of the Fed’s temporary easing of the “supplementary leverage ratio” (SLR), which seems to be part of the reason behind the sell-off in Treasuries, said Erik Bregar, director and head of FX strategy at the Exchange Bank of Canada.



The SLR directs large banks to hold more capital against their assets. Last April, the Fed eased the rules by exempting certain investments, including Treasuries, from a key leverage calculation in an effort to improve market liquidity as the economy cratered due to coronavirus shutdowns. So far there has been no word from the Fed on a possible extension.

“Primary dealers are shedding bonds because this exemption might not get renewed at the end of March,” Bregar said.

COT Report

Recent CFTC data shows that drop in net long positions of EUR is becoming a tendency. Last week it was solid drop on background of rising open interest. This week it becomes even worse:

1615622160001.png


As a result the net long position is dropping with fast tempo:
1615622243548.png

Source: cftc.gov
Charting by Investing.com



Week of the central banks

After a stunning selloff in U.S. Treasuries took benchmark 10-year yields above 1.6%, the highest in a year, the March 16-17 Federal Reserve meeting will be watched closely for hints policymakers are concerned about yields, asset bubbles and inflation.

A repricing of market interest rate expectations to anticipate a Fed hike as early as late 2022 is at odds with the Fed’s aim of keeping rates unchanged until the end of 2023. The Fed has appeared unperturbed so far by higher bond yields, but it may feel it’s time to push back against those rate-hike bets.

It is also expected to release fresh forecasts on economic growth as vaccines are distributed.

1615622495650.png



The central bank which pioneered yield curve control faces one of its toughest policy reviews on March 18-19.

The Bank of Japan will likely insert clearer guidance in its statement on what it sees as an acceptable level of fluctuation in long-term interest rates, according to sources -- a sign it won’t tolerate rises that hurt the economy.

Governor Haruhiko Kuroda and his deputy Masayoshi Amamiya have sent mixed messages on loosening the 10-year yield target band. Higher yields would acknowledge a global move higher but might spur unintended worries about policy tightening.



Given a nascent economic recovery, the BOJ may even suggest scope for more negative short-term rates. In the midst of this, financial year-end flows back into yen are accelerating. A currency rally will add to the BOJ’s headaches.

1615622588676.png


Thursday brings central bank meetings in Britain and Norway.

The Bank of England is not seen unveiling additional policy easing despite concerns over the recent spike in borrowing costs. Instead, any action such as upping the BoE’s bond-buying firepower is likely to come later in the year - perhaps in May, when the next set of economic forecasts emerge.

With first-quarter GDP data expected to show a near 4% drop on the back of pandemic-linked lockdowns and Brexit disruptions, economic recovery is expected to be gradual. A majority of economists polled by Reuters expect GDP will take two years to return to pre-COVID-19 levels.

Norges Bank is also tipped to keep rates unchanged but it may adopt a much more hawkish tone given signs of economic recovery in Norway, especially in housing.

1615622663055.png



Despite that wee was relatively quiet and we haven't got any breaking news, we still could make some new conclusions. First is the argue around reflation - situation is becoming more evident with more and more statistics confirming the economy recovery. This week we have Initial claims, Sentiment and spending numbers. Don't be confused by CPI data as it is lagging for 6-9 month behind the reality. PPI is lagging as well, but as it stands earlier in production cycle - it has shown increase. So, even PPI already shows some reaction. These numbers are points in favor of those analysts who suggests that recovery is started, while others still think that this is mostly speculative splash in the yields, triggered by some inner, technical reasons but not by rising inflationary pressure.

Second conclusion - upside perspective of EUR/USD stands under question now. EUR is loosing quorum as investors are abandoning it. ECB statement we mostly should treat as dovish. While EU has no signs of interest rates rising, ECB makes the statement on more money printing, if needed to keep interest rates low. In comparison to US where rates show outstanding rally but Fed shows no reaction. Additional bearish factor for EUR is interest rates difference per se. It makes US Dollar more attractive and already leads to capital flow into US assets.

