Forex FOREX PRO WEEKLY, May 23 - 27, 2022

Sive Morten

Special Consultant to the FPA
Messages
16,280
Fundamentals

This week has brought few surprises, not only on FX but on other markets, say stocks. At first glance, retail sales data was positive +0.6%, the rest of data later in the week was not too negative as well. But stock market has shown sharp reversal and huge collapse on Tuesday. As usual the real situation is hidden with details.

Market overview

The U.S. dollar recouped some of its losses against the euro on Friday, but remained set for its worst weekly performance against the common currency since early February as investors questioned whether the greenback's month-long rally was done.

The greenback has been supported in recent months by a flight to safety by investors, amid a rout across markets due to fears of the impact of soaring inflation, a hawkish Federal Reserve and the Russia-NATO conflict. That rally, however, sputtered this week as increased volatility in global financial markets sent investors to the yen and the Swiss franc for safety.

"The buck struggled to keep afloat this week as the rush to safety resulted in higher U.S. Treasury bond prices and lower yields," said Joe Manimbo, senior market analyst at Western Union Business Solutions in Washington, D.C. Meanwhile, an improving timeframe and trajectory for ECB interest rate hikes gave the euro an added boost," Manimbo said.

Euro zone money markets on Friday ramped up their bets on a 50 basis-point interest rate hike from the European Central Bank in July that would bring the bank's policy rate to 0%. Earlier this week, Dutch central bank governor and ECB policymaker Klaas Knot said the bank should keep the door open to a 50 bps hike if upcoming data suggested inflation was "broadening further or accumulating".

Knot's speech shifted market expectations, and on Friday traders priced in as much as 36 bps of hikes by July . That suggested a 25 bps hike is fully priced in, and about a 50% probability of an additional 25 bps move. Rising bets on a 50 bps hike have also driven a 16 bps surge in Germany's two-year yield this week, according to Tradeweb prices.



"Even if (Knot's) is a minority view at the ECB, I think we can now consider that 25 basis points at this meeting is going to be the minimum," said Antoine Bouvet, senior rates strategist at ING.

The dollar's retreat this week came after it hit a more than 5-year high against the euro last week.

"We see the buck as a bit elevated for sure and see room for other currencies to flourish as there is a gradual shift to better prospects if the global economy is to be helped out and revived from a terrible first half to the year," said Juan Perez, director of trading at Monex USA in Washington.

Finance ministers are worried that the economy would deteriorate further as sanctions against Russia make importing raw materials from oil to wheat more expensive - straining household budgets just as borrowing costs also rise.

"The economic outlook globally is challenging, and uncertain, and higher food and energy prices are having stagflationary effects, namely, depressing output and spending and raising inflation all around the world," U.S. Treasury secretary Janet Yellen said in Bonn on Wednesday.

Yellen had previously avoided mentioning "stagflation" - a term associated with 1970s inflation spikes and sluggish growth - when describing the U.S. economy, which has strong momentum from the COVID-19 recovery and strong labour market. A generation ago, it took Fed's chair Paul Volcker a brutal series of rate hikes and a recession to break the back of inflation, ushering an era of stable prices and steadier economic growth.

International Monetary Fund Managing Director Kristalina Georgieva said on Thursday that global finance leaders may need to become more comfortable with fighting multiple bouts of inflationary pressures. Georgieva told Reuters that it was getting harder for central banks to bring down inflation without causing recessions, due to mounting pressures on energy and food prices from war, China's zero-COVID policies that have slashed manufacturing with lockdowns, and the need to reorder supply chains to make them more resilient.



"I think what we need to start getting more comfortable with is, that may not be the last shock," she said, noting that she stopped viewing inflation as a "transitory" one-time shock when the Omicron COVID-19 outbreak took hold late last year.

She said strong demand from the United States, supply chain disruptions and the Ukraine war effects all point to longer-lasting inflation. The COVID-19 pandemic is not over and there could be another crisis, she added on the sidelines of a G7 finance ministers and central bank governors meeting in Germany.


