Sive Morten
Special Consultant to the FPA
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Fundamentals
Reuters reports dollar failed to rally on Friday against a basket of major currencies after a mixed U.S. jobs report stoked uncertainty over the timing of Federal Reserve rate hikes, but gains against the euro helped the currency edge higher.
U.S. Labor Department data showed nonfarm payrolls increased 223,000 last month, while the unemployment rate dropped to a near seven-year low of 5.4 percent. March payrolls, however, were revised to show only 85,000 jobs were created, the smallest since June 2012.
While the dollar initially rallied against a basket of major currencies after the data, with the euro slipping below $1.12 to a session low of $1.1179, it gave back most of its gains as traders digested negative details of the jobs report.
"It pretty much secured the idea that it would take some extremely strong data to have the Fed even contemplate moving in June," said Alan Ruskin, global head of currency strategy at Deutsche Bank in New York, on the jobs report.
The dollar index, which measures the greenback against a basket of major currencies, was set to post its fourth straight week of losses.
The U.S. nonfarm payrolls report has been closely watched for hints on how soon the Fed might be prepared to raise interest rates from rock-bottom levels. A rate hike will likely boost the dollar by driving investment flows into the United States.
The euro's weakness against the dollar marked its second straight session of losses after hitting a 10-1/2 week high of $1.1392 early on Thursday, although it was still set for its fourth straight week of gains against the greenback.
"After a move like we saw on the euro ... it’s not surprising that we saw some profit-taking and retracement back to $1.12," said Ashley Groves, vice president of key accounts at AFEX in New York.
The sterling was last up 1.35 percent against the dollar at $1.5450, not far from a more than 10-week high against the greenback of $1.5522 after Prime Minister David Cameron won an election victory in Britain.
CFTC data has changed slightly in favor of bulls. Somehow Reuters Datastream is not working, and I can’t put the charts as usual, but I put here the sheet from COT report on EUR. You can see that speculative short positions has dropped significantly stronger than longs but open interest has increased. By looking at numbers we see that it mostly has increased due hedgers’ short positions. They are opposite to speculative ones and this in general confirms our expectation of possible retracement up. Although we have to acknowledge that changes are not really significant.
Although we will talk on EUR mostly, recently I’ve found interesting article from “Alpha Now”. It points on possible relation between implied volatility of Cable and crucial political events in UK. It’s short so I put it here totally:
“Britons hit the polls this week and with almost nothing separating the two main parties the election is one of the most uncertain in generations. Uncertainty is showing in financial markets too with one-week sterling/dollar volatility at its highest level since the 2010 election.”
“The rise in the volatility gauge indicates that markets are pricing in a period of uncertainty owing to the likelihood of an inconclusive outcome in the election. The one-week volatility measure has surpassed the level it reached when Scotland voted on whether it wanted to become a separate country to the rest of the UK.
The one-year measure has increased this year but remains fairly moderate by historical standards and below the levels seen for the majority of time since the financial crisis. This suggest that traders do not think that the UK is about to enter a long period of instability and volatility. However, there is a risk that it is.
There is a real chance that, within a few weeks of Thursdays vote, a referendum will be announced – whether on the UK leaving the EU (so-called BREXIT), or on Scotland leaving the UK – that has the potential fundamentally to change the nature of the UK. A long period of uncertainty before any potential referendum took place would increase the risk premium on sterling assets. For example, we estimate that the mere announcement of a vote on ‘BREXIT’ could raise the risk premium on gilts by 200 basis points; sterling could fall 10%; and the FTSE All-share could lose as much as 30%.”
Technicals
Monthly
Shape of monthly chart has not changed significantly, so our view here holds mostly the same.
As we have estimated previously 1.05 is 1.27 extension of huge upside swing in 2005-2008 that also has created awful butterfly pattern. Recent action does not quite look like normal butterfly wing, but extension is valid and 1.05 is precisely 1.27 ratio. At the same time we have here another supportive targets, as most recent AB=CD, oversold and 1.27 of recent butterfly.
Now think what do we have – market at 1.27 butterfly target and oversold, CFTC data shows overextension of shorts positions. Recent data has led to dovish forecast on US rates, while EU recent data conversely was mostly positive, as well as earnings reports of EU companies. This smells like solid upside retracement.
