Forex FOREX PRO WEEKLY, May 08 - 12, 2023

Sive Morten

Special Consultant to the FPA
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Fundamentals

This week we've got a lot of data, including two central banks meeting and job statistics on Friday. If it is more or less clear with the job report, J. Powell speech raises many questions. Even not about the content of speech but about possible confidence loss in what he is doing. The most repeatable phrase was " we do not have information". It seems that Fed stands at the edge, when its technical economical decisions come very close to become political but it seems that J. Powell has no permition to accept this responsibility and, actually do not want it. This is not good sign for strategic management.

Market overview
The dollar rose on Thursday against the euro after the European Central Bank eased its pace of rate hikes, a day after the Federal Reserve hiked rates by 25 basis points and indicated that it may pause further increases. The ECB’s 25-basis-point increase was the smallest since it started lifting them last summer, but the bank also signalled that more tightening would be needed to tame inflation. The Fed on Wednesday dropped from its policy statement language saying that it "anticipates" further rate increases would be needed.

Market reaction was relatively subdued, however, with the euro and yen failing to break out of recent ranges against the greenback. The single currency has gained against the dollar in recent months as investors bet the dollar’s interest rate advantage over the single currency would continue to decline. But analysts said that much of that expected move may already be priced in, with the next focus likely to be when the U.S. central bank will start cutting rates.

“The monetary policy dynamics are more or less fully priced in here at this point in terms of the tightening cycle, now it’s going to be a focus on the bets on when the Fed starts to ease, how much it eases and how that relates to what (other) central banks are doing,” said Shaun Osborne, chief FX strategist at Scotiabank in Toronto.

Fed funds futures traders are now pricing in a roughly 62% chance the Fed will begin cutting rates by July, according to the CME Group’s FedWatch. Adding to the argument that the Fed will soon begin easing monetary conditions were lingering fears of banking sector turmoil.

Analysts at Morgan Stanley said that "we think the Fed is done hiking rates. But we expect the US dollar to gain," noting that "falling Treasury yields may herald a risk-off trading environment, implying US dollar strength to come." Shorter-dated rates are likely to fall on growing concern about the U.S. banking sector, the analysts said in a report, as money market fund assets continue to grow and banks see more deposit outflows.

The greenback got a brief boost on Thursday after data showed that U.S. Unit labor costs - the price of labor per single unit of output - surged at a 6.3% rate in the first quarter, after increasing at a 3.3% pace in the fourth quarter. It is interesting that Labour productivity simultaneously dropped by 2.7% in 1Q.

"That gave the dollar a bit of a push up because it came in quite a bit higher than expected and it’s not really commensurate with the Fed on hold story," said Osborne.

Economists polled by Reuters expect a 0.4% rise in consumer prices. A sharper-than-expected slowdown could vindicate those betting on rate cuts later this year, giving a further tailwind to risk assets - including an equity rally that has seen the S&P 500 gain 5.8% year-to-date. A strong reading, on the other hand, would support the case for the Fed to keep rates higher for longer and feed into market fears over stagflation - a mix of high inflation and low growth that is detrimental to risk assets.

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Another highly waited statistics is consumer price data for April, due on Wednesday, May 10, that could offer a clearer picture of whether the Fed’s interest rate increases are cooling inflation. A strong number could weigh on a rally that has lifted the S&P 500 nearly 8% this year. April’s survey of global fund managers from BoFA Global Research showed stagflation expectations near historical highs, with 86% saying it will be part of the macroeconomic backdrop in 2024.



The U.S. dollar will remain resilient against most major currencies over the coming months despite expectations of narrowing interest rate differentials, a Reuters poll of foreign exchange strategists predicted. The dollar was forecast to trade around current levels against most major currencies over the next six months, according to the April 28-May 3 Reuters poll of 75 strategists.

Still, Over the next 12 months, the dollar is expected to fall 2.7% and 2.4% against the euro and pound, respectively.

"If short rate expectations are going to drive currency trends, we'll go on seeing the ECB's hawkish stance dominate and there's more upside to EUR/USD...to come," said Kit Juckes, chief FX strategist at Societe Generale.