What's going on?


Here is the reason why relatively positive retail sales was not able to inspire markets:

Evidence of red-hot inflation seeping into the American economy is sending a chill through investors after major U.S. retailers reported people are cutting back on buying bigger-ticket items as they just try to get by. The sell-off came the day after data showing U.S. retail sales rose strongly in April as consumers bought more motor vehicles amid supply improvements along with increased spending at restaurants despite high inflation, souring consumer sentiment and rising interest rates

Investors wiped almost 25% off Target shares on Wednesday after its profit halved, and it fell another 3.2% on Thursday morning. Walmart was down 1.3% Thursday after already falling more than 17% in the two sessions after it reported weak results early on Tuesday.

"Retailers are starting to reveal the impact of eroding consumer purchasing power," Paul Christopher, head of global market strategy at Wells Fargo Investment Institute, said on Wednesday after his firm forecast a mild recession around year-end into early 2023. The consumer's ability to spend is eroding at a faster pace than it was a month or two ago. We think that pace is going to accelerate further," he said.

Cantor Fitzgerald said it was unwinding its expectation for a short-term bounce in equities and that if there is a lift, it would likely be shallow and "not worth playing."

"The (Wal-Mart/Target) numbers are very concerning as they show the consumer is reducing discretionary purchases while company margins return to pre-pandemic levels," said Eric Johnston, head of equity derivatives and cross asset at Cantor Fitzgerald.

Cliff Hodge, chief investment officer at Cornerstone Wealth, said the narrative was "shifting from inflation scare to recession scare."

Chuck Carlson, chief executive officer at Horizon Investment Services, said retailer results appeared to be potentially "one more indication of perhaps a slowdown in the economy. I just wonder if people are starting to really get pinched by fuel costs – both businesses as well as consumers. ... When you are paying north of $5 for a gallon of gas, that’s a hammer and that’s a hammer on everybody,” Carlson said.

But this is not the final point - J. Powell has decided to put the final nail in the coffin:

"What we need to see is inflation coming down in a clear and convincing way and we're going to keep pushing until we see that," Powell said at a Wall Street Journal event. "If we don't see that, we will have to consider moving more aggressively" to tighten financial conditions.

"Achieving price stability, restoring price stability, is an unconditional need. Something we have to do because really the economy doesn't work for workers or for businesses or for anybody without price stability. It's the bedrock of the economy really. Acknowledging the possible "pain" that controlling inflation might cause in terms of slower economic growth or higher unemployment, Powell said there were "pathways" for the pace of price hikes to ease without a full-blown recession.



But if inflation does not fall, Powell said the Fed would not flinch from raising rates until it does. (!!!)

"If that involves moving past broadly understood levels of 'neutral' we won't hesitate to do that," Powell said, referring to the rate at which economic activity is neither stimulated nor constrained. "We will go until we feel we are at a place where we can say 'yes, financial conditions are at an appropriate place, we see inflation coming down.'"

The Fed targets an inflation rate of 2% annually, but prices using the central bank's preferred measure are currently rising at more than three times that level. Inflation that is too fast can distort household and business planning, and, more to the point for the sense of urgency felt by Powell and his Fed colleagues, erode the ability of the central bank to keep it under control.

"Once the Fed starts hiking, they continue to hike until something breaks. Now the question becomes is what we should be looking at as a potential break? The equity market? Is it credit? Is it housing? I think that's going to be this cycle's big unknown," said Ian Lyngen, head of U.S. rates strategy at BMO Capital Markets in New York.

