Sive Morten
Special Consultant to the FPA
- Messages
- 18,676
Fundamentals
Recent week, guys, was not too load by political or economical events. As you know U.S. consumer prices rose less than expected in April, which again makes more probable gradual rate increases by the Federal Reserve.
Last week we've talked on this issue and despite mass euphoria on US dollar rally, Fed representatives have careful view on rate increase perspective. Now is only ~35% probability stands for 4th rate increase in December.
San Francisco Fed President John Williams said on Friday that he does not see any abrupt rise in inflation happening even as price gains have risen toward the central bank’s target.
This makes investors start to think on perspective of this rally, how long it will last and what to expect in nearest time.
“People are taking profits. The move is losing some steam,” Chuck Tomes, senior investment analyst at Manulife Asset Management in Boston, said of the dollar’s rise, which started in mid-April, and Friday’s profit-taking.
“The dollar’s rally is likely to have ended for now. But of course U.S. dollar strength could hardly go on as quickly and smoothly as it had done for the past weeks,” said Commerzbank analysts, predicting that the inflation numbers would only cause a pause in the dollar’s recovery.
“Given recent rises in oil prices, a weaker dollar earlier this year, and U.S. tax cuts, markets were clearly worried more about upside risks in (U.S.) inflation,” said Minori Uchida, chief currency strategist at MUFG Bank.
Euro now has it's own headache with Italian elections on horizon. The euro has so far weathered the impact from rises in Italian bond yields on signs the two anti-establishment parties could sweep into power as they made “significant steps” towards forming a government after weeks of political stalemate.
However, Italy’s next prime minister could be an independent figure who is not a member of either the anti-establishment 5-Star movement or the far-right League and a government could be sworn in next week if all goes well, a top 5-Star member said in a newspaper interview published on Friday.
Taking broader view on EU, not just on Germany, where economy momentum looks good, a loss of economic momentum in Europe has made policymakers in Europe and Britain more cautious about ending 2008 financial crisis-era policies.
On Friday, European Central Bank President Mario Draghi said the euro zone needs a new “fiscal instrument” to help weaker member nations if they are being overly penalized by investors during a debt crisis.
Traders pushed out expectations of a UK rate hike to end-2018 and the ECB boosting interest rates in the second half of 2019.
This mostly confirms what we've talked about last week.
Thus, as a bottom line, we could say that disbalance between US, EU and UK central bank policies hold. But in short-term perspective USD rally, probably will take a technical pause, as it was not supported by strong statistics. Interest rates also have taking a breath. While they keep upside sentiment, no upward continuation has happened last week:
That's being said, retracement that we were waiting for two recent weeks has not bad chances to happen.
COT report
CFTC data leads us to the same conclusion. Net speculative position has not changed and stands at the same level as last week. It means that investors are not hurry with taking new shorts by far.
Technicals
Monthly
Recent action barely impacts on monthly picture, but on weekly and lower time frames we will see that there are some technical reasons also exist that suggest a pullback.
Here we still keep an eye on two major issues. First one is 1.15 support area, which should become next natural destination point on EUR including YPP, as soon as price already has broken through 1.21.
As we have mentioned previously - reversal has happened after completion of harmonic swing and was stopped by YPR1. The fact that EUR has failed to break through YPR1 tells that upside rally from 1.03 to 1.26 was just a retracement within larger bear trend. Yes, it is a lot of time till the end of the year still and YPR1 could be broken, but, if EUR will not break it, then technical factors give a hint on EUR further drop and predict USD advantage in fundamental balance between US and EU, although driving factors of this process are unknown.
Second issue - potential bullish grabber as EUR is coming closer to MACDP line in May-June.
Weekly
This time frame brings major detail for 1-2 weeks of action. As you can see - price is oversold here and stands around weekly K-support. This is rather strong combination which should prevent further dropping, at least for few weeks. So, on technical picture, we also see reasons for pause in dollar rally.
As 1.19 K-area is rather strong, we probably should get some AB=CD pattern, which, in turn should lead EUR right to 1.14-1.15 area of neckline. Now we have "AB" part in place and anticipated upside bounce will become a "BC" leg. Even 3/8 retracement will lead EUR to 1.21 area.
Our longer term analysis mostly stands the same and is closely related to our fundamental view. Now it is easy to recognize potential H&S pattern here which satisfies all necessary conditions - 1.618 ratio, downside acceleration on 2nd half of the pattern, left side takes the shape of butterfly, which happens very often.
According to current expectations ECB will keep soft policy at least till the end of 2018, when QE programme should be over. This should let H&S to be formed. But perspective of its completion and target meeting is not as cloudless. To reach 1.10 target ECB probably should remain dovish longer or Fed should take more aggressive steps. Otherwise, once H&S will be completed - it could fail later, if ECB will change the course.
Daily
On daily chart we're now in standby mode for catching patterns based on thrust. On Friday we've got first close above 3x3 DMA. To form B&B "Sell" EUR needs to climb right to 1.2040 Fib level within 1-2 sessions.