Easing concerns about the health of the banking system following the orderly failure of three U.S. mid-sized lenders since mid-March suggests inflation remains the key worry given the economy is holding up reasonably well. Most of the optimism around the dollar stems from the view that irrespective of whether the Fed is done with its tightening cycle on Wednesday, it is unlikely to start cutting rates any time soon as some in financial markets are betting.

"It is our view, that these cuts will be priced out in the coming months as the Fed, like many other G10 central banks, struggles to push services inflation lower," said Jane Foley, head of FX strategy at Rabobank. "We also expect the dollar will see further bouts of support in the months ahead from safe-haven demand."

Euro zone inflation accelerated last month but underlying price growth eased unexpectedly. Overall price growth in the 20 nations sharing the euro currency picked up to 7.0% in April from 6.9% a month earlier, Eurostat said on Tuesday, in line with expectations in a Reuters poll of economists. Excluding volatile food and fuel prices, core inflation slowed to 7.3% from 7.5%.
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The central bank's latest poll of 61 large euro zone companies from outside the financial sector may give it some comfort, with companies reporting slower price growth, albeit with differences among sectors. Labour costs were rising, with wages expected to rise by 5% this year -- unchanged from the previous survey round in February. This meant that service providers, which are particularly sensitive to labour costs, continued to anticipate strong price hikes.

Nearly all 26 members of the Governing Council appear to agree that more policy tightening is required after a record 350 basis points of rate increases since July. A key worry is that wage growth is now accelerating above expectations and this will drive up the cost of services, the single largest item in the consumer price basket. Investors see the ECB's 3% deposit rate rising to around 3.75% by the end of the summer.

Economists at UBS expect the benchmark interest rate in the eurozone to peak at 3.75%, while Societe Generale sees it at 4% after the European Central Bank (ECB) signalled more tightening ahead. However, UBS expects a pause after July as it sees inflation declining slowly over the summer.

Goldman Sachs and Bank of America also expect the rate to peak at 3.75%, although BofA sees a "significantly" higher chance of rates hitting 4%. Societe Generale expects three more hikes as it sees the eurozone's core inflation staying elevated without showing convincing signs of weakening until September.

The ECB euro short-term rate (ESTR) September 2023 forward was around 3.6%, implying an ECB deposit rate peak of 3.7% by this summer.

The European Central Bank will stop reinvesting cash from maturing bonds bought under its 3.2 trillion Asset Purchase Programme from July, it said on Thursday, taking another small step towards shrinking its oversized balance sheet. Redemptions fluctuate, but about 148 billion euros' worth of debt held under the APP expires in the second half of the year. That means a halt to reinvestment would see an extra 58 billion euros' worth of maturities on top of the currently scheduled 15 billion euros per month.

At 7.7 trillion euros, the ECB's balance sheet is already more than a trillion euros below its peak size but remains well above its historical average. Thursday's decision does not affect reinvestments in the smaller, 1.7 trillion euro Pandemic Emergency Purchase Programme, which are set to continue until the end of 2024.

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On Friday, NFP showed that employers added 253,000 jobs, beating economists' forecasts for a 180,000 gain. But data for March was also revised lower to show 165,000 jobs added instead of 236,000 as previously reported.

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The unexpected rise in US employment and wages last month increases the chances that the Fed will keep rates high longer and possibly keep the door open for the 11th straight rate hike in June. U.S. average hourly earnings rose at an annual rate of 4.4%, above expectations for a 4.2% increase.

Technical analysts at JPMorgan including Jason Hunter noted on Friday that there are bearish divergences on the daily EUR/USD chart and that the single currency's gains have stalled, but the rally is "not decisively over." The bank said that if the euro sees sustained weakness below the $1.0909 and $1.0831 levels, it would confirm a short-term trend reversal, while a drop below $1.0762 "would imply a more significant trend reversal is in the making."

US BANKING CRISIS
Speaking shortly - it is not resolved and still underway, despite that the Fed, US Treasury together with big banks coup problem banks fast. To be honest guys, by looking at Fed, Treasury reactions, by looking on how fast big banks participate and takeover problem banks, I start to think that this is controlled and well-managed process. Because failed banks are not small at all. They are among top-20. And I start suspecting that it also could have a relation to inner political confrontation, becoming a tool for it.

