Forex FOREX PRO WEEKLY, May 18 - 22, 2020

Sive Morten

Special Consultant to the FPA
Messages
13,394
Fundamentals

World indeed gradually is coming back to life as pre-pandemic tensions are returning as well. This week we've got many IQ GDP releases, including UK GDP that let to estimate approximate picture of epidemic impact on global economy, also we've got Fed statement on US economy perspective. Next week we will keep an eye on US consumer spending data, WTI futures expiration again and some other issues. In EU area everybody keeps an eye on Germany court decision against ECB bond buying programme and what continuation will follow.

Federal Reserve Chair Jerome Powell, in a sober review of where the U.S. economy stands on the cusp of its reopening, said on Wednesday the country could face an “extended period” of weak growth and stagnant incomes, pledged to use more Fed power as needed, and issued a call for more fiscal spending. Though Powell is the latest in a parade of policymakers to brush off the notion that they might push rates into negative territory, Fed futures were pricing a small chance of sub-zero U.S. rates by March next year.

The dollar climbed towards a three-week high on Thursday as risk appetite deteriorated broadly after Federal Reserve Chairman Jerome Powell dismissed speculation about negative interest rates.

In its latest report on financial stability on Friday, the Fed said the global pandemic imposed sweeping risks. While policy actions from the Fed and others have helped bolster the economy, and the banking system has withstood the initial downturn, the report warned of major risks if the pandemic proves lengthy or more severe than anticipated.

Friday’s report noted the financial stresses that could build if the crisis persists, and households and businesses continue to be deprived of wages and revenue.
In short, no one from hedge funds to major banks to households would be immune from the risk they might default on debt, be forced to sell off assets, end up in bankruptcy, or see the value of assets dwindle.

“Forceful early interventions have been effective in resolving liquidity stresses,” Fed Governor Lael Brainard said in an emailed statement.
But she also highlighted a key worry at the central bank: that what might start as a cash crunch could spiral into something worse. Among highly indebted businesses, she said, “we will be monitoring closely for solvency stresses...which could increase the longer the Covid pandemic persists.”


Few if any parts of the economy are safe. The Fed noted for example that both commercial office buildings and farmland held high valuations relative to the income produced, possibly setting the stage for a drop in price. That could mean stress for property owners who have borrowed against their property, or for the financial institutions that hold the loans.

“Financial sector vulnerabilities are likely to be significant, in the near term,” the Fed said. “The strains on household and business balance sheets from the economic and financial shocks since March will likely create fragilities that last for some time.”

Love them or loathe them, negative interest rates are back in the spotlight as ammunition-depleted central banks debate the pros and cons of going down the unorthodox route already trodden by the BOJ and ECB. The Federal Reserve has so far brushed aside President Donald Trump’s calls to adopt negative rates. Bank of England governor Andrew Bailey too said he isn’t considering taking rates sub-zero. But markets reckon otherwise. Fed funds futures, for the first time ever, reflect a small chance that a negative rate policy will find its way to U.S. shores. Short-dated British gilt yields are back below 0%.

The truth is the coronavirus crisis is heaping pressure on policymakers to do more to support growth. New Zealand has flagged a possible shift to negative rates, just days after Norway cut rates to 0%. Even BoE boss Bailey declined to rule it out altogether.

Powell and other Fed officials will talking in coming days, the former testifying before a Senate committee on Tuesday. Bailey will take questions from UK lawmakers on Wednesday. Their comments will be scanned closely for any shift in stance.

-Less than zero? Powell shows no love for negative rates
-Bank of England not considering taking rates below zero - Bailey

This is interesting because just PJ talked on sufficient liquidity stimulus and that probably no need for more stands now - The U.S. House of Representatives on Friday narrowly approved a $3 trillion bill crafted by Democrats to provide more aid for battling the coronavirus and stimulating a faltering economy rocked by the pandemic.