Conversely, to create good DRPO "Buy" pattern, EUR should not reach 3/8 Fib level but give us "close below" and 2nd "close above" DMA.
What pattern has more chances to be formed? Well, on weekly chart we have bullish "Stretch" and strong support combination of weekly OS + K-support area. Usually such a background leads to stronger reaction on lower time frame i.e. here, on daily. This, in turn, tells that DRPO is more probable as it has higher upside target - at least 50% level of the thrust with coincides with major 3/8 resistance right @ 1.21
But also we can't exclude re-testing of 1.2180-1.22 resistance of previous lows. Now this scenario is not very interesting, because 1.22 stands above daily OB, but next week, it could come on first stage.
About morning star pattern and completed XOP target we already talked on Friday.
Intraday
Our Friday setup was perfectly completed as EUR has hit predefined 1.1970 target. 4H chart shows that 1.2040-1.2060 area will be K-resistance. Now market stands at first 3/8 Fib resistance level:
On 1H TF situation a bit blur. It is very difficult to say definitely whether market will proceed to 1.20 or turn down immediately. By indirect signs, it seems that another leg up to 1.20 should be formed. First, as market has hit our major target on Friday - price has turned to pennant consolidation rather than to sharp drop.
Upside action to 1.1970 was also fast.
Why 1.20 is important? This is disrespected XOP target on 4H chart and 50% resistance of most recent leg down. Here, on hourly chart, we also have larger AB=CD (red letters) with 1.20 OP target and, finally, this is 1.618 extension of our butterfly.
For daily setup this problem has no matter, because we do not care how and where market will go on 1H. For us only final pattern is important - either DRPO or B&B.
For intraday traders we could specify crucial level - 1.19. This is lower border of the channel, K-support and WPP. If you want to buy - this is the level that you need to keep an eye on, because you could place stops very close, just under this level. Breakout of this level will mean that EUR will drop further, may be back to daily lows. This, in turn, makes DRPO more probable.
If 1.19 level holds - EUR probably will make another leg up, at least to 1.20, or directly to 1.2040-1.2060, which could give us daily B&B "Sell".
Conclusion:
Fundamental picture puts EU and EUR in tricky position, where it depends on US and its trade policy as major driving factor right now for EU economy sentiment is tariffs and sanctions. Taking in consideration that US economy and yields are warming up, this makes USD looks stronger in perspectives of few months.
Fundamental picture gives high chances on reaching 1.15 area and upside bounce to 1.20-1.21 later, but further action either to 1.10 or to new highs above 1.26 will depend on fundamental balance and ECB policy in particular.
On coming week we will work with upside bounce on daily chart.
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.
Recent week, guys, was not too load by political or economical events. As you know U.S. consumer prices rose less than expected in April, which again makes more probable gradual rate increases by the Federal Reserve.
Last week we've talked on this issue and despite mass euphoria on US dollar rally, Fed representatives have careful view on rate increase perspective. Now is only ~35% probability stands for 4th rate increase in December.
San Francisco Fed President John Williams said on Friday that he does not see any abrupt rise in inflation happening even as price gains have risen toward the central bank’s target.
This makes investors start to think on perspective of this rally, how long it will last and what to expect in nearest time.
“People are taking profits. The move is losing some steam,” Chuck Tomes, senior investment analyst at Manulife Asset Management in Boston, said of the dollar’s rise, which started in mid-April, and Friday’s profit-taking.
“The dollar’s rally is likely to have ended for now. But of course U.S. dollar strength could hardly go on as quickly and smoothly as it had done for the past weeks,” said Commerzbank analysts, predicting that the inflation numbers would only cause a pause in the dollar’s recovery.
“Given recent rises in oil prices, a weaker dollar earlier this year, and U.S. tax cuts, markets were clearly worried more about upside risks in (U.S.) inflation,” said Minori Uchida, chief currency strategist at MUFG Bank.
Euro now has it's own headache with Italian elections on horizon. The euro has so far weathered the impact from rises in Italian bond yields on signs the two anti-establishment parties could sweep into power as they made “significant steps” towards forming a government after weeks of political stalemate.
However, Italy’s next prime minister could be an independent figure who is not a member of either the anti-establishment 5-Star movement or the far-right League and a government could be sworn in next week if all goes well, a top 5-Star member said in a newspaper interview published on Friday.
Taking broader view on EU, not just on Germany, where economy momentum looks good, a loss of economic momentum in Europe has made policymakers in Europe and Britain more cautious about ending 2008 financial crisis-era policies.
On Friday, European Central Bank President Mario Draghi said the euro zone needs a new “fiscal instrument” to help weaker member nations if they are being overly penalized by investors during a debt crisis.
Traders pushed out expectations of a UK rate hike to end-2018 and the ECB boosting interest rates in the second half of 2019.
This mostly confirms what we've talked about last week.
Thus, as a bottom line, we could say that disbalance between US, EU and UK central bank policies hold. But in short-term perspective USD rally, probably will take a technical pause, as it was not supported by strong statistics. Interest rates also have taking a breath. While they keep upside sentiment, no upward continuation has happened last week:
That's being said, retracement that we were waiting for two recent weeks has not bad chances to happen.
