Forex FOREX PRO WEEKLY, May 02 - 06, 2022

Sive Morten

Special Consultant to the FPA

Despite that this week we've got some important data, investors' focus more and more turns to global shifts in EU and the US economies. Although markets prepare to coming Fed meeting and NFP report, even the brief look over headlines this week, it becomes evident. It means two things. First is, it supports the importance and scale of ongoing processes. Second - confirms our fundamental view.

Market overview

The dollar's race to two-decade highs is leaving a trail of destruction in its wake, exacerbating inflation in other countries and tightening financial conditions just as the world economy confronts the prospect of a slowdown in growth. This year's 8% gain against a basket of currencies is driven partly by bets that the U.S. Federal Reserve will raise interest rates faster and further than other developed countries, and partly by its status as a safe haven in times of turbulence.

It is also supported by Japan's reluctance to ditch its super-easy policies, and fears of recession in Europe. Here are some areas affected by the dollar's muscle-flexing. Except Russian Ruble and Brazil Real that rise against USD:

Source: Spydell finance

Currency weakness normally benefits export-reliant Europe and Japan, but the equation may not hold when inflation is high and rising. Euro zone inflation hit a record 7.5% this month, although so far European Central Bank policymakers blame it mainly on energy prices. Bank of Japan boss Haruhiko Kuroda still views yen weakness as a positive for Japan, but lawmakers fret that the yen, at 20-year lows, will inflict damage via costlier food and fuel. Half of Japanese firms expect higher costs to hurt earnings, a survey found.

A rising U.S. dollar tends to tighten financial conditions, which reflect the availability of funding. Goldman Sachs estimates that a 100 bps tightening in its widely used proprietary Financial Conditions Index (FCI) crimps growth by one percentage point in the following year. The FCI, which factors in the impact of the trade-weighted dollar, shows global conditions at their tightest since 2009. The FCI has tightened by 120 basis points in April alone, as the dollar has strengthened 5%.

The U.S. FCI is at its tightest since July 2020.

"It has got to be concerning, given everything else that's going on. This is just the time you don't want too much tightening of conditions," said Justin Onuekwusi, portfolio manager at Legal & General Investment Management.


The rule of thumb is that a firmer greenback makes dollar-denominated commodities costlier for consumers who use other currencies, eventually subduing demand and prices. This year, however, tight supplies of major commodities have prevented that equation from kicking in as the war has hit exports of oil, grain, metals and fertiliser, keeping prices elevated.

"When you see what's happening in Eastern Europe, it swamps anything the dollar is doing," LGIM's Onuekwusi said.

The Fed might welcome a rising greenback that calms imported inflation -- Societe Generale estimates a 10% dollar appreciation causes U.S. consumer inflation to decline by 0.5 percentage points over a year. If dollar gains continue, the Fed won't need to tighten monetary policy as aggressively as anticipated; notably, the dollar surge of the past week has also seen money market bets on Fed rate hikes stabilise.

BMO Markets' analyst Stephen Gallo says if the Fed's trade-weighted dollar index were to break above pandemic-time highs -- it is currently 2% below that level --
"that might be something that would be enough to cause the Fed to deliver a less-hawkish hike next week. That might well mark the top for the dollar, he added.

The U.S. economy unexpectedly (???) contracted in the first quarter amid a resurgence in COVID-19 cases and drop in pandemic relief money from the government, but the decline in output is misleading as domestic demand remained strong. The first decrease in gross domestic product since the short and sharp pandemic recession nearly two years ago, reported by the Commerce Department on Thursday, was mostly driven by a wider trade deficit as imports surged, and a slowdown in the pace of inventory accumulation.

Gross domestic product fell at a 1.4% annualized rate last quarter, the government said in its advance GDP estimate. The economy also took a hit from supply-chain challenges, worker shortages and rampant inflation. Front-loading by businesses fearful of shortages because of the war contributed to a surge in imports. Exports tumbled, leading to a sharp widening of the trade deficit, which chopped 3.20 percentage points from GDP growth, the most since the third quarter of 2020. Trade has now been a drag on growth for seven straight quarters.

