Forex FOREX PRO WEEKLY, March 29 - 02, 2021

Sive Morten

Special Consultant to the FPA
Messages
14,702
Fundamentals

So, this week we've got few fundamental events that made significant effect on market's sentiment, at least in short-term perspective. We could recall news from EU, concerning lockdown, vaccination problems. Then speech from J. Powell and J. Yellen has followed. Additionally we've got some statistics. Next week also seems to be important as market waits for NFP release.

Market overview

The dollar hit a four-month high on Wednesday as concerns over a third COVID-19 wave in Europe, potential U.S. tax hikes and escalating tensions between the West and China sapped risk appetite.

The gauge “looks determined to test the top end of a new, higher 91-93 range we think will form in coming weeks,” Westpac strategists wrote in a client note, adding that extended lockdowns in Europe have sapped confidence in an economic rebound. “Meanwhile, the U.S. will have an impressive rebound in coming months amid a strong vaccine roll-out, stimulus payments and economic reopenings,” they said.

The index that measures the greenback’s strength against a basket of peer currencies is up nearly 3% year-to-date, confounding widely held expectations among analysts for a decline. Strategists at BCA Research said they believe the U.S. dollar is experiencing a “countertrend rally within a bear market.”

“Over the near-term, the dollar benefits from two supports. First, the U.S. growth will outperform thanks to generous fiscal policy and the country’s lead in vaccinations. Second, the NASDAQ and other highflying global equities have been correcting since February, creating some risk-off undertones that help the countercyclical greenback. However, real interest rate differentials will ultimately determine the currency’s cyclical outlook. The Fed’s commitment to maintaining an accommodative policy will cap upside to US real rates at the short-end of the curve. This will prevent a sharp appreciation in the dollar.

The euro hit a four-month low of $1.1812 after Germany extended a lockdown and urged its citizens to stay at home during the Easter holiday.

Worries over the pace of the pandemic recovery were heightened after a U.S. health agency said the AstraZeneca Plc vaccine may have included outdated information in its data. The flight to safety received an additional nudge when Treasury Secretary Janet Yellen told lawmakers that future tax hikes will be needed to pay for infrastructure projects and other public investments.

Yellen was testifying to the House Financial Services Committee along with Federal Reserve Chair Jerome Powell, who reiterated that an expected near-term spike in inflation will be transitory. That helped tame U.S. Treasury yields, with the benchmark sinking below 1.6% on Wednesday for the first time in a week, as it continued its retreat from a more than one-year high of 1.7540% touched last week.

Human rights sanctions on China imposed by the United States, Europe and Britain, which prompted retaliatory sanctions from Beijing, are adding to market concerns.

Seasonal factors are likely exacerbating currency moves, as some investors lock in profits ahead of the quarter-end and the holidays of Easter and Passover, according to Masafumi Yamamoto, chief currency strategist at Mizuho Securities. The main scenario for the market, that the global economy is recovering from the pandemic shock, is intact,” he said. We may see more of a correction into the start of April, but after that I expect a restarting of a risk-on trade,” with commodity currencies of advanced economies benefitting most, he said.

Euro zone business activity unexpectedly grew this month, a preliminary survey showed, but with much of Europe suffering a third wave of coronavirus infections and renewed lockdown measures, that may not last through April. Factories ramped up output at the fastest monthly pace in over 23 years, countering a continuing slowdown in the dominant services industry, which is more vulnerable to lockdowns and the region’s slow vaccine rollout.

IHS Markit’s flash composite PMI, seen as a good guide to economic health, climbed above the 50 mark separating growth from contraction, to 52.5 in March compared with February’s 48.8, its highest since late 2018.

The dollar hit a fresh four-month high against the euro on Thursday as the U.S. pandemic response continued to outpace Europe's, which has been hobbled by extended lockdowns and delayed vaccine rollouts. The safe-haven greenback held on to most of a broad two-day advance, which has been fuelled by worries ranging from Europe's third COVID-19 wave and potential U.S. tax hikes to the persistent spectre of inflation.