But meantime -
"The economy is strong. Consumer balance sheets are healthy. Businesses are healthy," Powell said :cool:
1653122307205.png


Now recall what we've said in previous two reports, concerning employment - "Once stock market turns down, be prepared to rising unemployment, as current levels missed the reality for 2-3 times". In fact, currently we have 9.5-10% unemployment in the US, but statistics doesn't include those who are not searching for the job and sit upon stock market "welfare" that was built with covid stimulus money. Now we see that these people start loosing their "welfare" and starts job searching:

United States Initial Jobless Claims
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But most investors are still do not understand what is going on. Take a look, at the recent Reuters poll, the majority still suggest that inflation comes down soon, Fed rate will be around 2.75% by the end of the year and GDP drop lasts not too long. A majority of poll respondents now expect the fed funds rate to be at 2.50%-2.75% or higher by the end of 2022, six months earlier than predicted in the previous poll, and roughly in line with market expectations for a year-end rate of 2.75%-3.00%.
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Meanwhile the poll showed a median 40% probability of a U.S. recession over the next two years, with a one-in-four chance of that happening in the coming year. Those probabilities were steady compared with the last survey. Forecasts for the unemployment rate remained optimistic, averaging 3.5% this year and next, before picking up to 3.7% in 2024.

The U.S. economy, which contracted for the first time since 2020 in the January-March period, was expected to rebound to an annualized growth rate of 2.9% in the second quarter. But forecasts were in a significantly wide range of 1.0%-6.9%. GDP growth was predicted to average 2.8% this year before moderating to only 2.1% and 1.9% in 2023 and 2024, respectively, down from the 3.3%, 2.2% and 2.0% predicted last month.

Reality stands a bit different. Investors are becoming increasingly concerned about global growth with optimism at an all-time low, as they increase their cash holdings to the highest level in two decades, according to BoFA Securities' monthly fund manager survey. Growth expectations remain weak, BofA said, with optimism about the economic outlook falling to a record low in its survey history, the U.S. investment bank said.

Hawkish central banks (31%) and global recession (27%) are considered to be the two biggest tail risks among investors, with inflation (18%) and war fears (10%) receding. The May fund manager survey is "extremely bearish", BofA said, but still missing the "full capitulation" piece as investors continue to expect rate hikes rather than cuts.

Global investors massively cut their positions in bond and equity funds in the week ended May 18 on concerns of inflation and that rising interest rates will lead to recession. According to Refinitiv Lipper, investors exited a net $18.57 billion worth of global bond funds, marking the biggest weekly outflow since Feb. 16. But where is money flows - right, to the US Government debt. Government bond funds however, remained in demand as they lured $5.45 billion in a third straight week of net buying.
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A sell-off in U.S. stocks and bonds will likely dry up during the summer months as the Federal Reserve whittles down its nearly $9 trillion balance sheet, said Rick Rieder, chief investment officer of global fixed income at Blackrock, the world’s largest asset manager. Rieder believes the Fed’s balance sheet reduction, which is expected to begin in June, will prove a “catalyzing moment” for asset prices and after that confidence may return to markets. Markets have been shaken by the central bank’s hawkish pivot, which is targeting the worst U.S. inflation in decades.

"I do think we'll see better markets starting sometime in around the summer. ... A lot will happen between now and then,” Rieder told Reuters in an interview.

Rieder believes that a rise in Treasury yields, which move inversely to bond pieces and saw yields on the benchmark 10-year Treasury hit a 3-1/2-year high of 3.2% last week, is nearly over. Ten-year yields could hit an upper limit of possibly 3.25% to 3.5%, Rieder said, though he expects them to decline from those levels in the coming few months.

"I think we've seen at least 90% of the move in rates this year", Rieder said.

Longer-term, however, Rieder (BlackRock) believes the decades-long bull market in bonds is likely over. "We've seen the end of the bond bull market: There's a structurally higher inflation because of deglobalization, supply chain evolutions, stickier infrastructure costs,” he said.

Concerning the EU - situation stands tricky. Just take a look at Trade balance. From stable positive numbers it has collapsed to all time lows. ECB bankers want to rise rates? But who pays for the gap? Here is only one option - either people stop eating and consuming other goods or ECB just prints money to pay for the growing import or issue the debt. Besides, second hit comes from 15% EUR devaluation, which makes situation even tougher. Besides, 1Q commodity prices are promised to be lower than in IIQ 2022. The blow stands on the horizon...