Recent data shows, that deposits outflows continues. Deposits on a non-seasonally adjusted basis fell in the week ended April 26 to about $17.1 trillion, a drop of about $120 billion from the week earlier. That was the lowest level since June 2021, with deposits now having declined by more than $500 billion from the week before collapsed in March. Meanwhile, total banking system credit has yet to show the contraction many economists and policymakers anticipate to develop after the recent banking system turmoil and aggressive interest rate increases by the Federal Reserve over the past year. We mentioned few more banks that under investors' scrutiny for to fall next, such as WestPac and some others. Run into money market funds continues:
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And actually, this is not unique for the US, but the same tendency starts in Europe. In Germany, Bundesbank data showed households' deposits dropped nearly 8% from a year earlier.
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So, the reason why I think that this is controlled process is an example of JP Morgan deal on FRB takeover. Take a look, The FDIC is ready to take on $13 billion in potential losses. JPMorgan has $900 billion in cash position (that is, free money), so they can buy up half of the banks altogether. We remember that the assets of the banking sector in the US are about 20 trillion. dollars, and the capital is about 10%. And that's for reporting purposes. Unrealized losses there are approx. equal to capital. So JPM can buy all this for zero, and use the cash to add liquidity to them and make them a little healthier. The losses will be borne by the state. Very convenient, right? And we also have GS, Citi, Morgan Stanley, WS etc that could also "participate".

In fact, if there is a bank with a good loan portfolio, which can agree with the regulator to take over other banks on good risk-free conditions, this opens up completely different perspectives. Especially when he conditionally has an unlimited resource in the Fed.

In fact, such a bank can even pick up not only depreciated financial assets in these banks, such as loans or bonds, but also real assets. And do it with free money. Let me remind you that the same JPMorgan deposit rates are still near zero and depositors carry their money to them, escaping problems in small and medium-sized banks. And commercial real estate, even regardless of the decrease in occupancy, fell in price only because of the increase in rates by tens of percent. Why is it bad to pick it up now, if you understand that sooner or later the rate will drop to zero again and only due to inflation this property will add interest per year?

So, I would start talking about the US banking system controlled&managed "centralization" rather than uncontrolled chaotic banking crisis where Fed and US Treasury are trying to fight the fire and plug holes. In latter case, everything was going to be not as smooth as it has happened.

Second is, on a back of this crisis, could stand the priority of narrow-group interests over public ones (trying to tear off a bigger slice while there is an opportunity). While other market participants, and politicians, too, simply refuse to believe in such primitive cannibalism and try to find either a cunning plan or a subtle calculation in the actions of the Fed. It is easy - raise rates, provoke crisis and start banking sanitation.
Finally, banking crisis could have relation to strategic plan. More and more economists start speaking about controlled US Default. This is necessary to take back the strategical control that is lost now. But to do this, they need really big event, something of 09/11 scale. Thus, consolidation of banking system might be the preparation step. But, what is more probable - this is combination of all reasons mentioned here. And there are few political events that indirectly hint on this verse. We consider them in our Gold report tomorrow.

Of course, it can't pass unsigned for real economy sector. Small businesses are struggling to get loans and tightening conditions, and that usually means lower bank lending over the next 12 months. This chart also confirms our view that the US economy is already in recession since the last year, at least:
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Bank failures, by and large, is not a tragedy, but they are an important indicator that the real sector can't carry the burden of higher rates, because banks cannot fully put these rates on them. Loans have the appropriate deadlines, and the rate increase is going too fast. All these bank rescues take place inside the financial system and do not affect M1 and M2. People simply transfer money from a small bank to a large bank or to money market.

The fight against inflation is not real. Over the year, QT M1 and M2 decreased, but only on savings accounts of non-financial companies. An indicator of a decrease in demand would be a decrease, first of all, in current accounts. Don't you spend "cash" first and only then sell assets if you need money?

Therefore, It seems that the main part of the blow falls on the financial sector, and the global one. The real sector did not feel this until the rates rose for it, and this is happening quite slowly. Thus, the major goal is to weaken or expose oversea competitors and this goal is being successfully implemented, then it is necessary to make sure that the competitor has problems for a long time. The Great European Depression. And this can only be done by destroying its superstructure in the form of the financial sector. So maybe that's the goal?