Speaking on Fed meeting, it seems that they should say something about interest rates - just to show that they familiar with market concern and keep the finger on pulse. Even if they intend to do nothing right now. But we can't exclude totally possible verbal intervention if Fed expresses "concern". That could push interest rates significantly lower. Technically it should happen, because this is first rally after long-term drop, and it has to be retracement around it. The same is for Dollar Index - it has untouched major 87.40 target that should be reached. May be Fed puts the hand to this. SLR programme also should be in focus, if it keeps working, it obliges banks to hold more riskless assets on balances, supporting demand for US Bonds. And this also could become the reason for pullback on interest rates.

Even without Fed results - overall situation is not in favor of EUR. Massive run out from the EU currency could fizzle our technical upside bounce from strong support, or make it weaker. The necessity to get more confirmation for long entry increases.

Technicals

Monthly

Recent action has minimal impact on long-term charts by far. MACD trend stands bullish and EUR is far enough from vital 1.16 area. Still, with coming important Fed meeting next week and poor COT numbers situation could become worse.

Technical picture suggests that we could accept any pullback with no problems to bullish context while it stands above 1.16 lows. The invalidation point, by the way, agrees with Yearly Pivot point that has special meaning to us. Although it is preferable to the market to stay above 1.20, just to keep short-term bullish context either.

Drop below 1.16 breaks the normal market mechanics as major retracement and reaction to COP is done. Thus, another deep retracement here is not logical and should not happen. Besides, action below 1.16 means appearing of bearish reversal swing. It is not necessary leads to bearish collapse and drop below 1.02 but deeper downside action happens and we would have to forget about bullish positions on lower time frames.

Upside targets are based on the same AB-CD pattern and stand the same. EUR has to break 1.24-1.25 level to reach them.

eur_m_15_03_21.png


Weekly

Here we have first reaction on our strong K-support area and oversold. As we've mentioned last week, context here has turned bearish, and if we wouldn't have support area, we probably would search chances to go short. Now we have a kind of bullish DiNapoli "Stretch" pattern here.

Commonly market should show stronger reaction on support of such scale, but we have few fundamental events on coming week that could make impact on it. In general, other signs here are not friendly to EUR, which makes us to treat any upside action as retracement by far. As we have bearish divergence here, and potential shape of H&S that could lead EUR below 1.16 area. Flat Fed statement in March could turn this scenario from potential to reality.

Besides EUR clearly shows downside acceleration to K-support, which is also could be treated as bearish sign. It means that on daily chart it would be better to not take long position blindly, waiting for clear bullish patterns for risk minimization.

eur_w_15_03_21.png


Daily

Trend remains bearish by far, despite we have first bounce from support and large "222" Buy pattern. Fortunately no grabber has been formed recently and EUR just reaction on 1.20 Fib resistance area.

No clear bullish patterns are formed yet. If you trade this setup right "from the scratch", buying as soon as market hits downside OP and with stops below recent lows - then it is nothing to change. For others, who prefer to use patterns to step-in - it is still the waiting time as no clear pattern has been formed yet here.

eur_d_15_03_21.png


Intraday

Maybe it makes sense to wait for something like that:
eur_1h_15_03_21.png


Why we a bit sceptic on immediate upside continuation, and suggest another downside swing. Well, mostly because of reversal swing down. Take a look - here downside swing is greater than previous swing up, this is not good for upside tendency. It could not mean that tendency is over but it increases risk of deeper downside retracement. As EUR likes "222" patterns - why not to watch for another one, but of a bigger scale?
 

Sive Morten

Special Consultant to the FPA
Messages
14,742
Morning everybody,

As usual, at the eve of Fed situation stands tricky. Market keeps way open in both direction and everybody could find the background for its own view, no matter, whether he wants to buy or sell. In such situations we should take a bit different view and approach to position taking. Of course - most conservative way that always works is do nothing, wait for release and trying to take position on retracement.

Still, if you want to take position in advance of meeting - you could think about Stop entry orders. We expect big volatility. If JP tells nothing about rates - downside action continues. Last time EUR has dropped for 200 pips, this time it might be smaller, but still weekly K-area might be re-tested easily.

Conversely, any word on "concern" about interest rates pushes dollar down. And with untouched 87.4 target by DXY - it means that reaction should be strong as well. The advantage of stop orders - you could place them in both directions but just one will be executed, because of strong action in just one direction. Another way to act is to use currency short-term options.