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The Labor Department’s weekly jobless claims report on Thursday, the most timely data on the economy, supports the contention that it would take a while for activity to rebound even as businesses in many states reopen after shuttering in mid-March as authorities tried to slow the spread of COVID-19, the respiratory illness caused by the virus.

The latest data lifted to 36.5 million the number of people who have filed claims for unemployment benefits since mid-March, with more than one in five workers losing their job. Claims will be closely watched in the coming weeks for signs of whether companies rehire workers as businesses reopen.

German economic output contracted by 2.2% in the first quarter, as market participants were expecting. Germany slid into recession after suffering its steepest quarterly contraction since the 2009 financial crisis as shops and factories were shut down in mid-March, preliminary data showed on Friday. Moreover, the euro zone economy experienced its deepest contraction on record in the first three months of the year against the previous quarter.

“Data published since the first estimate has been generally weaker than expected and we see a risk of the first estimates being revised down for several countries,” SEB’s Hammer said. Kit Juckes, macro strategist at Societe Generale, said that euro/dollar “is too weak already to fall fast”.

U.S. President Donald Trump signalled a further deterioration of his relationship with China over the coronavirus outbreak, saying he had no interest in speaking to President Xi Jinping right now and going so far as to suggest he could even cut ties with the world’s second-largest economy.

As we talked about it earlier, it is a mistake that coming expectations are deflationary because of drop in consumer demand. Data shows that inflationary expectations are rising in perspective of 2-3 years. Fathom reports that

"the colossal amount of fiscal and monetary stimulus that has been put in place, and the further blurring of the lines between monetary and fiscal policy, have raised fears of inflation in some quarters — fears that Fathom, for the time being, does not share. Alternatives to fiat currencies including gold and Bitcoin are trading above their pre-crisis levels, but not far above for now. Concerns that this crisis will radically undermine the value of fiat currencies in the longer term are not yet priced in — correctly in Fathom’s view.
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Such optimism as there is about the shape of the global recovery is fragile and could easily be undermined by the emergence of a second wave of the disease. Unfortunately, there is already some evidence of that from China and South Korea. Watch this space.

In general guys, multiple fact GDP numbers shows that expectations were worse than reality shows, but it is too early to celebrate. As Fathom reports -

"Amazingly, these numbers were better than many had predicted ahead of the release. That being said, most countries only implemented restrictions on movement in the late stages of the quarter suggesting that worse numbers are still to come. Given that this crisis is unprecedented in economic history, it is likely that the uncertainty surrounding these numbers is greater than usual. "

Recently we've talked about divergence between macroeconomic data and behavior of financial markets. Normal balance is broken by huge liquidity injection. As a result, stock market has lost touch with reality:
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But not only stocks. As Fathom tells - All four of equities, tech stocks, government bonds and house prices are now in ‘bubble’ territory, around 2 standard deviations above their respective means. And that is despite the fact that the VIX (inverted on the chart below) is recording fear at the same level as during the Great Financial Crisis. The massive response of macroeconomic policy underpins this picture.

1589621293314.png


It means that nothing is clear yet and residual crisis momentum has big chances to trigger another downside leg on financial markets in nearest time. As a result, Fathom provides the following forecast of Global GDP:

The trough of the global recession was probably reached in April, with GDP down some 10% in Q2 compared to 2019 Q4. The three scenarios V, U and L remain in play, with equal weights on V and L (45% each) while the intermediate U shape has the lowest weight. In our view, the U scenario is not stable: more likely it will morph into either a V (back to pre-crisis levels by the middle of 2021) or an L (where a growing financial crisis will keep growth lower for much longer).
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CFTC Data

Speculators' net bearish bets on the U.S. dollar shrank to the smallest position in seven weeks
in the latest week, according to calculations by Reuters
and U.S. Commodity Futures Trading Commission data released on Friday. The value of the net short dollar position was $9.08 billion for the week ended May 12, compared with a net short position of $9.15 billion for the prior week.

