Forex FOREX PRO WEEKLY, May 16 - 20, 2022

Sive Morten

Special Consultant to the FPA
Messages
16,119
Fundamentals

So, we've got the CPI this week, which initially was treated as a bit contradictive. At first glance inflation has slowed, but this is deceivable view. After minor reaction - dollar keeps going higher. Today we take in-depth view, why it is happening and whether it is really positive. Also we take a look at some important statistics that was not widely presented in media this week. It is highly representative.

Market overview

The dollar slipped on Friday as a rally in equities contributed to a risk-on mood, but was still set for a sixth straight week of gains as investors remained concerned about slowing global growth and Federal Reserve policy tilting the United States into a recession.

High inflation and the Fed's rate hike path have fueled worries of a policy error that could cause recession or a stagflation scenario of slowing growth and high prices. Readings this week showed some signs that inflation was beginning to ebb, although at a slow pace. The dollar showed little reaction on Friday to data showing U.S. import prices were unexpectedly flat in April as a decline in petroleum costs offset gains in food and other products, a further sign that inflation has probably peaked

Other data from the University of Michigan showed its preliminary reading of consumer sentiment for early May deteriorated to its lowest level since August 2011 as concerns about inflation persisted. Even with the recent inflation readings, Cleveland Fed president Loretta Mester said it would need to move lower for "several months" before the Fed can safely conclude it has peaked, and she would she would be ready to consider faster rates hike by the September Fed meeting if the data do not show improvement.

The University of Michigan's survey on Friday showed the deterioration in sentiment, which some economists said pushed it into recessionary territory, was across all demographics, as well as geographical and political affiliation. Gasoline prices and the stock market have a heavy weighting in the survey. Gasoline prices resumed their upward trend this month, setting an average record high of $4.432 per gallon on Friday, according to AAA. Fears that the Federal Reserve will have to aggressively tighten monetary policy to bring down inflation have unleashed a massive equities sell-off on Wall Street.

The University of Michigan's preliminary consumer sentiment index tumbled 9.4% to 59.1 early this month, the lowest reading since August 2011. Economists polled by Reuters had forecast the index dipping to 64. The sharp decline is in stark contrast with the Conference Board's consumer confidence survey, whose index remains well above the COVID-19 pandemic lows.

Just take a look how market reacts on this data -
"But confidence has been a poor guide to consumption growth in recent years, so we would not read too much into that signal," said Michael Pearce, a senior U.S. economist at Capital Economics in New York. "Just because consumers resent paying higher prices and are suffering limited availability doesn't mean they aren't still making those purchases."

"The issue is where are we looking for recovery, how are we going to negotiate what seems to be coming down the pike. You have a Fed that is not ready to cut rates and help the economy - you have a Fed that is raising rates, that is a very unusual situation," said Joseph Trevisani, senior analyst at FXStreet.com in New York. "I don’t think you have seen a capitulation in equities... I just don’t sense the kind of panic that you usually see at the end," said Trevisani.

The University of Michigan survey's gauge of current economic conditions dropped 8.4% to 63.6. That was the lowest reading since 2013, and 36% of consumers attributed their negative assessment to inflation. Its measure of consumer expectations declined 9.9% to 56.3. Consumers viewed buying conditions for long-lasting manufactured goods as the worst since the survey started tracking the series in 1978. Economists were unfazed, noting that consumers were sitting on at least $2 trillion in excess savings accumulated during the pandemic.

"But consumer spending keeps rising, and with savings high, household debt low and the jobs market strong, that spending should continue until the economy falters," said Robert Frick, corporate economist with Navy Federal Credit Union in Vienna, Virginia.Even as consumers stressed about high prices, long-term inflation expectations appeared to be well anchored. The survey's one-year inflation expectations were at 5.4% (LOL) for the third straight month. Its five-year inflation expectations were unchanged at 3.0% for the fourth consecutive month. (!!!)

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Investors have flocked to the safe-haven on concerns about the Fed's ability to dampen inflation without causing a recession, along with worries about slowing growth arising from the Ukraine crisis and the economic effects of China's zero-COVID-19 policy amid rising infections. The U.S. currency is on track for its sixth straight week of gains, its longest weekly streak of the year and has climbed more than 9% for 2022.

While the European Central Bank is widely anticipated to begin hiking rates in July, the central bank is expected to adopt a less aggressive pace than the Fed. The European Central Bank (ECB) will start raising rates gradually this summer, ECB member and Bank of France head Francois Villeroy de Galhau said on Wednesday.
Several ECB policymakers have argued for a rate hike in July to counter rising inflation, which soared to a record high of 7.5% in the 19-nation euro currency zone last month

U.S. Treasury Secretary Janet Yellen said that she believes the Federal Reserve can bring down inflation without causing a recession because of a strong U.S. job market and household balance sheets, low debt costs and a strong banking sector. Yellen told a U.S. House of Representatives Financial Services Committee hearing on Thursday that
"all of those things suggest that the Fed has a path to bring down inflation without causing a recession, and I know it will be their objective to try to accomplish that. "It's having a substantial adverse impact on many vulnerable households And we are laser-focused on addressing inflation," Yellen said.

The dollar was lower on Wednesday after economic data showed inflation remained high but was unlikely to lead the Federal Reserve to shift to a more aggressive path of monetary policy. The consumer price index rose 0.3% last month, the smallest gain since August, the Labor Department said on Wednesday, versus the 1.2% month-to-month surge in the CPI in March, the largest advance since September 2005. On an annual basis, CPI climbed 8.3%, higher than the 8.1% estimate but below 8.5% the prior month.

"Hope springs eternal here but at the end of the day markets are correct in thinking these inflation pressures are ultimately transitory, that we should see a diminishment in supply chain issues and demand as well for the coming months," said Karl Schamotta, chief market strategist at Cambridge Global Payments in Toronto. Essentially to me, the challenge here is inflation expectations are well anchored across the spectrum ... ultimately traders will look through this and we will see a bit of a reversal in the trend that we are seeing right now."

From the comments above we it becomes evident that as analysts as Fed and Treasury representatives do not want to see the obvious signs that situation is deteriorating fast. We already warned about danger to rely on "expected forward" inflation rates, because it easily could be manipulated by futures market prices.

How situation stands in reality

A number of currency strategists have already flagged the risk of seeing the euro go below parity with the dollar while the yen is trading towards levels unseen in about two decades. The mood is also worsening across stock markets as the rise in yields of 'risk-free' government bonds dent the appeal of wobbly risk assets.
U.S. stocks marked their fifth consecutive weekly drop last week -- its worst run since 2011. The Nasdaq is down about 25% from its peak in November when the 'transitory inflation' narrative was officially ditched by central bankers.

The pace of interest rates hikes is already fuelling recession fears in Britain where the BoE warned that dealing with an inflation over 10% will have dire consequences for the economy. In the meantime, the world must now cope with fast-rising bond yields and a surging greenback. The dollar hit a two-decade high this morning as investors turned to their favourite safe haven as the war and COVID-19 lockdowns in China continued to weigh on global growth. This morning's data showed China's export growth slowed to its weakest in almost two years.

Data from the Labor Department showed weekly initial jobless claims rose to their highest level in three months, although the labor market remains a strength of the U.S. economy - recall what we've said about relation of stock market and unemployment in recent report. As stocks start dropping, people start searching the job. Be prepared for jump in unemployment for 2-3 times within nearest months.

In the 12 months through April, the PPI increased 11.0% after accelerating 11.5% in March and above an estimated increase of 10.7%.

"PPI slightly mixed to slightly less than expected today but overall there is still a lot to worry about... if S&P sells off again that is going to be broadly supportive of dollars," said Erik Bregar Director, FX & Precious Metals Risk Management at Silver Gold Bull Inc in Toronto. (The Fed) have a big, big credibility problem, they have always had one but it’s worse now. The inflation genie is out of the bottle and nothing else matters now," said Bregar.

Analysts at Barclays have warned of a 5 percentage point hit to euro zone GDP and a dive below dollar parity for the euro if Russia closes its gas taps as part of the escalating war in Ukraine.

"If EU sanctions force Russia to close its gas taps (to Europe), we expect EURUSD to fall below parity," Barclays said in a note on the rising tensions. Our economists estimate that a total loss of Russian supplies, combined with rationing of the remainder, could dent euro area GDP by more than 5 percentage points over one year".

A recent report by credit ratings giant Moody's warned that a halt to the energy trade between Russia and Europe would lead to recessions around the world
About 25% of the nearly 4,000 non-financial companies Moody's analyses globally would "face significant stress" it said, although it would be a significantly higher 40% in the Europe Middle East and Africa (EMEA) region. It "will cause significant stress around the world" Moody's said.
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The average interest rate on the most popular U.S. home loan rose to its highest level since 2009 last week and demand for mortgages jumped for a second straight week despite the rising costs, Mortgage Bankers Association data showed on Wednesday. The average contract rate on a 30-year fixed-rate mortgage increased to 5.53% in the week ended May 6 from 5.36% a week earlier, the MBA survey showed.
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Although CPI and PPI looks slowing at first glance, the inflation is spreading wider, taking all spheres of life. Thus, food prices are growing at a record 0.9% m/m, the growth of prices for new cars is accelerating again to 1.1% m/m, transport services are growing by 3.1% per month, the acceleration of prices for medical services +0.5% per month. Rental prices are also growing by 0.5% mom, and they make up a third in the CPI structure, household, cultural and entertainment services are growing in the range from 0.4 to 0.8% per month.

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Concerning PPI, average numbers show some slowdown but finished good prices stand at 1974 year record:
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As we already told in our reports, the US has compounding inflation that consists of monetary part and structural part. The monetary component could be controlled and depressed by Fed rate hikes, but it takes small part of total inflation. The core of current inflationary process is disbalances between consumption and production. Other words speaking, the US economy capacity can't satisfy the consumption demand and this difference previously were covered by financial stimulation. In fact, population consumes too many goods and this consumption was paid by owed money. It means that we have the lack of goods as economy can't produce them but we have a lot of money on the hands of consumers. The reasonable result - goods become more expensive. And rate change can't fix this problem as it can't provide more goods to consumption. It means that economy has to contract.

In 1929, the gap between real (that is, those that the US economy could provide) incomes and expenditures inflated by financial stimulation of demand reached 15% of GDP, respectively, the decline exceeded 30% Today, this gap exceeds 25%, which means that according to the results of the structural crisis, the decline will be more than 50% of the real GDP of the United States, which is about $15 trillion. The rate of decline should be approximately 7-9% per year, and today it is provided mainly due to accelerated (relative to income) price growth, precisely the inflation levels that you could see now. Besides, the negative effect of raising rates, in a way of further consumption drop due to the rising needs for debt servicing, are still here.

But why dollar is rising?

The reasonable question though is why dollar is rising if situation is so bad. The reasons are purely fiscal, not fundamental. Shortly speaking there are three of them:
  • The first reason is carry trade, although we suppose that it is not the primary factor. Fed rate change is faster than in EU, Japan and other countries, except GB, maybe. This makes investors to move capitals overseas. Additional reasons is geopolitical escalation in EU, lack of transparency in economical and political programme, what ECB and Brussels intend to do and how it will re-shape the economy. As we've warned in February, it already summed of ~ 1Trln. capital flow.

  • The majority of global debt is nominated in USD. Thus, to serve it, you need dollars. Now we have a liquidity crisis. In fact, Fed dries liquidity, starting QT. The liquidity crisis, leads to lack of safety and triggers accumulation of assets for debt servicing.

  • Finally, 2/3 of global debt has floating rate. As rates are rising it is more dollar needed to serve it. In a global scale, this is a huge amount of money.
That's being said - the rising of the dollar right now is a negative, sign of crisis event, when investors are running into funding currency, out from third-sided currency projects.

You can see the evident signs of liquidity drying. Last week we've talked about coming collapse on stock market. Now you can see effect on the cryptocurrencies. Now they become the primary source of liquidity. With assessment of S&P index collapse to 1500 point, we're sceptic on crypto rebound at any time soon. Correlation with NASDAQ has reached 95%. Thus our long-term analysis of cryptocurrency also seems to be correct.

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Currently some analysts suggest "no bottom" drop of the stock market. The logic is simple. Taking in consideration the average levels of stock market multiplicators, the 50% drop to ~ 2400 by S&P looks like perspective of nearest year. While another 50% to 1200-1500 should happen later because of new "high rates" reality. It leads to rising debt cost, taxes and cuts the profit margin (revenues-expenses) for the companies in the long term, interrupted by mid term 5-6% upside pullbacks.

Fed gradually is achieving what they want - to transfer liquidity from stock market to debt, as they have not enough money to serve it. Global equity funds witnessed a surge in outflows in the week ended May 11, as fears of an economic slowdown and further tightening by major central banks to tame stubborn inflation spooked investors. In a fifth straight week of net selling, investors liquidated global equity funds worth $10.53 billion, compared with just $1.65 billion worth of net selling in the previous week, according to Refinitiv Lipper.

The same is in EU. The rise in European bond yields is alarming some economists, who warn that Italy and Greece in particular do not have much wiggle room before their debt servicing burden starts rising, rekindling memories of the 2011-2012 euro debt crisis. Just five months into the year and even before the European Central Bank tightens policy, French and German 10-year debt yields are up over 120 basis points and set for their biggest annual surge since 1999 - the year the euro was born. Spanish, Italian and Portuguese yields are up more than 155 bps.

Higher yields are not confined to Europe - Janus Henderson predicts debt interest costs globally will rise by almost 15% this year compared with 2021. But the euro bloc, with some of the world's most highly indebted sovereigns, is among the most vulnerable. Indebtedness there has actually risen since the 2010-2012 crisis, when spiralling borrowing costs in Ireland and southern Europe threatened the very existence of the euro bloc, partly a result of the unexpected burden of the COVID-19 pandemic.

"If rates were to rise sharply for longer, we might well be facing Euro Crisis 2.0," Deutsche Bank investment strategist Maximilian Uleer said.

Everything goes with the plan, guys. There are the first Fed policy fruits that we're waiting for - collapse on the stock market (in progress), 3 times jump in unemployment till the end of the year, massive defaults among "zombie " (zero profit margin) companies and junk bonds companies that lead to accelerate of stock market collapse. Then, rising taxes, wages and earnings contraction should appear. Not very optimistic...

Speaking on dollar dynamic, it should last for more, at least in the short term. The money flows are not finished yet, as well as central banks policies' difference. Fed anyway will miss the amount of money to serve the debt burden, if even they drop the stock market. Because you can't serve 30 Trln portfolio with lack of liquidity and rise rates at the same time. The turning point happens, when rising yields start show not the Fed rate change but credit risk that investors stand demand for default. Massive US debt sell-off triggers sharp reversal on the dollar as well. With the inflation tempo that we have right now, it could stand in perspective of 1-1.5 years.

Despite that everything looks bad in the US - the EU hardly avoid the same destiny. Although EU in general has a bit better situation with debt that is below 100% of GDP, it has not similar structure of debt among the members, as we've mentioned. The US has much better commodity basis, almost self-sufficient, compares to EU. Besides, as EU companies have ~ 40-50% their business in the US - stock indexes are highly correlated, which means that EU hardly avoid the same way. Thus, hopes on sharp reversal of EUR hardly possible until situation becomes better.

Although it is too early to talk about it, and chances mostly stand theoretical, but some geopoliticians seriously start discussion of as EU break as US break. EU might be broken of inner contradiction between Brussels dictate and national interests while in the US it might be MAGA vs globalist confrontation, as currently no doubts that Trumpists will take control of Senate in November. So, any law activity of the US president will be controlled by counterparty. On a background of fast households' wealth deterioration, who knows what consequences it might be...

Technicals

Monthly

Although it seems that we should be happy as 1.0430 target is hit - there is few reasons for celebrating. The technical picture mostly confirms our worry that we've shown above, in the fundamental part. The recent CFTC report shows shorts covering in sufficient amount, but open interest dropped, which means that this is just profit taking by speculators.

Market is not at oversold. Our major AB-CD pattern here shows clear acceleration of CD leg through the OP target, market already stands below YPS1 which is strongly bearish. This significantly increases chances on downside continuation. Although we have nearest target around 0.9750, which is the butterfly 1st extension, it is more probable that in the case of drop below the parity, EUR should tend to major target cluster of 0.90, including 1.618 butterfly target and two different XOP's, with all-time one.

EUR_m_16_05_22.png


Weekly/Daily

On a weekly chart we see nothing yet but oversold level. No reaction starts by far. So, let's see whether EUR is able to show something valuable. On daily chart the only idea that we see is potential reverse H&S pattern. We have completed 1.618 butterfly that we've traded last week. This ratio is typical for H&S and butterflies very often becomes the part of it. Thus, here we keep an eye on it. Neckline agrees with strong resistance area and daily OB which might be used as potential target for intraday trading:
EUR_d_16_05_22.png


Intraday

Since it is long way to go on daily chart until H&S, which actually could fail, on intraday chart EUR has near standing target of 1.05 area. Butterfly is done, we have warned about XOP on Friday and it is still barely not completed, but we have W&R, which could mean that no return to XOP happens probably. Anyway, if EUR shows upside bounce at all - it should start it from here. Thus, if you're interested with long position taking, you could try this one. Downside breakout means that no retracement happens and EUR keep going down.
Maybe we even could treat this action as DRPO "Buy" with the target around 1.0480-1.0490
EUR_1h_16_05_22.png
 

Sive Morten

Special Consultant to the FPA
Messages
16,119
Morning everybody,

So, everywhere tactical bounce is started. Today I do not see any necessity to update EUR, just because everything goes with the plan, and we already have specified targets and levels for short term bounce. Besides, GBP shows more interesting trading setups. So, I would like to talk about GBP today.

The bounce that we have now is not the changing of major bearish context and our 1.20 target still stands on the table. The thing that we're dealing with right now is just a temporal short term bounce.

On daily chart three major moments. First is - untouched 1.20 XOP, second - 1.2420 daily Overbought level and finally bullish reversal session right at the bottom with MACD upside trend. This tells us few things. Upside retracement might be compounded, say, AB-CD, second - tod-tom hardly price jumps above 1.2420. This is important because of patterns below.
gbp_d_17_05_22.png


4H chart shows that we have 1.2450-1.2490 K-resistance area as well. Thus, it makes almost unavoidable H&S shape here, as GBP can't break through the neckline directly. Here is we also have 3-Drive, but it is almost done already.
gbp_4h_17_05_22.png


On 1H chart XOP target stands around 1.2440 and also agrees with the same level. This is the first setup for bears. It is possible to consider short entry but place stop behind XOP, and better above 4H K-area, at least initially. Potential minimum target is the right arm of H&S. But, we also can't exclude its failure because of XOP. Thus, this position could get better potential.
gbp_1h_17_05_22.png


For the bulls is nothing to do by far, as we already too close to XOP and Obought. So, it makes sense to wait for H&S right arm to make decision on entry.
 

gwynfor

Private, 1st Class
Messages
53
Hi Master Sive,
Thank you again for all your hard work in difficult times.
Can you please help me with the 3 Drive. I have read the section on it in the Forex Military School several times and am still confused.
Is this the correct way to mark the extensions/expansion ?
GBPUSDH4.png
 

Sive Morten

Special Consultant to the FPA
Messages
16,119
Hi Master Sive,
Thank you again for all your hard work in difficult times.
Can you please help me with the 3 Drive. I have read the section on it in the Forex Military School several times and am still confused.
Is this the correct way to mark the extensions/expansion ?
View attachment 76844
Hi mate, no - you should take extension of the retracement action (that stands against the major tendency). Here it is. This is the same way how you set the butterfly targets.
gbp_4h_17_05_22.png
 

Sive Morten

Special Consultant to the FPA
Messages
16,119
Morning everybody,

So, EUR is trying to catch up with the rally that we see on other markets. Performance is not as strong as on GBP, but the background is better. EUR still stands around monthly OP and weekly oversold. On daily chart, if GBP stands already at K-area and overbought, EUR is still on a half way to it:
EUR_d_18_05_22.png


Performance here might be a bit different, although swings should be in the same direction. Thus, EUR also now is turning down, forming the retracement after recent rally:
EUR_4h_18_05_22.png


On 1H chart it seems that we could keep an eye on 1.0480 support area, that might become upside continuation start. 1.0430 next support could be considered only if EUR fails to turn up from the K-area.

1.0480 seems interesting, guys, because it might be B&B Buy on 4H chart. We probably should get the bounce but be ready for possible drop to 1.0530 still - move stops to breakeven once upside bounce starts. (here is we have minor DRPO "Sell" on top, by the way)
EUR_1h_18_05_22.png
 

Sive Morten

Special Consultant to the FPA
Messages
16,119
Morning guys,

So, markets are coming to the vital point for the bulls and where we also should make a decision - whether we would like to take part in all this mess or not :))

On EUR currency market is flirting with our 1.0480 K-support area that we've mentioned today. It is unclear by far, could it go up right from there or make a bit deeper retracement first. If you've taken position here already, you could either move stops to breakeven or add more position at the next level which give you an average around 1.0450 that is also nice.

EUR_4h_19_05_22.png


I'm speaking about action to the next support because it looks nice. Take a look, we have Agreement with XOP target right at Fib support.
EUR_1h_19_05_22.png


The same story on GBP -I'm really aesthetically like the combination of 3-Drive Buy and 5/8 Fib support which makes it attractive for long entry consideration.

GBP_1h_19_05_22.png


At the same time, guys, as stocks are keep falling, currencies could turn up earlier, without reaching of 5/8 levels.
 

Vokin

Private, 1st Class
Messages
25
Sorry, i dont understand:.."as stocks are keep falling, currencies could turn up"....
When stock falling, market is in risk off mode, thus safe heaven curr (with USD) are UP?
 

Sive Morten

Special Consultant to the FPA
Messages
16,119
Sorry, i dont understand:.."as stocks are keep falling, currencies could turn up"....
When stock falling, market is in risk off mode, thus safe heaven curr (with USD) are UP?
This is in a cross-markets mode. Domestically, currencies and stocks have negative correlation. Just take a look at DAX and EUR two days ago. Selling of the stocks suggest demand for liquidity, which makes currency to rise. Here I'm talking on very short-term relation, for 1-2 sessions.
 

Sive Morten

Special Consultant to the FPA
Messages
16,119
Morning everybody,

So, in general our trading plan for this week performs nice. Now we could discuss possible upside targets. Today I wouldn't count on too extended action, just because daily Obought stands at 1.0628. The same is on GBP that already stands at Overbought for the 4th session in a row.
EUR_d_20_05_22.png


On 4H chart we have clear AB-CD pattern, COP is just has been hit. The OP stands at 1.0476. It seems too extended for today:
EUR_4h_20_05_22.png


On 1H chart market is forming upside butterfly and hits 1.27 extension, the 1.618 perfectly agrees with daily OB level right at 1.0627. This is more reasonable target. Besides, EUR shows good acceleration, so chances to reach next extension looks good.

The only problem right now is with the entry. It is not reasonable to jump right here, because target is too close and stop is extended, so risk/reward ratio is not in our favour. Thus, we need either wait for deeper pullback, in a way of downside ab=cd pattern to one of the support areas (especially if bearish grabber appears). Or, use minor upside swing from 1.0551 level as the background for position taking with stops just under this level. But it is very small scale 5-15 min chart trade probably... In this case risk/reward is OK and risk in general will be very small. Maybe you could find some other solution:

EUR_1h_20_05_22.png
 
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