Technically, it seems that market still expects something. At least EUR stubbornly stands above intraday 50% Fib support, which makes possible AB-CD action to 1.2070 area:
eur_d_16_03_21.png


On intraday chart it takes the shape of triangle with features of bullish dynamic pressure:
eur_4h_16_03_21.png


But this is only from one point of view. From another one - I would ask you, why we can't get something like that:
eur_1h_16_03_21.png


Price action inside triangle stands lazy and choppy. Definitely this is not yet the upside continuation. We have "222" Sell shape inside (minor ab-cd pattern) that might reverse around 5/8 Agreement resistance and trendline, forming the top of right wing....

So, as you could see, technically both ways have background. Maybe tomorrow morning we get more clarity, right before the Fed press-conference, but using of Stop orders could resolve this concern. At least that could make entry process less nervous and emotional.
 

Sive Morten

Special Consultant to the FPA
Messages
14,742
Morning everybody,

So, the butterfly that we've discussed recently on 1H chart is completed perfectly. Which means that on 4H chart triangle has been broken down and EUR has formed bearish reversal candle. If we wouldn't have Fed on horizon - I would say wait and do not go long yet:

eur_4h_17_03_21.png


On 1H chart we also have bearish signs - fast acceleration down to Agreement support and 1.27 butterfly target suggests high chances on more downside action. While 1.618 target stands just in a distance of 20 pips, it might be not as crucial to current situation, but downside action could mean return back to 1835 lows or even a bit deeper, in a case if Fed ignores interest rates behavior in their statement.

Another technical reason for swing down is uncompleted 3-Drive "Sell" on 10-year yields that could make spike to the new top.
eur_1h_17_03_21.png


If you want to jangle nerves a bit and get some gambling - it is possible to consider long entry around 1.1875-1.19 area with stops below the lows. It might be costly, but if Fed touches the interest rates topic - you get good entry.

Alternatively, which we believe more reasonable option in current circumstances - is to wait for results of Fed meeting and then join the action. Because if Fed tells something new - upward action should be rather strong, as Dollar Index could go to 87.4, while Fed's silence is not new and downside reaction will be smaller.
 

Sive Morten

Special Consultant to the FPA
Messages
14,742
Morning everybody,

So, Fed statement was able to calm down markets a bit, but this is definitely not the statement that could reverse the tendency. It means that we should treat it just as pullback, but not the major reversal and set targets correspondingly.

On daily chart price stands around 1.1990 resistance where we could get minor pullback:
eur_d_18_03_21.png


Since this is just a pullback, we're mostly dealing with AB-CD pattern that has 2 targets. Both of them create Agreements with corresponding major resistance levels:
eur_4h_18_03_21.png


Thus, if you already have long position - this is great, you could move stops to breakeven. Others, who have decided to not trade through the Fed doom&gloom now could consider 1.1930 K-area for entry with stops below "C", as this is invalidation point of the whole construction:

eur_1h_18_03_21.png
 

Sive Morten

Special Consultant to the FPA
Messages
14,742
Morning everybody,

After the Fed action slows significantly. Today we take a look as on GBP as on EUR. On GBP price performance is not quite bullish, market is forming daily triangle pattern with bearish grabber on top. And until grabber is valid - it would be better to not consider any long positions. The one way how it is possible to play is to use Stop "Buy" order above grabber's top:

gbp_d_19_03_21.png


On 4H chart market stands in the same range where it was last week, when we've traded first swing down. The shape of H&S pattern inside looks week as well, and not reliable. Price was not able to break rectangle resistance and pulled back, which should not happen with H&S normally:
gbp_4h_19_03_21.png


If you have bearish view - it is possible to use daily grabber, which is very simple as we know where is vital point of the pattern.

On EUR situation is similar. Market upsets fast in recent upside action. Price has dropped below our K-area recently but it still keeps valid bullish patterns:
eur_1h_19_03_21.png


So, we have an option either out on breakeven as price now returns back to broken K-area or keep it right to the end, as 4H time frame patterns still has some theoretical chances to work. You could choose what you like more:
eur_4h_19_03_21.png
 
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