In a wider measure of dollar positioning that includes net contracts on the New Zealand dollar, Mexican peso, Brazilian real and Russian ruble, the U.S. dollar posted a net short position valued at $8.06 billion, compared with a net short position of $8.35 billion a week earlier.

Increased worries about a second wave of coronavirus infections and a gloomy outlook for economic data rattled investors in recent sessions providing some support to the greenback. The U.S. Dollar Currency Index, which measures the greenback’s strength against six other major currencies, was on pace to finish the week up 0.7%, its best weekly gain in six weeks.

On Friday, data showed U.S. retail sales endured a second straight month of record declines in April as the coronavirus pandemic kept Americans at home, putting the economy on track for its biggest contraction in the second quarter since the Great Depression.

"Haven assets have fared solidly this week as markets price in a longer road to recovery," said Joe Manimbo, senior market analyst at Western Union Business Solutions in Washington.

On EUR speculative position has not changed too much, mostly stands the same as last week.


Next week, as we've said above, we intend to watch on Fed comments on Tuesday and BoE comments on Wednesday on perspective of national economies and potential change their view on negative rates.

Powell and other Fed officials will talking in coming days, the former testifying before a Senate committee on Tuesday. Bailey will take questions from UK lawmakers on Wednesday. Their comments will be scanned closely for any shift in stance.

-Less than zero? Powell shows no love for negative rates
-Bank of England not considering taking rates below zero - Bailey


Second moment is earnings report of retail companies that should become good source of additional data that describes situation in economy. The U.S. first-quarter earnings season is mostly winding down, but the retail sector is just revving up. Coming days bring results from big U.S. retailers including Walmart, Home Depot, Lowe’s, Target, Kohl’s and Best Buy. Their figures will show whether Americans, locked down by coronavirus, are still spending money.

With more than 35 million U.S. jobs lost since mid-March, the outlook isn’t rosy for the consumer discretionary sector . S&P Consumer sector Index is expected to post a 45% drop in Q1 earnings. S&P Consumer staples on the other hand should see a 5.2% increase, according to IBES data from Refinitiv. The retailers are reporting in the shadow of online shopping giant Amazon, which is among the “stay-at-home” stocks benefiting from the lockdown. Its shares have soared some 28% this year.

Finally, Tuesday brings the monthly expiration of U.S. West Texas Intermediate crude futures contract. Normally uneventful, the expiry turned into a nightmare last month when crude slumped to negative-$40 a barrel and brimming storage tanks discouraged traders from taking delivery of oil. Many are worried about a repeat performance. Already, the U.S. Commodities Futures Trading Commission has warned market participants they should be prepared for volatility and negative pricing again. After all, oil storage remains tight and U.S. demand is still 23% below last year’s average.

But oil prices have rallied of late on hopes energy demand will get a boost from an easing of lockdown restrictions. In another hopeful sign, U.S. crude inventories fell in the most recent week for the first time since January. Yet some traders seem to be heeding the CFTC’s warning. Volumes in the July futures contract, which expires in a month’s time, are outpacing the June contract by nearly 50%.

And here is, guys, picture of the day. Take care yourselves...
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So, -
If we try to make a bottom line and analyze somehow all this mess, we can't come to definite conclusion as current situation has too much blank spots and involves too many parameters. It seems that we will get more or less clear information by Autumn at best. The only thing that we could say is US stands in better position compares to EU by few reasons. First is, that we treat as major one - markets are not shocked by huge Trillions injections from the Fed. They accept it easily. Potentially this is a fiscal bomb but in longer perspective. Now, it short-term - this gives strong advantage to US in resolving of pandemic consequences, compares to EU. EU still can't get to agreement on measures - what they should be and how large they should be, so that politicians start to talk on EU breakup.
Second - some relapse of financial crisis should happen as bearish momentum is strong and markets overestimated positive effect of Fed measures. So, some deep retracement, or even, new lows could happen across the board within few months.
Any negative turn will be supportive to USD as well.
It seems that US Dollar is turning from reserve currency into global currency features. Who knows maybe this is it that Covid story stands for...
Thus, currently we do not see any single factor that we could hook for, that stands potentially in favor of EUR. Brussels bureaucrats can't come an agreement on saving of core EU countries, such as Italy and Spain. What will happen when Eastern Europe minions open their starving throats.
This makes us to have negative EUR/USD view in long-term perspective. The first euphoria of "coming back to life" sentiment and seeming decrease demand for safe haven assets was mostly phantom, naked the existed problems and showing that things wouldn't sort themselves out