April has closed and confirmed nicely looking bullish engulfing pattern. We know that most probable target of this pattern is length of the bars counted upside. This will give us approximately 3/8 Fib resistance 1.1810 area. Could we call this situation as “Stretch”? By features probably yes, since market is oversold at support, but by letter not quite, since 1.12 level mostly was broken and the area where market stopped was not a Fib level. Still, applying here Stretch target (middle between OB and OS bands) we will get an area of 50% resistance of most recent swing down around 1.22 area.
Another very important moment here is recent thrust down itself. Take a look – it is perfect for DiNapoli directional pattern, say, B&B “Sell”, or even DRPO… but B&B seems more probable. You can imagine what B&B means on monthly chart – large swings, definite direction of trading for weeks. Retracement up has no limitation from monthly overbought level. We think that we need to be focus mostly on B&B from 1.22 area, just because market is oversold. That’s why 3/8 level could not hold upside retracement. In 1.22 area also stand previous lows.
Still, our next long-term target stands the same – parity as 1.618 completion point of recent butterfly. Currently we should treat this bounce up, even to 1.22 area, only as retracement within bear trend. Yes, tactically fundamentals have become weaker in US, and open door for pause in bearish trend, but overall picture has not changed drastically yet.
Weekly
Trend is bullish on weekly chart and as we’ve estimated last week ¬we have confirmed DRPO “Buy” in place. Still our suggestion was correct and market was not able to move significantly higher due existence of strong resistance cluster around 1.14-1.15 area that includes Fib level, MPR1, broken YPS1 and Overbought. Second one coincides with monthly level around 1.18-1.20. Weekly chart shows that it will be also K-area. And this area approximately coincides with 50% level of DPRO thrust that is the target of this pattern. So, as monthly picture as weekly one point on high probability of reaching 1.18-1.20 area in medium term perspective. But action to this area should start after retracement down. This retracement, in turn, will be major object of our attention since we’re looking chance for taking long position here.
Last week has become a high wave pattern on weekly. It was formed by many reasons. Technically, because market stands at strong resistance, fundamentally – because NFP data was mixed and mostly flat. Although April data was in a row with expectation and this was a positive sign, especially after poor ADP report. At the same time March data was downgraded to 85 K and overall impact on market was flat.
As we mostly trade on daily chart our initial trading plan will be focused on first, closer target.
Daily
The core of our daily analysis we mostly have discussed yesterday. Market is forming something that looks like 3-Drive “Sell” pattern. Appearing of this pattern right in this area looks reasonable because EUR has not quite reached yet 1.618 target of AB=CD pattern and appearing of 3-Drive will let it to do this. Also this is an area of MPR1. On coming week this pattern will become a cornerstone of our short-term analysis.
At the same time we’re interesting with this 3-Drive not per se but as the one that could trigger meaningful retracement down. This is the major issue that we would like to get. We expect that EUR could reach an area around 1.10 - daily K-support and MPP that was not tested yet.
So daily picture matches well to big EUR puzzle. On monthly we have bullish engulfing and expect retracement back inside the body of it before upward action will start. On weekly market is overbought at Fib resistance and despite that we have DRPO “Buy” there – chances on pullback are significant and finally, on daily – appearing of 3-Drive and completion major AB=CD makes retracement very probable.
Thus, monthly engulfing and weekly DRPO (although they are the same pattern in fact) give us confidence with upside continuation while daily patterns and weekly overbought @ Fib resistance let us count on pullback that we should use for long entry. It’s very good picture.
4-Hour
Here you can see the same 3-Drive but with more details. Actually EUR forms nice harmonic swings on retracement down. We have bearish divergence with MACD indicator right at strong resistance area. Finally, take look – WPS1 will stand approximately in the same 1.10 area that we will be looking for.
Conclusion:
EUR could turn to solid upside retracement that will be notified even on monthly chart. For us it will mean clear direction of trading for considerable period.