COT report
CFTC data leads us to the same conclusion. Net speculative position has not changed and stands at the same level as last week. It means that investors are not hurry with taking new shorts by far.
Technicals
Monthly
Recent action barely impacts on monthly picture, but on weekly and lower time frames we will see that there are some technical reasons also exist that suggest a pullback.
Here we still keep an eye on two major issues. First one is 1.15 support area, which should become next natural destination point on EUR including YPP, as soon as price already has broken through 1.21.
As we have mentioned previously - reversal has happened after completion of harmonic swing and was stopped by YPR1. The fact that EUR has failed to break through YPR1 tells that upside rally from 1.03 to 1.26 was just a retracement within larger bear trend. Yes, it is a lot of time till the end of the year still and YPR1 could be broken, but, if EUR will not break it, then technical factors give a hint on EUR further drop and predict USD advantage in fundamental balance between US and EU, although driving factors of this process are unknown.
Second issue - potential bullish grabber as EUR is coming closer to MACDP line in May-June.
Weekly
This time frame brings major detail for 1-2 weeks of action. As you can see - price is oversold here and stands around weekly K-support. This is rather strong combination which should prevent further dropping, at least for few weeks. So, on technical picture, we also see reasons for pause in dollar rally.
As 1.19 K-area is rather strong, we probably should get some AB=CD pattern, which, in turn should lead EUR right to 1.14-1.15 area of neckline. Now we have "AB" part in place and anticipated upside bounce will become a "BC" leg. Even 3/8 retracement will lead EUR to 1.21 area.
Our longer term analysis mostly stands the same and is closely related to our fundamental view. Now it is easy to recognize potential H&S pattern here which satisfies all necessary conditions - 1.618 ratio, downside acceleration on 2nd half of the pattern, left side takes the shape of butterfly, which happens very often.
According to current expectations ECB will keep soft policy at least till the end of 2018, when QE programme should be over. This should let H&S to be formed. But perspective of its completion and target meeting is not as cloudless. To reach 1.10 target ECB probably should remain dovish longer or Fed should take more aggressive steps. Otherwise, once H&S will be completed - it could fail later, if ECB will change the course.
Daily
On daily chart we're now in standby mode for catching patterns based on thrust. On Friday we've got first close above 3x3 DMA. To form B&B "Sell" EUR needs to climb right to 1.2040 Fib level within 1-2 sessions.
Conversely, to create good DRPO "Buy" pattern, EUR should not reach 3/8 Fib level but give us "close below" and 2nd "close above" DMA.
What pattern has more chances to be formed? Well, on weekly chart we have bullish "Stretch" and strong support combination of weekly OS + K-support area. Usually such a background leads to stronger reaction on lower time frame i.e. here, on daily. This, in turn, tells that DRPO is more probable as it has higher upside target - at least 50% level of the thrust with coincides with major 3/8 resistance right @ 1.21
But also we can't exclude re-testing of 1.2180-1.22 resistance of previous lows. Now this scenario is not very interesting, because 1.22 stands above daily OB, but next week, it could come on first stage.
About morning star pattern and completed XOP target we already talked on Friday.
Intraday
Our Friday setup was perfectly completed as EUR has hit predefined 1.1970 target. 4H chart shows that 1.2040-1.2060 area will be K-resistance. Now market stands at first 3/8 Fib resistance level:
On 1H TF situation a bit blur. It is very difficult to say definitely whether market will proceed to 1.20 or turn down immediately. By indirect signs, it seems that another leg up to 1.20 should be formed. First, as market has hit our major target on Friday - price has turned to pennant consolidation rather than to sharp drop.
Upside action to 1.1970 was also fast.
Why 1.20 is important? This is disrespected XOP target on 4H chart and 50% resistance of most recent leg down. Here, on hourly chart, we also have larger AB=CD (red letters) with 1.20 OP target and, finally, this is 1.618 extension of our butterfly.
For daily setup this problem has no matter, because we do not care how and where market will go on 1H. For us only final pattern is important - either DRPO or B&B.
For intraday traders we could specify crucial level - 1.19. This is lower border of the channel, K-support and WPP. If you want to buy - this is the level that you need to keep an eye on, because you could place stops very close, just under this level. Breakout of this level will mean that EUR will drop further, may be back to daily lows. This, in turn, makes DRPO more probable.
If 1.19 level holds - EUR probably will make another leg up, at least to 1.20, or directly to 1.2040-1.2060, which could give us daily B&B "Sell".
Conclusion:
Fundamental picture puts EU and EUR in tricky position, where it depends on US and its trade policy as major driving factor right now for EU economy sentiment is tariffs and sanctions. Taking in consideration that US economy and yields are warming up, this makes USD looks stronger in perspectives of few months.
Fundamental picture gives high chances on reaching 1.15 area and upside bounce to 1.20-1.21 later, but further action either to 1.10 or to new highs above 1.26 will depend on fundamental balance and ECB policy in particular.
On coming week we will work with upside bounce on daily chart.
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.