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Most dismiss interest rate hikes of more the 100 basis points by year-end as excessive. However, interest rate futures suggest the European Central Bank's (ECB) first rate hike since 2011 will likely come in July, with 110 basis points (bps) priced in by December.

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Next Week to watch

#1 Fed minutes publication

Powell has vowed to raise rates as high as needed to tame inflation. The minutes will show how tenacious policy makers expect inflation to be and whether growth is resilient enough to face much tighter monetary policy.

#2 US GDP and Retail Sales

Retail and institutional investors are also bearish. A U.S. retail investment sentiment index is close to a March 2009 low while fund managers are running their highest cash levels since September 2011.

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#3 Global PMI data

Forward-looking Purchasing Managers' Index (PMI) data from the United States, Australia, Britain, Japan and euro area is worth paying attention to. Entrenched in their inflation fight, policymakers may reach a pivot point in coming months where they have little choice but to focus on recession risk. PMIs have held up well recently, but might show how close that turning point is.

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Conclusion:

It seems, guys, that we see starting point of the trend and chain of the events that we've discussed in our regular weekly reports. Last week, we've come to conclusion that with "-8%" real rate for the US Debt, Fed has no buyers, but it vitally needs the liquidity that it tries to extract from all possible sources. External cashflows are ending - Japan and EU already meets deeply negative trade balance and current account, so they do not have "free profit" to invest in the US Debt. The same is for China, which meets problems in the economy and even could start withdraw reserves out of the US Debt to support national economy.
The final source that Fed has is other markets. The cryptocurrencies has become the first victim and lost 60% of total capitalization already, but it is not the end point yet. Stock markets starts feeling pressure.
Now, those of you who read our reports easily could combine recent events in a single chain - Fed needs liquidity to serve the national Debt. This results in Powell 's hint on "no limits" for rate change. Otherwise they can't make it attractive for the buyers. Stock investors have swallowed this and understand that party is over, starting selling everything (especially growth) stocks. This, in turn, let BlackRock's Rieter to say that hardly 10year yield rises more than 3.25-3.3% this year. (Of course, as Fed starts sucking all liquidity into US Debt market). But in long term he said that " Decade bullish bonds trend is over", as he understands that the source of stock market is limited. It could support bonds in short term, but not forever.

As a result we're coming to conclusion that monetary authorities are loosing relation to reality. Powell can raise the rate as high as he wants — but he cannot solve the task of reducing inflation. In general, the picture of macroeconomic indicators now shows that the structural crisis finally spreads over the entire world economy. Not only the US and the EU are falling, but also China.
As it was shown above, the forecasts of growth rates have nothing deal with the reality — inflation rates are underestimated as much as growth has long been replaced by a recession in the United States since at least the fourth quarter of last year. Some analysts tell that the difference between official and real US GDP statistics has gap of at least 5-6%, and the situation has not improved since then.
For debt assets, the yield today is at least -8% (inflation is recognized about 10%, the yield is 2-3%). Raising the rate to "neutral" means that the cost of debt servicing will increase for households by at least 5 times. This means a catastrophic drop in demand and massive bankruptcies of citizens.
The latter, from the point of view of demand, may be good (since it is equivalent to debt cancellation), but it will hurt the banking system hard, and mostly the largest multinational banks. And there is no good way out of the situation, given that it is the latter who control the Biden administration and the US Democratic Party.
In general, the light at the end of the tunnel is not visible yet.
The threat of a rate hike always has a negative impact on stock indices, and on any speculative assets. And if we assume that the Fed really wants to achieve a "neutral" rate (that is, one that provides at least zero returns on debt), then the corresponding amount of its growth will have to be deducted from the current yield of financial instruments. Which, of course, speculators can't like.