Businesses have turned to imports to satisfy demand, with local manufacturers lacking the capacity to boost production. Business inventories increased at a $158.7 billion pace, slowing from the robust $193.2 billion rate in the October-December quarter. Inventory investment cut 0.84 percentage point from GDP growth.


Growth in consumer spending, which accounts for more than two-thirds of U.S. economic activity picked up at a rate of 2.7%. Consumer spending last quarter was driven by services. The shift in demand from goods is likely to help ease pressure on supply chains. Consumer spending accounts for over 70% of US GDP – this is the most important category on which long-term trends in the American economy depend.

Real expenses are seriously slowing down from Q2 2021 - 16.2% YoY, 7.1%, 6.9% and 4.7% by Q1 2022. Relative to the pre-war period, i.e. from Q4 2019, consumer spending increased by only 5% in real terms. And this was supported solely by exorbitant state subsidies and cheap loans. Thus, as mentioned, the trend is that goods are going into negative territory, services are accelerating, so inflationary pressure will transform from a commodity segment into services.


Some investors suggest that the US economy shows healthy grow and stands not near the recession or stagflation:

"The U.S. economy is not anywhere close to recession," said Gus Faucher, chief economist at PNC Financial in Pittsburgh, Pennsylvania. "Underlying demand remains strong, and the labor market is in excellent shape. Growth will resume in the second quarter."

But if you take a look at the source of consumption spending rising - you'll see that this is very fragile foundation. Personal savings slump drastically. Now, by the recent data, the personal yearly spending stands around $50K per citizen, while in 1947 it was around just $10K. In order to support current consumption, American households are forced to get into savings The savings rate has fallen to lows in 10 years. But this does not help, because the growth rate of consumption expenditures in real terms is radically decreasing. The attraction of fiscal madness is over, inflation is accelerating. There is not the slightest doubt that by the end of 2022, the pace of spending will go into a deep negative.


The personal consumption expenditures (PCE) price index shot up 0.9% in March, the largest increase since September 2005, after climbing 0.5% in February. In the 12 months through March, the PCE price index jumped 6.6%, the largest gain since January 1982, after rising 6.3% in February. The so-called core PCE price index increased 5.2% year-on-year in March.

Even if inflation has peaked, it could remain uncomfortably high for a while. A separate report from the Labor Department on Friday showed its Employment Cost Index, the broadest measure of labor costs, jumped 1.4% in the first quarter after advancing 1.0% in the October-December period. Labor costs soared 4.5% on a year-on-year basis, the biggest gain since 2001, after increasing 4.0% in the fourth quarter.

The ECI is widely viewed by policymakers as one of the better measures of labor market slack and a predictor of core inflation as it adjusts for composition and job quality changes.

"With compensation costs from an overheated labor market a more persistent source of inflation and more within the Fed's purview, today's report ups the chance for multiple 50 points rate hikes at coming meetings, beginning with next week's meeting," said Sarah House, a senior economist at Wells Fargo in Charlotte, North Carolina.

But high inflation eroded the gains for employees. Inflation-adjusted wages fell 3.6% year-on-year. Benefits jumped 1.8%, the most in 18 years, after increasing 0.9% in the October-December quarter. With inflation wiping out the compensation gains, consumers are tapping into savings to fund their spending, which some said suggested a slowdown in consumption was looming. The saving rate dropped to 6.2%, the lowest since December 2013, from 6.8% in February. Consumers accumulated more than $2 trillion in excess savings during the pandemic.

"Rising prices is eating away at the real value of these savings," said Andrew Hollenhorst, chief U.S. economist at Citigroup in New York. "Real incomes excluding transfer payments are essentially flat over the last six months which implies either wages need to accelerate further or real consumption will continue to slow."