Still, major fundamental factors are still valid and even action to 1.20 should be treated as retracement…
The technical portion of Sive's analysis owes a great deal to Joe DiNapoli's methods, and uses a number of Joe's proprietary indicators. Please note that Sive's analysis is his own view of the market and is not endorsed by Joe DiNapoli or any related companies.
Reuters reports dollar failed to rally on Friday against a basket of major currencies after a mixed U.S. jobs report stoked uncertainty over the timing of Federal Reserve rate hikes, but gains against the euro helped the currency edge higher.
U.S. Labor Department data showed nonfarm payrolls increased 223,000 last month, while the unemployment rate dropped to a near seven-year low of 5.4 percent. March payrolls, however, were revised to show only 85,000 jobs were created, the smallest since June 2012.
While the dollar initially rallied against a basket of major currencies after the data, with the euro slipping below $1.12 to a session low of $1.1179, it gave back most of its gains as traders digested negative details of the jobs report.
"It pretty much secured the idea that it would take some extremely strong data to have the Fed even contemplate moving in June," said Alan Ruskin, global head of currency strategy at Deutsche Bank in New York, on the jobs report.
The dollar index, which measures the greenback against a basket of major currencies, was set to post its fourth straight week of losses.
The U.S. nonfarm payrolls report has been closely watched for hints on how soon the Fed might be prepared to raise interest rates from rock-bottom levels. A rate hike will likely boost the dollar by driving investment flows into the United States.
The euro's weakness against the dollar marked its second straight session of losses after hitting a 10-1/2 week high of $1.1392 early on Thursday, although it was still set for its fourth straight week of gains against the greenback.
"After a move like we saw on the euro ... it’s not surprising that we saw some profit-taking and retracement back to $1.12," said Ashley Groves, vice president of key accounts at AFEX in New York.
The sterling was last up 1.35 percent against the dollar at $1.5450, not far from a more than 10-week high against the greenback of $1.5522 after Prime Minister David Cameron won an election victory in Britain.
CFTC data has changed slightly in favor of bulls. Somehow Reuters Datastream is not working, and I can’t put the charts as usual, but I put here the sheet from COT report on EUR. You can see that speculative short positions has dropped significantly stronger than longs but open interest has increased. By looking at numbers we see that it mostly has increased due hedgers’ short positions. They are opposite to speculative ones and this in general confirms our expectation of possible retracement up. Although we have to acknowledge that changes are not really significant.
Although we will talk on EUR mostly, recently I’ve found interesting article from “Alpha Now”. It points on possible relation between implied volatility of Cable and crucial political events in UK. It’s short so I put it here totally:
“Britons hit the polls this week and with almost nothing separating the two main parties the election is one of the most uncertain in generations. Uncertainty is showing in financial markets too with one-week sterling/dollar volatility at its highest level since the 2010 election.”
The one-year measure has increased this year but remains fairly moderate by historical standards and below the levels seen for the majority of time since the financial crisis. This suggest that traders do not think that the UK is about to enter a long period of instability and volatility. However, there is a risk that it is.
There is a real chance that, within a few weeks of Thursdays vote, a referendum will be announced – whether on the UK leaving the EU (so-called BREXIT), or on Scotland leaving the UK – that has the potential fundamentally to change the nature of the UK. A long period of uncertainty before any potential referendum took place would increase the risk premium on sterling assets. For example, we estimate that the mere announcement of a vote on ‘BREXIT’ could raise the risk premium on gilts by 200 basis points; sterling could fall 10%; and the FTSE All-share could lose as much as 30%.”
Technicals
Monthly
Shape of monthly chart has not changed significantly, so our view here holds mostly the same.
As we have estimated previously 1.05 is 1.27 extension of huge upside swing in 2005-2008 that also has created awful butterfly pattern. Recent action does not quite look like normal butterfly wing, but extension is valid and 1.05 is precisely 1.27 ratio. At the same time we have here another supportive targets, as most recent AB=CD, oversold and 1.27 of recent butterfly.
Now think what do we have – market at 1.27 butterfly target and oversold, CFTC data shows overextension of shorts positions. Recent data has led to dovish forecast on US rates, while EU recent data conversely was mostly positive, as well as earnings reports of EU companies. This smells like solid upside retracement.