There core is the Eurodollar system. It can be destroyed by a liquidity crisis. The background is prepared with a high rate. How many commercial mortgages in the United States need to be refinanced in the next three years? 5 trillion? The eurodollar system is many times larger than the American one and the debt there is more diverse.

So - keep an eye on the process of banking crisis, but take a wider look at reasons and consequences. It might be just a tool, the disguise of big political tricks.

To be continued...
 
THE FED MEETING RESULTS

Before we start consideration of Powell's speech, let's briefly take a look at recent data. Because major question still stands about next Fed meeting on 14th of June, and whether they will change the rate. Don't treat our view as the truth of last resort, but we do not see completion of any conditions for Fed rate cut or pause mentioned by J. Powell on previous meetings. Unemployment is falling, wage inflation is raising, as well as PCE data last week. GDP inflation components have increased as well, including Labour cost mentioned above. If we get higher CPI next week - as Reuters expect, this just support our view. Although we see drop in Retail sales, production, manufacturing, PMI and sentiment - they remain moderately negative, mostly at the same levels as few months ago. Thus, we think that market undervalues possible rate hike chances in June and overvalues chances on Fed cut as soon as in July or even by the end of the year. This is just our personal opinion. For now we suggest that Fed will increase rate in June as well.

Now to J. Powell statement... It indicates his nervousness and loose of confidence. This makes us think that he has come to some edge in own decision making. For next step he just has no permition and need to get additional instructions from J. Biden and Democrats that he hasn't got yet. Take a look. The Fed's mandate does not imply political decisions, they are technically financial in nature. But in the current situation, the picture looks somewhat more complicated.

If the rate is seriously raised to bring inflation to the expected 2%, then the decline in production, construction and living standards of the population will become prohibitive. It can be done — but in this case it is no longer a technical, but a political decision.

If the rate is raised and private demand is stimulated at the same time, then this may give the opposite option — inflation will not fall. And then what is the sense to stimulate an industrial and construction downturn?

If we stimulate the consumption of the poor households (and it has been falling for several months, which is clearly visible from our reviews), then inflation will surely rise, which will cause an additional blow to the consumption of the middle class. And helping the entire middle class is just very high inflation with the collapse of the real sector of the economy. And this is also a political decision.

You can try to evade the decision, which, in fact, was demonstrated by the Fed. Since the rate hike by a quarter of a percentage point was almost the overwhelming opinion of market participants. The trouble is that it will not stop the economic downturn, as well as the banking crisis, and therefore it is also a political decision.

Precisely because the Fed leadership does not have such a mandate, there is no doubt that it has repeatedly appealed to the White House and Biden personally with a request to make a political decision. But, judging by the behavior of Janet Yellen, such a decision was not made yet. In a sense, this means that the strategic planning system in the United States has been destroyed and political conclusions can be drawn from this, In the meantime, it can only be noted that Powell's behavior at the press conference indicated that he was extremely nervous. And this in itself raises serious concerns. Let's go through most important commentaries.

"The conditions of the banking sector have generally improved; We are striving to learn the right lessons; We are committed to reducing inflation to 2%; Further rate hikes — everything depends on incoming data; The labor market remains "very tense"; The wage growth shows signs of weakening. The number of vacancies is decreasing; There is still a long way to go to reduce inflation to 2%; We are ready to do more if necessary; It will take more time to see how the tightening of the policy will affect the US economy!; Events in the banking segment further tighten Financial Conditions."

The translation is -
"We have not received any additional powers, our data is not enough to make informed decisions, a political decision is required, but we cannot take it."

Actually, this is exactly what we talked about above. But then the answers to the questions began and they turned out to be very informative. Powell said:

"We have not made a decision on the PAUSE, but we have removed the statement about the need for further rate increases.We will take into account certain factors to make decisions. We're not talking about expectations. The forecast of the chairmen of the regional reserve banks is a moderate recession. But this is not my basic scenario.My forecast is moderate growth of the US economy.The labor market is stabilizing. There is some progress, but inflation is still high. Many banks are now focused on their level of liquidity. The US debt ceiling is a risk for future prospects. Although this is not a factor for the Fed's decision-making.There are no plans for further consolidation of banks. We don't want big banks to acquire small banks. We have a versatile banking system, but with First Republic there was no other way out."