After months focusing on central banks' response to raging inflation, financial markets are being jolted into the realisation that a global economic downturn may now loom. Sentiment dampeners include the Ukraine war, huge rises in energy and metals prices, aggressive central bank policy tightening led by the U.S. Federal Reserve, and China's policy of locking down cities to ward off COVID. The International Monetary Fund and World Bank fanned growth fears further last week when they cut 2022 global forecasts by nearly a full percentage point. Financial analysts too are increasingly pessimistic, with Deutsche Bank seeing an "outright" U.S. recession by end-2023. Omens are flying in thick and fast.

On the data front, U.S. new home sales hitting two-year lows, weakening British and German consumer sentiment and new factory orders all point to slowing growth momentum. The average interest rate on the most popular U.S. home loan rose to its highest level since June 2009 last week and demand for mortgages ebbed as the impact of rising costs began to bite, Mortgage Bankers Association (MBA) data showed on Wednesday.

The average contract rate on a 30-year fixed-rate mortgage increased to 5.37% in the week ended April 22 from 5.20% a week earlier, the MBA survey showed. It has risen 220 basis points from 12 months ago, with most of the rise since the turn of the year as financial markets have reacted to the U.S. Federal Reserve's plans to raise interest rates more swiftly to combat high inflation. The MBA said its Purchase Composite Index, a measure of all mortgage loan applications for purchase of a single family home, fell 7.6% on a seasonally adjusted basis, while the refinance index fell 9%.

European Central Bank policymaker and hawk Robert Holzmann expects an initial interest rate increase this summer or autumn and for rates to rise gradually before settling next year around 1% or 1.5%, he told Austrian broadcaster ORF on Friday.

"I belong to the group that is now in favor of rapid action. That means in summer, maybe in autumn. In addition and if necessary in December," he said. The "equilibrium rate" of around 1% or 1.5% will probably be reached next year, compared to a current deposit rate of -0.5%, he added.

The euro's drop to a five-year low is rekindling the possibility the currency will reach parity versus the dollar for the first time in two decades, as fears of a euro zone recession encourage investors to pile on the bearish bets. Russia's move to cut off gas supplies to Bulgaria and Poland is the latest blow for the currency, already pressured by the twin headwinds of a surging dollar and sweeping COVID-linked lockdowns in China, a major market for bloc exports. Germany and other European countries could be next in line for restrictions on gas.

"The embargo could tip the European economy into recession sooner than later and as a result we are short the euro expecting it to weaken to at least $1.05 in the near term and maybe towards parity," said Kaspar Hense, a senior portfolio manager at Bluebay Asset Management in London.

Data in the euro zone's biggest economy Germany showed consumer morale at a historic low and the government sharply cut its 2022 growth forecasts. A credit default swap index showed the cost of insuring exposure to lower-rated European debt is at its highest in two years, highlighting risks companies face.

More downside is likely, said Vasileios Gkionakis, EMEA head of G10 FX strategy at Citi, adding that "speculative positioning is much cleaner than before, suggesting scope for bigger 'short' accumulation."

Indeed, one-month euro/dollar risk reversals -- a option market gauge of demand for options on a currency rising or falling -- moved sharply on Wednesday to imply more euro weakness. The ratio of call options on the euro compared to puts almost halved on Wednesday from the previous day to minus 1.8, the lowest since early-April. Call options confer the right to buy an asset while puts enable holders to sell.

"Our analysis has shown that flows rather than fundamentals may have been the key driver behind the euro’s drop over the last week as around two-thirds of the decline was focused around the fixings," said Alexander Jekov, an FX strategist at BNP Paribas in London. "On our fair value estimates, euro-dollar's fair value stands at 1.11 which is close to the biggest valuation discount to the spot market since the launch of our model more than a decade ago," Jekov said.