April has closed and confirmed nicely looking bullish engulfing pattern. We know that most probable target of this pattern is length of the bars counted upside. This will give us approximately 3/8 Fib resistance 1.1810 area. Could we call this situation as “Stretch”? By features probably yes, since market is oversold at support, but by letter not quite, since 1.12 level mostly was broken and the area where market stopped was not a Fib level. Still, applying here Stretch target (middle between OB and OS bands) we will get an area of 50% resistance of most recent swing down around 1.22 area.
Another very important moment here is recent thrust down itself. Take a look – it is perfect for DiNapoli directional pattern, say, B&B “Sell”, or even DRPO… but B&B seems more probable. You can imagine what B&B means on monthly chart – large swings, definite direction of trading for weeks. Retracement up has no limitation from monthly overbought level. We think that we need to be focus mostly on B&B from 1.22 area, just because market is oversold. That’s why 3/8 level could not hold upside retracement. In 1.22 area also stand previous lows.
Still, our next long-term target stands the same – parity as 1.618 completion point of recent butterfly. Currently we should treat this bounce up, even to 1.22 area, only as retracement within bear trend. Yes, tactically fundamentals have become weaker in US, and open door for pause in bearish trend, but overall picture has not changed drastically yet.
Weekly
Trend is bullish on weekly chart and as we’ve estimated last week ¬we have confirmed DRPO “Buy” in place. Still our suggestion was correct and market was not able to move significantly higher due existence of strong resistance cluster around 1.14-1.15 area that includes Fib level, MPR1, broken YPS1 and Overbought. Second one coincides with monthly level around 1.18-1.20. Weekly chart shows that it will be also K-area. And this area approximately coincides with 50% level of DPRO thrust that is the target of this pattern. So, as monthly picture as weekly one point on high probability of reaching 1.18-1.20 area in medium term perspective. But action to this area should start after retracement down. This retracement, in turn, will be major object of our attention since we’re looking chance for taking long position here.
Last week has become a high wave pattern on weekly. It was formed by many reasons. Technically, because market stands at strong resistance, fundamentally – because NFP data was mixed and mostly flat. Although April data was in a row with expectation and this was a positive sign, especially after poor ADP report. At the same time March data was downgraded to 85 K and overall impact on market was flat.
As we mostly trade on daily chart our initial trading plan will be focused on first, closer target.
Daily
The core of our daily analysis we mostly have discussed yesterday. Market is forming something that looks like 3-Drive “Sell” pattern. Appearing of this pattern right in this area looks reasonable because EUR has not quite reached yet 1.618 target of AB=CD pattern and appearing of 3-Drive will let it to do this. Also this is an area of MPR1. On coming week this pattern will become a cornerstone of our short-term analysis.
At the same time we’re interesting with this 3-Drive not per se but as the one that could trigger meaningful retracement down. This is the major issue that we would like to get. We expect that EUR could reach an area around 1.10 - daily K-support and MPP that was not tested yet.
So daily picture matches well to big EUR puzzle. On monthly we have bullish engulfing and expect retracement back inside the body of it before upward action will start. On weekly market is overbought at Fib resistance and despite that we have DRPO “Buy” there – chances on pullback are significant and finally, on daily – appearing of 3-Drive and completion major AB=CD makes retracement very probable.
Thus, monthly engulfing and weekly DRPO (although they are the same pattern in fact) give us confidence with upside continuation while daily patterns and weekly overbought @ Fib resistance let us count on pullback that we should use for long entry. It’s very good picture.
4-Hour
Here you can see the same 3-Drive but with more details. Actually EUR forms nice harmonic swings on retracement down. We have bearish divergence with MACD indicator right at strong resistance area. Finally, take look – WPS1 will stand approximately in the same 1.10 area that we will be looking for.
Conclusion:
EUR could turn to solid upside retracement that will be notified even on monthly chart. For us it will mean clear direction of trading for considerable period.
Still, major fundamental factors are still valid and even action to 1.20 should be treated as retracement…
The technical portion of Sive's analysis owes a great deal to Joe DiNapoli's methods, and uses a number of Joe's proprietary indicators. Please note that Sive's analysis is his own view of the market and is not endorsed by Joe DiNapoli or any related companies.
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