Even Germany's reversal of a call for a strict lockdown over the Easter period did little to build confidence in the region's economic outlook, instead compounding discontent with Chancellor Angela Merkel's handling of the pandemic.

"The weak point in Europe remains around the vaccine rollout amid the rise in new virus cases and the tightening of restrictions ... which likely means the mooted acceleration in Q2 may have to be pushed back by a quarter," Tapas Strickland, director of economics and markets at National Australian Bank, wrote in a client note.
The narrative of the U.S. outperforming Europe in the coming quarter remains."


Meanwhile, benchmark 10-year Treasury yields consolidated around 1.6%, a week after hitting a more than one-year top of 1.754%, which had also supported the dollar.

"The U.S. longer-term Treasury yield is lower than the previous week’s level, and that is a very big factor for the improvement in market sentiment," said Minori Uchida, chief currency analyst at MUFG Bank. Even if the yield is 1.6 or 1.7%, it is not enough to push up the dollar constantly."

Treasury volatility has dropped this week as buyers stepped back into the market, bringing benchmark yields back below the one-year high of 1.754% reached last week.

“As that volatility began to flatline a bit, I think we started to see some incremental demand,” said Jonathan Cohn, an interest rate strategist at Credit Suisse in New York. The vast majority of that came during Asia trading hours, which to me suggested potentially some renewed buying from those foreign investors that had previously been sidelined amid the relentless sell-off in the high-vol environment,” Cohn said.

Demand for bonds as investors sell equities and rotate into fixed income for quarter-end is seen as supporting bonds this week and early next week. Many analysts expect Treasury yields to keep rising if economic data begins to meet expectations of strong growth and with inflation expected to jump relative to last year, when price pressures dropped as businesses shut down to fight the pandemic.

“Ultimately in the medium-term we expect yields to continue to rise against a very supportive fiscal backdrop,” said Cohn. Data on Friday showed U.S. consumer spending fell in February by the most in 10 months, as a cold snap gripped many parts of the country and the boost from a second round of stimulus checks to middle- and lower-income households faded.

The consumer spending decline should be temporary. U.S. President Joe Biden will unveil a multitrillion-dollar plan to rebuild America's infrastructure next week, though that should take awhile to boost the economy. Philadelphia Fed President Patrick Harker said the central bank will continue to support the U.S. economy until it recovers from the pandemic and he is not worried about inflation.

U.S. Treasury Secretary Janet Yellen and Federal Reserve Chair Jerome Powell expressed their confidence in the U.S. recovery during a second day of testimony to
Congress. Yellen told Senate lawmakers she was open to banks buying back stock and paying dividends, an updated view showing her confidence in the economy. Powell also said he thinks 2021 will be a "very, very strong year in the most likely case."

in EU concerns have been magnified because the third wave of infections is being largely driven by the U.K. strain of the virus, according to Commonwealth Bank of Australia strategist Kim Mundy.

"The risk is that the more contagious and deadly strain of the virus elicits a stronger response from European governments, which sees Europe remaining locked down for longer," she wrote in a note. A significant delay to Europe's re-opening efforts will only widen the divergence between the economic outlook in Europe
and the U.S
.," putting additional pressure on the euro, she said.

“The dollar is set to rise further, our vaccine rollout is coming along,” said Ronald Simpson, managing director, global currency analysis, at Action Economics. “Europe is sucking wind on the vaccine front.”


The dollar traded near multi-month highs against most major currencies on Friday, supported by a wave of optimism over improving U.S. economic data, the rollout of coronavirus vaccines, and rising Treasury yields.

The greenback has more room to rise against the euro, but its gains against other currencies in the past few weeks have been so rapid that some analysts are warning against chasing the dollar higher from current levels.

"The euro has broken through the 200-day moving average, and that is a clear sign that it will continue to go lower," said Minori Uchida, head of global markets research at MUFG Bank in Tokyo. The yen is getting strong on some of the crosses, which will cap dollar/yen. Yields have supported the dollar, but this move could start to run out of steam."