The past week may point to a bumpier ride ahead, with analysts noting an unexpected, nearly $500 billion shift in the Fed's balance sheet driven by factors beyond its control and volatility in stock and bond markets as signs the central bank's pivot to tighter monetary policy may not run so smoothly. In particular, a nearly 9% drop in the S&P 500 index over the past month may show a coming hit to household wealth that quickly translates into lower consumer spending, said Steven Blitz, chief U.S. economist at TS Lombard. He noted that changes in asset prices are a key and perhaps increasingly important way monetary policy can influence economic activity and inflation.

"The tie between consumer spending and equity market performance has grown tighter over the years," Blitz said, as more households invest and holdings increase among the age groups most likely to buy higher-priced durable goods. If markets continue to weaken, consumers will "sharply contract spending by the end of this year, possibly sooner," he said. "This economy needs a 'buyers strike' to flip into recession, and weak enough equities could stress household balance sheets enough to set one off."

COT Report

Recent CFTC data shows clear bearish tendency in sentiment on EUR. Open interest is up for 26K+ contracts while bears have increased positions significantly.
Speculators' net long positioning on the U.S. dollar rose in the latest week as well, according to calculations by Reuters and U.S. Commodity Futures Trading Commission data released on Friday. The value of the net long dollar position climbed to $13.92 billion for the week ended April 26, from $12.91 billion the previous week. This week's U.S. dollar net long positioning was the largest since early April, and the first increase in four weeks.


Next Week to watch

Some big beasts of the central banking world take centre stage over the coming week, with the U.S. Federal Reserve, the Bank of England and the Reserve Bank of Australia holding policy meetings.

#1 the Fed
Increasingly hawkish Fed rhetoric has sparked nasty sell-offs in stock and bond markets, and on Wednesday we will see just how aggressive the central bank plans to get over coming months. The Fed has flagged a 50 basis-point interest rate rise on May 4, and investors expect a hefty 240 bps of monetary tightening in 2022. Many reckon the Fed will continue to surprise on the hawkish side, as it fights to tamp down the worst inflation in four decades.

Markets will also focus on the Fed's plans for its nearly $9 trillion balance sheet, which it could start unwinding as early as May

#2 BoE

The Bank of England's meeting, a day after the Fed, is tipped to lift interest rates for a fourth time in a row, the first time it would have done that since 1997.
BoE boss Andrew Bailey says the bank is treading a "very tight line" between curbing inflation, which at 7% is more than three times its target, and avoiding a recession. A quarter point hike to 1% would meet a precondition for the BoE to start actively selling bonds it holds. A big question for markets is when these sales will start; estimates range from June to well into 2023. Active bond sales would tighten monetary conditions but could hurt a faltering economy and no major central bank has yet started the process.

#3 China and Australia

The yuan, down 4% this month, may have further to fall if weekend data shows Chinese factory activity still weakening. China's slowdown has also applied a discount at the quarry - pushing the Aussie dollar down some 4.5% through April. With recent data showing Australian first-quarter inflation at 20-year highs, anticipation is building that a hiking cycle could begin as soon as Tuesday.


To be continued in the next post...

Sive Morten

Special Consultant to the FPA

The information above accurately confirms our long term view on ongoing processes as in the US as in EU. The only adjustment that we probably should make is amount of money that the US should get from EU and other countries. It seems that they tend to be smaller. The major reason is a fast decay of current account surplus of EU and Japan because of double impact from rising commodities prices and devaluation of national currencies, especially JPY. First source is already closed as QE programme is finished in March.

JPY is and always was one of the major source of capital delivery to the US. The yen crashed by 20% over the year. The current account in Japan has already been practically reset at the end of 2021 – a total of $ 15 billion plus against the "norm" of 45-50 billion in the period from 2015 to 2020.

At the same time, the trade balance of goods and services at the end of 2021 went into negative territory by $ 15 billion. The main reason is expensive raw materials. For example, in 2019, raw materials occupied about 38% of the structure of imports of goods, in 2022 raw materials can reach 80-85% in the structure of imports.

The key raw materials that Japan imports have risen in price in the first 4 months of 2022 relative to 2021 by about 80% in dollars, and the revaluation in yen by 20%. There is no doubt that the current account will go far into the negative.