Barely recognizable positive hints still stand around EU. While the sanctions bravada stands in every headlines, the facts tell the opposite. We see signs that EU tries to escape the US economical trap. First is - Germany and Italy approved Russian gas payments after nod from Brussels, and second - The Great Rebrand: Western business reborn in Russia under new names. It doesn't mean that problems are over and tensions stopped, but EU now turns on the way to soft the negative sanctions impact. On a surface - they all remain, but on practice the work-around solution exists. This could bring a lot of positive to EU, at least its heavy industry, plants could keep working, although major sanctions' burden stand upon households, as usual. With the current level of trade deficit they can't avoid the recession but they try to make it a bit softer.
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Based on the data that we've got this week - rising of jobless claims, fall of the stock market and debt yield on a background of extremely hawkish J.Powell rhetoric, we suggest that we're in first stage of the coming crisis. While investors not quite understand this, based on recent Reuters polls. It means that the process of cashflow out from stock market to the bond should last for some time more, which suggest that dollar should keep dominant role and upside trend for longer as well. Big catalysts could come from negative surprise of GDP and Retail Sales data next week.
 

Sive Morten

Special Consultant to the FPA
Messages
16,280
Technicals
Monthly

Here we just see first signs of OP reaction. 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.

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_23_05_22.png


Weekly

Here we could focus on the pattern that we've got last week, due to impressive EUR performance. This is bullish engulfing pattern. Weekly overbought is not a barrier now, thus, it seems that nearest target that could focus on stands around 1.07-1.08 area:
EUR_w_23_05_22.png


Daily

Here trend stands bullish and we even have small divergence on MACD, suggesting that EUR should exceed the top of "A" point. Here price stands too close already to resistance area of 1.0670-1.0712 and Overbought, so it makes sense to wait for 2nd chance to enter, if, say, EUR shows the bounce out from resistance area:

EUR_d_23_05_22.png


Intraday

Here, on Friday we've discussed upward continuation to OP target around 1.0675. COP reaction is done and EUR should keep going higher if it still aimed on OP

EUR_4h_23_05_22.png


Another pattern that sets the alternative target but still looks interesting - 3-Drive "Sell". THe minor ab=cd retracement that we've discussed on Friday is done, so market could keep going to the next 1.618 target of the 1st Drive, (which is also the butterfly). The 1.27 extension of 2nd drive perfectly agrees with it right at 1.0627 area.

EUR_1h_23_05_22.png


The target of 3-Drive is important because it perfectly agrees with the horizon neckline on 4H chart of potential H&S pattern. Market could go to OP directly, but once 3-Drive target will be hit - it would be better to tight stops or even book result, at least partially. 1.05 K-area now looks like possible invalidation point for this intraday setup.
 

sveckar22

Corporal
Messages
111
Retail sales are not inflation adjusted, and neither is the GDP by the real rate of inflation, if those two numbers were inflation-adjusted investors and the general public would realize we are already in recession but everybody was acting until very recently like we have a strong economy and a strong stonk market.
 

Sive Morten

Special Consultant to the FPA
Messages
16,280
Retail sales are not inflation adjusted, and neither is the GDP by the real rate of inflation, if those two numbers were inflation-adjusted investors and the general public would realize we are already in recession but everybody was acting until very recently like we have a strong economy and a strong stonk market.
Absolutely, growing consumption for 14% in recent 12 months, what actually Powell talked about, that it is strong - in reality just 2%, adjusted for inflation.
 

Sive Morten

Special Consultant to the FPA
Messages
16,280
Morning everybody,

So, now it becomes evident even in headlines that EU walking around its own sanctions, keeping the same amount of import as Russian gas as oil. Some countries ban import on paper but keep it via 3rd countries, just paying higher price for the same resources, Poland, for example.

Anyway, common sense is returning gradually and this is good for EU economy. This makes EUR to bounce up a bit quicker. Thus, it already hits the predefined daily resistance. While bulls should wait for the pullback to support area, bears could consider intraday setups:
EUR_d_24_05_22.png


4H chart shows that this is also an Agreement area, as EUR completes the OP target as well.
EUR_4h_24_05_22.png


Usually, in such circumstances of bullish reversal swing and existence of strong resistance area - market should show 1/2-5/8 pullback, somewhere to 1.05-1.0530 area. But, I also would watch for 1.0550-1.0565 K-area. First is, because it is stronger, second - it agrees with previous consolidation of the EUR, before it collapsed to 1.03 lows. While major 5/8 level stands below this consolidation. It will be easier and safer to book result at K-area:

EUR_1h_24_05_22.png


The 1.06-1.0610 K-area might be used for very short-term trading. For position taking you could watch for some bearish reversal patterns on top. Now for instance, DRPO "Sell", mostly is formed, or, you could watch for, say, H&S pattern... maybe something else will be formed.
 

Sive Morten

Special Consultant to the FPA
Messages
16,280
Morning everybody,

So, EUR shows solid performance, suggesting that it has some inner buyers' power, although you can't see it definitely from the chart. But by some indirect signs we could conclude that. For instance, yesterday, all technicals factors suggested starting of the retracement as it was 100% resistance combination of the K-area, Obought, and OP target. But - price keep going higher. Today price stands above the K-area and it seems it has stopped not because of K-area but because of next Obought level:
EUR_d_25_05_22.png


As yesterday we haven't got any bearish patterns on intraday charts, it makes us think that it would be better to wait with the new scalp shorts until EUR completes XOP target around 1.0830 area. By the way, it agrees with 50% Fib level, that EUR likes to reach. Once this combination will be completed and with coming GDP/Retail Sales release tomorrow, maybe something bearish could be formed.
EUR_4h_25_05_22.png


Other words speaking, as EUR shows strength, first is - we wait for XOP+50% Fib level, second - wait for clear bearish patterns on 1H chart. For the bulls nothing has changed - we wait for the same pullback.
 

Sive Morten

Special Consultant to the FPA
Messages
16,280
Morning everybody,

So, because of a bit irrational price action recently in relation to strong resistance area, we've agreed to watch for clear bearish signs, before taking any shorts. At first glance today we've got some, but, as we've said in gold report - I have some bad feeling about it ;)

On 4H chart we have H&S shape, downside reversal swing, but performance... guys, it is too slow and choppy for H&S. Taking in consideration uncompleted XOP, bad fundamentals and high chances for negative surprise in GDP report - it seems that butterfly also might happen:
EUR_4h_26_05_22.png


That's being said, guys, if you still decide to go short, it be correct, who knows - try to minimize risk. First is, stay focused on nearest 1.06 target first, second - place not too far stop, maybe be even to use existed H&S pattern here.

EUR_1h_26_05_22.png
 

Sive Morten

Special Consultant to the FPA
Messages
16,280
Morning everybody,

So, our "bad feelings" on bearish EUR setup was not in vain. Now it seems that we should stay focused on 4H XOP target..

But today I would like to talk about GBP again, as currency is forming good trading setup. First is, I would like to remind you that we have bearish mid term view, and current upward action is just a temporal pullback in downside trend. Now it seems that the bounce is coming to an end. GBP has reached strong daily resistance area of K-level and Overbought. Also recall that we have uncompleted XOP target lower:
gbp_d_27_05_22.png


On 4H chart our upside OP target is mostly done, making Agreement with the daily resistance level. CD leg is slower, which makes good chances for downside reversal:
gbp_4h_27_05_22.png


Finally, on 1H chart we see butterfly pattern right on top that has the same target as OP. So, if you think about short position here - maybe be this setup will be interesting.
Conservative traders could wait a bit longer. If our suggestion is correct, then it should not become a surprise if later we get H&S pattern here:
gbp_1h_27_05_22.png
 
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