While there is nothing new, the position that the Fed itself will not make fundamental decisions has been confirmed only (indirectly). But then there was this:

"It is very important to raise the limit of the US debt ceiling. There is no clear understanding of how much the "banking crisis" has affected the degree of tightening of financial conditions.We need to see additional data to announce that the Fed's rate ceiling has been reached. In general, we will not have to raise interest rates too much (but a little bit more?) further. It will take a few more months to look at the data.Perhaps we are already close to a rather restrictive monetary policy. We need to see additional data to announce that the Fed's rate ceiling has been reached. In general, we will not have to raise interest rates too much further! It will take a few more months to look at the data. Perhaps we are already close to a fairly restrictive policy. (to the Fed rate ceiling)".

It's the same "data" thing over and over again. Powell categorically rejects the requirement to formulate his strategy, whether the Fed will necessarily bring inflation to 2% or retreat due to a decrease in the standard of living of the population. We have already noted that such a dilemma goes beyond the Fed's mandate, but Powell cannot openly admit this, since this will immediately dramatically increase the risk assessment of a serious collapse of the system.

We continue to quote Powell's answers:

"A recession can be avoided! The probability of this is higher than its inevitable onset. There are no guarantees, but the labor market can continue to cool down without a significant unemployment rate. I do not think that the level of wages is the main engine of inflation. If there is going to be a recession, I hope it will be mild. The Fed's attention will now switch to strengthening lending activities! Now it would be inappropriate to start lowering rates. The service sector (without housing) — there is no significant progress in reducing the inflation rate. The Fed's inflation forecasts do not imply a rate cut."

Everything is the same, only in the other direction. We won't raise it yet, but we won't lower it either. We have no grounds for making such decisions. In fact, it is panic and confessions of one's own powellness powerlessness. How soon market participants will understand this is a question, but the situation in the banking sector shows that depositors have less and less faith in the monetary authorities, as we've shown above - massive withdrawals underway.

Instead of Conclusion:
As you understand, in such an environment it is useless to make and more or less long-term forecasts. But, described picture around the Fed (and what we will say tomorrow concerning debt ceil in our Gold report) are the reason why we expect quite strong events in late May — early June, by the time it is absolutely necessary to increase the US debt ceiling. Even if the ceiling is increased, the US Treasury will immediately enter the public debt market with colossal borrowings, which will increase the dollar deficit and lead to an increase in its exchange rate. And if it is decided to declare a technical default … In general, we invite our readers to think about the situation and their reaction to it...

Technicals
Monthly

Monthly picture shows no changes as 0.5% rate change from ECB has not happened. We stand at the eve of big events and within 1-2 candles here situation could change drastically. As market still stands around major 50% resistance, we can't exclude downside momentum trade, despite that this is not B&B pattern any more.

To start speaking about major big shift here - EUR has to jump above YPR1 of 1.16 area.
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Weekly

Both counterparts have made expected steps, sending market to uncertainty and recent week performance is a good example of it. Market has formed indecision week, and will wait for new drivers, that could be US inflation and consumption next week.

All other things remain the same. Nearest upside target stands at 1.1240-1.1275 K-area, overbought and COP ~1.1320. The potential MACD bearish divergence is visible but not completed yet, as trend remains bullish by far.

The only minor conclusion that we could make from recent week - it is a bit bullish. Because price has formed the new lows but then has returned back. I'm not sure that this will help much, but still...
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Daily

Here is also - not too much to add. Our suggestion of 1.0980-1.10 area re-testing on Friday was correct and mostly it has become the low of the session, then price pulled back. Now is the same story as on weekly chart - high wave pattern, indicating indecision. Short term direction depends on breakout.
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Intraday

On Friday evening we see sharp reversal of the tendency and huge bullish engulfing pattern. Maybe EUR could continue downside action, but within few hours after Monday's open we should get some upside continuation first:

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It seems that 1.10 area once again stands in focus. This is 50% Fib level and downside AB=CD target, so bulls could consider it for decision making. Bears, otherwise, could watch for the signs of engulfing failure, if price start dropping back to 1.0965 lows. In other case - bears have to wait when upside target will be done. It will be around 1.1060-1.1070 area supposedly:
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I think we are experiencing something unique and similar as in 2008/2009 crisis.. just in opposite direction.. for example GBP..
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I only do not expect so much overlaping monthly candles on the top at the reversal, should be sharp and fast..
My current picture of the leg up.. monthly candles I really don´t like but the picture is clean..
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This is why I think current high could be in place..
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I know I am mixing TFs and structures are different but..
 
Morning everybody,

Europe (and Russia, btw) celebrates today the victory over nazism in WWII. So, EU session will be quiet with thin liquidity, at least until US will step in.

In general, EUR looks a bit heavy and I would say that bears looks a bit better now. First is on daily chart, take a look - price has tested our HW pattern's top but drops back. Fundamental background also brings nervousness as US authorities and J. Yellen in particular spin up default topic. Trend remains bearish here, on daily chart.
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On 4H chart indeed we get pullback and big engulfing pattern is still valid, but pullback is rather deep. IN a case of engulfing failure, EUR could try to reach 1.0930 OP target:
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Still, I wouldn't hurry up to sell right now as bulls still have the chance. Market has re-shaped a bit the pattern and now is forming reverse H&S with deep shoulders. Also we have here bullish divergence:
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So, if price start dropping to 1.0970 and lower, showing clear signs of H&S failure, it should be possible to consider short entry. For the bulls it is also something to think about. Yes, H&S looks a bit heavy and honestly, chances on success are not too much. But, from the other side, it is very comfortable point for position with highest reward/risk ratio. Also something to think about. You also could drop the time frame to 15min, for example and watch there for bullish reversal pattern, if you get any, place stop with the pattern - all the better.
 
Morning everybody,

So, EUR has resolved the questions with direction yesterday and it seems that minor W&R of daily High wave pattern was decisive (from technical point of view). But, real background for dropping is debt ceil intrigue. Now talking starts about 14th Amendment that Biden could apply and raise ceil without Congress agreement. This is bad scenario and temporal, but it seems the only one that Democrats have right now.

Obviously this tensions support demand for USD. It is paradox - people running into the currency of potentially defaulted country. That's why, supposedly it doesn't matter what CPI and PPI tomorrow we get. Slightly higer, slightly lower - it doesn't matter, because the hot news now is the debt ceil.

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It means that despite volatility that we could get on background of CPI report, EUR/USD should hold downside direction until debt ceil problem will be resolved somehow.

On 4H chart EUR has clarified the direction. Engulfing finally has been erased, local lows were broken. Here we have few downside targets, starting with our OP @ 1.0928 and down to 1.085 of XOP and a kind of butterfly extension. Watch for bearish grabber here as well.
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On 1H chart price pops up from support, but action doesn't show any thrust. So, it is not bullish reversal. Minor OP is done already XOP is around 50% Fib level 1.0995-1.10. So, for short entry (if you're not scare of CPI wobbling), you could split position in two parts for enter here and around resistance level. So, let's see what will happen next.
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Morning everybody,

So, CPI indeed has shaked the boat a bit, but EUR has not broken vital level that we've specified for retracement. Now, on daily chart price is going lower, once again confirms "high wave" background. Nearest daily support is 1.0850-1.0870 K-area and oversold. So probably we could use it as a floor for current week:
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On 4H chart OP target is reached. Next intermediate target is 1.09 - 1.27 extension a kind of butterfly pattern that we've discussed. Major target here is XOP, it stands around daily support area - 1.0850, as well as 1.618 butterfly extension:
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Here is how it has happened yesterday - market jumps on 0.1% less CPI number precisely to our resistance and minor XOP target, that we've discussed yesterday. Now we also have minor butterfly here, but with the same 1.618 target around 1.09. If you still consider short entry - it makes sense to wait for minor pullback, at least to 1.0950 area due OP/1,27 butterfly completion.
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Downside action looks strong, so 1.09 at least, looks likely.
 
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