Why is this important? Japan is the absolute leader in the supply of financial capital to the United States, both direct and portfolio investments. The source of supply is the current account. Also, when the yen falls, the Japanese usually repatriate foreign assets back to Japan, the carry trade of non-residents is curtailed. The USA will be very hurt and bad without Japan.

There is an important nuance with the latest trends in the dollar, where the strongest strengthening of the dollar has been observed for 10-12 years against the background of the tightening of the Fed's policy and the global curtailment of risk operations.

Dramatic increase in costs for US donor countries. Over 80% of net inflow foreign capital in US securities comes from the UK, the Eurozone, Japan, Korea and Taiwan, and related offshore companies. We've considered Japan above.

All these countries are net importers of raw materials, whose prices have reached a historic high with the strongest price momentum in history for the first 4 months of 2022 for a wide sample of goods. Everything is getting more expensive: oil, gas, coal, all kinds of metals, fertilizers, agricultural products and so on. The extreme growth of the dollar relative to all major currencies is added to the rise in commodity prices, and the dollar's growth is the strongest in 10-12 years. This is a double cost.

Devaluation might provide positive effect to economy, but it needs time to restructure domestic economy and logistics. It means that raw material prices has more chances to destroy the Eurozone, Japan, Korea before their companies "feel" the effect of devaluation on their own production cluster.

Therefore, the second quarter is promised to be just killing to trade balances. The Eurozone and Japan could care this as they have a margin of safety. The United States, which has a record double deficit – the state budget plus the current account, will not survive. All this time in 2020-2021, these gaps were closed by the Fed and non-residents.

In the current conditions, the deteriorating of the positive balances should accelerate, whereas in the US the trend is reversed – deficits are only expanding. But since May they still want to reduce QE by 90-100 billion dollars a month. It might be the "road to hell" for global financial markets and Friday's 3.5% drop in the S&P 500 to annual lows might be the starting point.

Once the oversea capital flows dry, the performance of the US dollar changes, as background of interests rising changes from external demand to natural US Dollar devaluation, lost of attractiveness and purchase power and becomes a reflection of rising default risk. Supposedly we have 2-3 months until this happens, and EUR could change the trend.

But geopolitics now comes at first stage. Fed Reserve obviously sees the same things that we discuss now. The US comes to November elections, and they could involve ultimate measures to keep dollar on the surface, score points off EUR, by green lighting of more escalation in Eastern Europe. In this case, this process of Dollar devaluation could be delayed for longer term.


With the recent pace of performance, we have to wide the picture and take a look at more history. In short-term, reaching of OP at 1.0430 brings no questions, as well as possible tactical bounce out from it during the next week.

Further perspective looks different. As we consider only technical factors here, definitely market has to go below OP, because of faster CD leg and acceleration to OP target. Ultimately, we see 0.9 target - because of butterfly extension and XOP (red) target.

Here we also have all-time blue XOP that stands right in the same area. The problem here that price is already passed the OP and stands in extension to XOP. Still, the reaching of 0.9 area is not predefined yet. It might happen in a case of further geopolitical escalation in Europe.

Now it is better to consider the 1.27 butterfly extension as the next possible target around 0.97-0.98 area.
But this is still the long road to go.

In near term, EUR has oversold level around the parity, as well as 1.025 previous lows area. Thus, we expect high volatility in attempt of breakout. On coming week price should keep flirting around 1.0430 target, hopefully it will be hit finally.


Here we do not see anything useful for direct trading. The most important thing here is oversold. It means that most probable floor for coming week will be around 1.0430 area. The shape of pullback is uncertain from here. On the daily chart the same story - market is oversold but no clear patterns are formed yet.


On 4H chart we have nice thrust. As we suggest that 1.0430 level should be hit before reversal, it is logical to keep an eye on possible DRPO "Buy" here:

While on the 1H chart the reversal process could take the shape of the butterfly:

That's, at least, our preparation to coming week. Let's see what happens in reality...