Technicals
Monthly


While emotions run high around fundamental and macroeconomic data, technical picture barely has changed since last week. EUR has spent all week in tight range, struggling with intraday resistance area. Still, this price behavior confirms our suggestion on importance on this level as direction's bet stands on the table.

Technical picture keeps intrigue by far as patterns that we have here mostly are bullish. And despite rising concern on EUR longer-term perspective, patterns are not broken yet.

Although major conditions stands the same - technically EUR direction depends on breakout of the doji. But two side-by-side grabbers set bullish context and point on its invalidation level - grabbers' lows. This fact changes technical picture on EUR as trend on monthly chart remains bullish.

Interestingly, that doji levels coincide with Pivots support and resistance levels as well. Downside breakout opens road to the parity, while upside break should open road for equal doji distance to upside - somewhere to 1.23 area. Still the major question of EUR driving factor stands on the table. It is difficult to find something inside EU that could drive EUR up to 1.23, or at least to 1.15. Thus, in turn, something should be in US that should weaken US Dollar.

Also, as we've said earlier, we're keep watching on the Dollar Index chart, or better to say historical resistance level that will provide the direction. This is all time K-level. As you understand, its breakout or reversal out from it will be major event for FX market.

eur_m_18_05_20.png


Weekly

Weekly time frame mostly shows indecision. EUR shows equal swings in both directions and in recent few weeks they have become much smaller than previously. EUR was not able to move above the local top that we've pointed two weeks ago. It means that bullish turn on EUR has not happened. Besides, we also have got the bearish grabber that is opposite to monthly one. If it succeeds - it will cancel monthly grabbers.
This makes us to be extra careful with any bullish setups that we could get on daily chart, including the one that we've discussed last week. Yes, we have hidden bullish divergence here. It is good but too few to make a context for the trade. Besides, it is too blur in time and for the truth sake - it is not completed yet, as no bullish cross of MACD lines is happened. Definitely, some clear bullish setup has to be formed on daily chart as well to make conclusion on reversal. Now we do not have it yet, or may be we will not get it at all, taking in consideration recent fundamental background and price action here, on weekly chart.
eur_w_18_05_20.png


Daily

Here is our long-delayed daily scenario that stands in game for two weeks already. What new we could add here compares to Friday? Almost nothing, except maybe new small bearish grabber that has appeared there. Price behavior shows rising bearish pressure on the market, because with obvious signs of bullish reversal price can't get started it. Once price can't go up, it goes down - no third way exists.
It means that we repeat the same conclusion as on Thu-Fri - no new longs by far. Bears could try to go short on a background of multiple grabbers.

eur_d_18_05_20.png


Intraday

Once we decide to forget about longs for some time, let's consider how we could go short on EUR. In general the price action recent weeks takes the flag shape. Previous tops are grabbers. On a way up on Friday market hits Agreement resistance, forming "222" Sell pattern. 1.09 top is also reversal candle on 4H chart as we've said in Friday's video. Thus, it seems that we could watch for minor bounce up on Friday's grabber directly and initial stop above Agreement resistance and the grabber.
eur_1h_18_05_20.png
 

soul rebel

Private, 1st Class
Messages
58
Hello Sive
Thank you for posting your detailed weekly report, very interesting reading as always.
Following on from your GBP/USD analysis last week and your reasoning for USD strength over the Euro, would it be correct to say this could be the start of a disparity between the direction of these pairs over the coming weeks/months?
Kind Regards
Viresh

P.S: Looks like your inclination was correct about GBP with a tail end close on Friday I think you were right about your suggestion we could see the 50% level hit around 120 even ;)
 

chalo

Private, 1st Class
Messages
27
Thank you Sive, always grateful for you analysis. Looking forward to the announcements next week. Enjoy your weekend.
 

gwynfor

Private, 1st Class
Messages
38
Hi Guys,

Havn't seen Stag here for some time. Hope he's keeping well.

You may recall my fascination with situations where I see an EW pattern matching Sive's invaluable analysis. I may have one here to share.

Essentially from the high of 1.1146 I see a 3 wave down move. The complex middle section from W to X is I believe an expanded flat. If the ensuing Y wave matches the W in terms of distance travelled then we get a projected low of 1.0639 - very close to the 20th March low of 1.0636.

The Y leg would also complete the Blue (B) leg in response to the Blue (A) leg. As they are likely to be equal this would suggest we have a regular flat. It's Blue (C) would then move up back towards and probably slightly past 1.1146.

Hope this helps or at least is of interest
Overall at 2020 05 17.png
 

Sive Morten

Special Consultant to the FPA
Messages
13,394
Havn't seen Stag here for some time. Hope he's keeping well.

You may recall my fascination with situations where I see an EW pattern matching Sive's invaluable analysis. I may have one here to share.
Thanks mate, great Insight. Long time we haven't seen any EW analysis, especially with Stag absence...
Now we need just find out how it will be in reality ;)
 

Icecube

Recruit
Messages
4
Dive thanks a lot for your updates. Pls Sive which best indicator can be best to use now? Pls help us with updated indicator. Thanks
 

Sive Morten

Special Consultant to the FPA
Messages
13,394
Dive thanks a lot for your updates. Pls Sive which best indicator can be best to use now? Pls help us with updated indicator. Thanks
Hi mate,

there is no "best" or "worse" indicator per se. It depends on your trading system. Any indicator that you use just execute the special function in your trading plan. For example, for trend - we use MACD, to analyze Overbought/Oversold - Detrended Oscillator etc.
 

Sive Morten

Special Consultant to the FPA
Messages
13,394
Morning everybody,

So, as we've said - only strong external driving factors could turn change the situation on the markets. Once we've said that - bingo. Breaking news on first positive results of Covid vaccine testing and second - France and Germany have approved EU 500 Bln bonds programme to support most hurt economies - Italy and Spain.
So, EU was positively stunned twice. That drastically changes the picture, at least in short-term. The one thing is bad - we can't foresee this kind of surprises, this is out of our control.

The power of this news should be enough to lead EUR at least to 1.11 area and then we will see. On daily chart all grabber have been erased, price is not at Overbought and not at any Fib resistance. So, the road up is open:
eur_d_19_05_20.png


ON 4H chart we have few targets. First one is our neckline - XOP of minor AB=CD pattern. It could be reached within few hours probably. Next one is large AB=CD and butterfly 1.27 extension - both coincide the daily top around 1.11.
eur_4h_19_05_20.png


...and how nice Monday has started.;)) Take a look, price has started great drop right from our XOP target where we've taken short position. Here is another case - where you could see efficiency of b/e stop orders...

On a way up, at least till XOP on 4H chart do not expect deep retracement. It already has happened. So, maybe it makes sense to consider Fib level from most recent upside swing...
eur_1h_19_05_20.png



And on GBP - guys, we also should review the trading plan. As market shows reaction at our 4H OP - keep an eye on possible reverse H&S pattern on 1H chart. More details in the video.
 
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