U.S. jobless claims fell to a one-year low last week an President Joe Biden said he will double his vaccination rollout plan after reaching his previous goal of 100 million shots 42 days ahead of schedule, both of which support optimism in the dollar.

"The dollar has made quite a bit of a comeback so far this year. Many have been reconsidering the bearish sentiment that’s been around the dollar since the middle of last year," said Minh Trang, senior foreign exchange trader at Silicon Valley Bank. "Markets are basically expecting that the success of vaccine rollout will lead to higher inflation, and force the Fed to reconsider, and rates will have to move up sooner than what is being projected. That’s translating to the currency market."

In a fillip for the euro, business morale in the euro zone's biggest economy Germany hit its highest level in almost two years in March as rising demand for manufactured goods kept factories humming through rising coronavirus infections and lockdown restrictions.

COT Report

This week we do not have as drastic changes in sentiment as in two previous weeks. Although long speculative positions have been closed on a background of rising open interest, but its value was relatively small. While speculators were closing positions - hedgers were doing the opposite, and in both directions.

1616832308133.png


As a result - total position has not changed too much. Still, overall downside tendency here holds and comes from September 2020. Indeed, market could just make some preparation to the quarter end.

1616832389540.png

Source: cftc.gov
Charting by Investing.com



Next week to watch

GOODBYE, Q1

A new U.S. president, the selection of the candidate who might be Germany’s next leader, a $1.7 trillion rise in the value of global equities, amateur traders taking on seasoned hedge funds and digital art selling for millions of dollars.

It’s been an eventful quarter. Brent crude and copper are top performers with respective gains of around 20% and 15%; the commodity-heavy FTSE stocks index is up 4%. Wall Street’s 2020 winners, the FAANG stocks, are barely in the black.

Bonds, hurt by reflation, bring up the rear. U.S. and German government bonds have lost 5%-6%; emerging currency debt holders are down 6.5%.

Yet even with almost half a billion vaccine doses administered globally, markets are ending March with a whimper. That’s because of renewed China-U.S. tensions, higher bond yields, a COVID-19 resurgence and a massive tanker stranded in the Suez Canal that may deal a blow to world trade. The coming quarter will be interesting too.

HOW MANY JOBS?

Friday’s U.S. jobs data will show whether the labour market is getting stronger. In February, the economy created a forecast-beating 379,000 jobs as a decline in new infections and additional pandemic relief boosted hiring. Analysts expect 500,000 jobs were created in March, the largest monthly gain in five months.

The number of Americans filing new claims for unemployment benefits hit a one-year low last week, a powerful boost to an economy on the verge of stronger growth thanks to a $1.9 trillion stimulus package and rapid vaccine rollout.

1616832855843.png



TUG OF WAR

Oil producers’ group OPEC and its allies convene on Thursday and, for now, they are expected to stick with production cuts agreed at the last meeting.

Renewed lockdowns and rising coronavirus caseloads have pushed Brent crude off recent highs above $71. But the 400-metre container ship aground in the Suez Canal could well cause a supply squeeze if tug boats trying to free it fail to do so in coming days.

As of now, OPEC+ supply curbs of about 7 million barrels per day, plus Saudi Arabia’s additional one million bpd cut, should remain in place.

The United Arab Emirates’ energy minister says OPEC+ is unlikely to pump more oil than markets can handle. Another reason for caution is rising Iranian oil exports, which have also weighed on prices.

1616832927192.png



So, the chief analysts of big companies and banks have explained everything in commentaries well. Taking everything in consideration - interest rates, EU situation and driving factors for US Dollar rally, it seems that most conservative view - keeping of the same tendency within 1-2 weeks, while later it could start fading. As it was said above - bond buyers are gradually stepping in, which caps the upside potential of US Dollar in medium-term perspective. Despite negative sentiment around EU - its economy sentiment indicators show positive mood. So, conservative outlook suggests further EUR/USD drop within 1-2 weeks but then situation could change. This is, by the way, perfectly matches to our technical view.

Ultimate scenario suggests the new cycle and supposes that interest rates rally and dollar appreciation should last, making Fed to change rhetoric near the summer. It means that although we could get pause in downside tendency, but it should be temporal, with keeping major downside EUR tendency intact. This scenario stands in tight relation
to analysis that we've made last week and "taper tandrum" Fed strategy in particular. We need more time to understand whether this strategy takes place indeed. Because currently, the first splash in interest rates could be just a result of first activity boost after long-term silence. In fact - this is the factor that needs to be checked. If overall activity remains high and companies capacity from incremental becomes regular at high levels - this scenario could become primary.

Although these scenarios are different, but they are different in longer-term perspective, while they coincide in short-term one. Thus, currently we do not need to choose between them and we still aimed on our 1.16 target that agrees with both scenarios in perspective of coming week.


Technicals

Monthly

Technically, context remains bullish by far on monthly chart but EUR is coming to vital 1.16 area, and it seems that it should reach it. Fundamental reasons we've discussed above while technically March black candle has moderate pace that stands more in favor of downside continuation rather than reversal. While in reaching 1.16 level it is nothing criminal, problems might appear if EUR breaks it down, because it destroys normal bullish market mechanics.

The reason for that is previous retracement that was reaction on COP target, now theoretically, EUR should stay in extension to next, OP target. If it turns to retracement, forms reversal swing and drops below 1.16 - this is bearish sign that should not happen at supposedly bullish market. Besides, 1.16 is YPP and drop below it also indicates sentiment shift.

At the same time 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 for some time.

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_29_03_21.png


Weekly

As we've said last week - "other signs here (beyond support) are not friendly to EUR, which makes us to treat any upside action as retracement by far."

Indeed, reaction on K-area was light and market breaks through it already. Now it seems that price action is mostly stopped by oversold area. Since CD leg shows acceleration, and fundamental background agrees with downside continuation, our primary target here is 1.16 level of XOP and Agreement with major Fib support area. Besides, in longer perspective we keep watching for H&S pattern here.
eur_w_29_03_21.png


Daily

Here situation barely has changed since Friday as we've got inside session. Our trading plan suggests that any moderate pullback we try to use for short entry, following our trading plan and "sell the rally" approach, until market is going to 1.16. Around 1.16 we intend to consider long entry as EUR could start significant upside bounce, trying to form the right arm of weekly H&S pattern:

eur_d_29_03_21.png


Intraday

Here we also have Friday's trading plan intact. EUR has butterfly target ahead and it has not been hit yet. Flag pattern that has been formed recently is not the rally that we're waiting for. This is more the continuation pattern. It means that our suggestion on reaching butterfly target before pullback starts is still valid:
eur_4h_29_03_21.png


We also keep an eye on possible DRPO "Buy" that could start as soon as target will be reached:
eur_4h1_29_03_21.png


Thus, few setups stand in the pipe. For daily chart - we're just waiting for resistance to sell the rally. Approximately it should around 1.1850 and 1.19 K-area. Second - scalp traders could consider long position once butterfly target hits and DRPO "Buy" is confirmed.
 

RahmanSL

Major
Messages
2,821
Hi Sive...excellent reporting and analysis.


Yes, the USA has more going for them in their pandemic & economic recovery while judging by the haphazard way that vaccine roll-out and economic recovery in the EU and Britain seems to be either being run by or is being advised by that 45th one-term-twice-impeached-disgraced president.

All all those geopolitical issues you highlighted are very worrisome indeed as that create much uncertainties & anxieties to the world. BUT, like they say, even in the worst of times, opportunities exist for those who dare.

All the best, continue to stay safe, and wishing you fantastic trading times ahead.
 

Sive Morten

Special Consultant to the FPA
Messages
14,702
Morning everybody,

EUR keeps well our trading plan by far, forming the new low and completes butterfly 1.618 target. Currently we hope that we get some upside reaction as our strategy now is to sell the rally around Fib resistance levels. At the same time, daily chart shows that EUR could just keep dropping as no solid levels or oversold stand below:
eur_d_30_03_21.png


On 4H chart, action is slowing which is good for pullback, butterfly target is reached and price could form even grabber on the bottom:
eur_4h_30_03_21.png


Here we also are watching for DRPO "Buy". On lower time frames, you also could find the minor butterfly and bullish divergence. In fact, market has to either turn up right from here, or it will be just downside continuation. So, if you intend to buy - it is not necessary to hide stop too far. In fact, there are few options we have for long entry - either to buy right around 1.1735 bottom with higher risk, or just wait for DRPO confirmation. In this case risk will be smaller but price level is worse as well...
eur_4h1_30_03_21.png
 

Sive Morten

Special Consultant to the FPA
Messages
14,702
Good morning,

EUR has dropped a bit more recently, ignoring butterfly target and erasing potential DRPO "Buy" pattern. Now we see some upside reaction but this is not reaction on the target - this is just effect of weekly oversold. We still keep in mind chances to go short if any pullback happens, but to be honest, as we're coming closer to 1.16 - chances to get this trade are tending to zero. Of course, NFP could bring surprises on Friday, but now it seems that on daily chart we mostly should start thinking about long entry around 1.16 major support:
eur_d_31_03_21.png


Recent upside reaction on oversold last week was very small. As price is not at support and ignores any intraday targets - this time reaction supposedly will be the same. I'm no sure that EUR could reach even nearest resistance level.
eur_4h_31_03_21.png


Scalp traders also have poor context for trading - just weekly oversold and this channel support on 1H chart. No patterns, which not sufficient to go long, especially when market ignores all intraday support areas.
eur_1h_31_03_21.png


That's being said - on daily we mostly wait for 1.16 to Buy, no reliable setups on intraday charts by far. We could consider bearish trades as well, but only if EUR hits 4H resistance levels.
 

Sive Morten

Special Consultant to the FPA
Messages
14,702
Morning everybody,

Today we talk about GBP as on EUR everything is mostly the same. So, it is no need to change our plan. On GBP our decision was to sell around strong intraday resistance areas, hoping that price completes daily OP around 1.35 area:
gbp_d_01_04_21.png


In fact, the chance to sell already have been formed couple days ago, but we suppose that we will get another one. Intraday performance hints on another upward swing in nearest time. The reason why we think so stands twofold. First is - price is forming triangle consolidation mostly, instead of sharp reversal. This is not the way how market turns to daily target. It mostly reminds consolidation before another upside effort. Second - we've almost got bullish grabber on 4H chart, that suggests another swing up. As a result, potentially we could get better setup for short entry a bit later that consists of upside AB-CD, which gives us "222" Sell on daily chart around 4H K-resistance and - take a look, it is easy imagine upside butterfly here with the same target:
gbp_4h_01_04_21.png


Thus, if you want to go short on daily chart - wait for upside action to K-area. For scalp traders it is possible to consider long entry, with stop relation to either grabber or "C" lows, as it is invalidation point as for butterfly as for AB-CD pattern.
 

Sive Morten

Special Consultant to the FPA
Messages
14,702
Morning everybody,

Today volatility could be more significant as Good Friday is a holiday in Europe while US should release NFP data. EUR finally is showing some bounce, reaching 1st intraday resistance area. But, since we've got morning star pattern here - it could go a bit higher.

At the same time, NFP could bring drastic adjustments and lead to appearing of bearish grabber here. In this case downside action could continue immediately:
eur_d_02_04_21.png


In the case, if we still become right, and Morning star works properly - our major level to watch is K-resistance area around 1.1860:
eur_4h_02_04_21.png


Besides, it also could become an OP target of AB-CD pattern on 1H chart:
eur_1h_02_04_21.png


That's being said - conservative approach is to do nothing and keep an eye on 1.1860. Alternatively, it is possible to split position and prepare for possible immediate reversal due super positive NFP release. Personally, I do not like to trade major events and prefer to act when all information is available. But this is personal and up to you.

Our GBP setup is done well and market almost has reached OP. So, also think what you intend to do with long position that we've taken yesterday.
 
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