Sive Morten

Special Consultant to the FPA
Good morning,

Market shows tight consolidation around 1.05 area without solid activity by far, supposedly preparing to Fed statement. Although it is more or less clear with the pace of interest rate change - some degree of freedom remains around QT speed. Market expects that it should announced around 90 Bln per month, but due recent statistics we expect more hawkish Fed statement and suggest that the pace of bond selling might be increased, which should push EUR lower:

This is the reason, why we do not consider any bullish scenarios until market completes major monthly 1.0430 OP target. On 1H chart our butterfly is loosing shape a bit, although we still use the extension target. Additionally we have local AB-CD with the XOP at the same area:

That's being said - bears could hold positions while bulls should wait the moment of 1.0430 completion at least, and market reaction before taking any positions.

Sive Morten

Special Consultant to the FPA
Morning everybody,

So, market stands tight around the lows, and with yesterday's attempt of upside action - the pennant shape becomes even more evident. The same patterns we see on interest rates and DXY:

On 4H chart it seems we could talk about DRPO "Failure" pattern:

While on 1H chart we could re-shape and draw again the butterfly pattern:

For bearish position stops have to be placed above "A" point, so it makes risk/reward ratio close to "1" and provides no obvious advantage. Speaking about long position, if you still would like to take it - we suggest at least to wait when 1.0430 target will be reached, before buying EUR.

Sive Morten

Special Consultant to the FPA
Morning guys,

So, we thought that Fed tells the truth to the investors, but they decided to postone it on later time. Announced QT pace is slower as they intend to start with just 45B bonds selling and rise it to the 90B only to September. JP once again argued on strong consumption but in recent report we've shown what this consumption is based on. People are loosing their savings.
Now, we the Fed move - be prepared for another spike in mortgage rates that triggers the cyclical effect on consumption again and so on.
Anyway, as theoretically statement was a bit dovish and we were wrong in our suggestion, the upside pullback might be a bit stronger. Although we do not think that major trend has some risks to be broken.

In fact, our pennant shifts to the flag by far, remaining bearish:

On 4H chart we have butterfly and AB-CD pattern and market now stands at first target cluster of 1.27 extension and OP. Since we have the acceleration and reversal bar here - chances on upside continuation exist. So EUR should try tod-tom to complete 1.618 butterfly target, at least, and maybe XOP as well.

So, if you intend to take short position, we suggest to wait a bit more, maybe even till the next week, as tomorrow we get NFP as well:

As we also have "222" Sell right now, bulls could consider 1.0560 K-support, which seems suitable for entry in a case of upside continuation. Stop supposedly might be placed just under reversal bar lows.

Sive Morten

Special Consultant to the FPA
Morning everybody,

So, music plays not too long. Despite soft Fed comments, many banks and RBA in particular, start massively revising as inflation forecasts and EUR target. Opinions are differ, but the bulk of analysts suggest further EUR depreciation.

Concerning technical picture - rates are keep rising and already stand around 3.05%, on EUR and DXY we've got the bearish grabber, suggesting further action, which agrees to our plan for the week:

On 4H chart reversal was rather sharp and even strong Fed impulse hasn't helped to make the pullback slightly higher. Market has turned down at the resistance, OP and butterfly targets that we've discussed yesterday:

Now we do not consider any long positions, even intraday, suggesting that market has to hit 1.0430 target first. Although we're not sure that we get the pullback there as well, but, at least, that should be some support and chances for the pullback there stand higher.

Right now we could get chance for another short entry. On 1H chart potentially we could get the grabber. That could give EUR the chance to form "222" Sell pattern here around 1.0560 area, if, say, NFP data will be slightly lower or whatever.

Anyway, if you search chance to go short, it might be not bad setup. In a case of downside breakout - it is nothing to do, as market is tending to major target, and it would be better to consider new short entry on a pullback out from it on next week, probably: