Forex FOREX PRO WEEKLY, May 24 - 28, 2021

Sive Morten

Special Consultant to the FPA
Messages
14,731
Fundamentals

So, the passed week was relatively quiet on classic market as cryptocurrencies stand in focus. 50% collapse shadows any other news that we have through the week. In our monthly BTC report we yet to assess long-term impact which supposedly will be dramatic.

Market overview

The dollar dipped on Tuesday for the fourth straight session, reaching its lowest level against a basket of currencies since late February on waning fears that inflation spikes could prompt the Federal Reserve to raise interest rates sooner than anticipated.

U.S. Treasury yields stalled as investors grew more confident that the Fed will hold off on tightening its accommodative monetary policy, despite worrisome indicators that booming demand and scarce supply are sending prices soaring. Those price increases have stoked fears of longer-term inflation, despite the central bank's assurances that the spikes will be transitory.

"The market has come around to the Fed's expectation that inflation is set to rise over near term but will plateau and decline in the coming months," said Joe Manimbo, senior market analyst at Western Union Business Solutions in Washington. The perception is the Fed could lag other central banks in normalizing its policies. As long as the Fed maintains this very dovish policy stance, that's going to leave the dollar vulnerable," Manimbo added. "Having said that, the Fed signaling a change in course might not be that long in the offing if we see strong data, especially in the job market and inflation."

The British pound , buoyed by the lifting of COVID-19 restrictions, passed the $1.42 level for the first time since Feb. 24. Fans have appeared on Premier League matches in 37 tour for the first time in a year.

"It's a good day for the pound," Manimbo said. "The Bank of England has upgraded outlook for the UK economy and the pound is starting to bear the fruit of that. Britain's strong vaccine rollout has pulled growth forward."

On Thursday minutes from the Federal Reserve's last policy meeting revealed, and there was more talk of tapering its bond purchases than investors had expected. In the Fed minutes, several policymakers said that a discussion about reducing the pace of asset purchases would be appropriate "at some point" if the U.S. economic recovery continues to gain momentum.

A "number" of Fed officials appeared ready to consider changes to monetary policy based on a continued strong economic recovery, according to minutes of the U.S. central bank's April meeting, but data since then may have already changed the landscape.

"A number of participants suggested that if the economy continued to make rapid progress toward the (policy-setting) Committee’s goals, it might be appropriate at some point in upcoming meetings to begin discussing a plan for adjusting the pace of asset purchases," the minutes said in the most overt reference yet to a possible taper of the Fed's crisis-fighting bond purchases.

The minutes of the April 27-28 meeting showed the Fed beginning to wrestle with the emerging difficulties of getting the $20 trillion U.S. economy fully reopened after the disruptions caused by the coronavirus pandemic.

The emerging logistical challenges set up a potential clash between the two sides of the Fed's twin goals of encouraging maximum employment while also keeping inflation tame. A "couple" of officials were already concerned inflation could hit "unwelcome levels" before they had time to recognize it was happening and plan the proper policy response, the minutes showed.

That surprised investors, given Fed Chair Jerome Powell had said right after that meeting last month that it is not time yet to begin discussing any change in policy.

With the job market still far short of the Fed's goals and the coronavirus still killing hundreds a day in the United States, "it is too soon to open the taper discussion," St. Louis Fed President James Bullard said earlier on Wednesday.

Bullard added that only after the health crisis is more fully controlled should the Fed consider curbing its support for the economy. "In the weeks ahead it might become clearer," he told reporters after a virtual appearance at an economics forum.

The minutes of the Federal Open Market Committee's meeting indicated some Fed officials at that point at least were contemplating action to reduce the monetary policy support rolled out last spring to help the economy through the recession triggered by the pandemic.

In light of data since then, however, the minutes are "substantially stale," Citi economists Andrew Hollenhorst and Veronica Clark wrote this week.

Hollenhorst and Clark still expect the Fed to begin trimming its $120 billion in monthly asset purchases in December, but contingent on a "strong May jobs report" of at least 750,000 positions added. Much will be riding on whether the May numbers start to resolve the dilemma presented to the Fed in April.

The Fed will hold its next meeting in June, when officials will not only issue a new policy statement but update their projections for growth, inflation, unemployment, and the appropriate path of the Fed's benchmark overnight interest rate, which is currently pinned near zero.

Along with faster-than-expected inflation, more recent surveys showed consumer expectations about future price increases were also rising, possibly chipping away at the central bank's confidence that public attitudes about inflation were "well-anchored."

"It remains surprising how many Fed officials describe expectations as 'well-anchored' despite those expectations measures being very much on the move," Karim Basta, chief economist at III Capital Management, wrote last week.

The dollar bounced off three-month lows against European currencies on Thursday after minutes from the Federal Reserve's last policy meeting revealed there was more talk of tapering its bond purchases than investors had expected.

"The minutes contained wordings that appear to seek to start discussion on tapering at an earlier timing than expected," said Takafumi Yamawaki, head of fixed income research at JPMorgan. "If the next jobs data due on June 3 is strong, markets will start bracing for the Fed making a specific mention on tapering at its next meeting in June."

"It is worth noting that the FOMC Minutes predate the latest CPI and payroll/earnings numbers, so the fears of the minority on the FOMC are likely to have become a little more acute since the April meeting," said Tapas Strickland, director of economics, markets at RBA in Sydney.


The Fed minutes lifted U.S. bond yields a tad, with the 10-year Treasuries yield at 1.671% , compared with around 1.65% just before the release of the minutes.
Still, yields have so far remained below their March peaks, in part capped by doubts over how aggressively a dovish Fed could move towards removing stimulus.

"Towards the summer, the U.S. has fiscal issues, and it is uncertain how big fiscal spending will be. It will be difficult for the Fed to make any moves without more clarity on fiscal policy," said Minori Uchida, chief currency analyst at MUFG Bank. I'd think the dollar will gain on talk of tapering in the very near-term but I doubt it will last long," he added.

The dollar was pinned near milestone lows on Friday, and headed for a weekly loss, as traders' initial concerns at taper talk in Federal Reserve minutes ebbed - with actual tapering seeming distant - while pandemic recovery boosted other currencies. After bouncing off a four-month low on the euro as the mere mention of tapering policy prompted fears of early rate rises, the dollar has dropped back.

"It has been just over 24 hours since markets got spooked by the prospect of the U.S. Fed tapering its asset purchases, but having proverbially slept on it, the mood seems less sour today," ANZ analysts said in a note. "Which seems reasonable – it's not like the Fed is on the brink of wanting to actually act."

A future discussion on tapering is also already reflected in the pricing of U.S. Treasuries and in money markets after the heavy selling of government bonds through February and March, limiting further dollar gains from the Fed minutes.

"The world was, is and will remain awash with cheap dollars," said Societe Generale strategist Kit Juckes. As long as the Fed is talking about tapering, Treasuries are likely to remain stuck in their range and the dollar's path of least resistance is to go on falling, albeit slowly."

Dollar also was boosted by encouraging U.S. manufacturing data, but remained on track for a weekly loss as traders' concerns about taper talk in U.S. Federal Reserve minutes moderated.

The latest flash PMIs reinforce our view that the economy will continue to grow at a faster pace in the U.S. than in the euro-zone in the next few years," said Simona Gambarini, markets economist at Capital Economics. This feeds into our forecast that long-dated yields will rise more rapidly in the former than in the latter and that the euro will fall back against the U.S. dollar," Gambarini said.

MAY NFP EXPECTATIONS

Federal Reserve officials and new Dallas Fed data have begun lowering expectations for May jobs growth in the United States as business hiring plans continue to outrun the supply of people able or willing to work. Dallas Federal Reserve president Robert Kaplan said Friday that hiring difficulties have continued through May, and will likely lead to another weak jobs report following the lower-than-expected 266,000 positions added in April.

A survey published by the Dallas Fed earlier in the day, meant to provide a mid-month check on national employment trends, pointed to weakening job growth as well.

Fed officials had hoped to see a “string” of months in which a million or more new jobs were added to U.S. payrolls, helping the country quickly claw back the 8.2 million positions still missing from before the pandemic.

St. Louis Fed president James Bullard earlier this week however called that figure “hyped up,” and said a “more realistic” expectation was for perhaps half a million jobs a month.

Philadelphia Fed President Patrick Harker on Friday became the second Fed official, along with Kaplan, to urge a faster start to talks over when and how quickly to reduce the central bank’s $120 billion in monthly bond purchases.

“It is something that, in my mind, we should start to have a conversation about sooner rather than later,” Harker said at a virtual event organized by the Washington Post.

Atlanta Fed president Raphael Bostic and Richmond Fed president Thomas Barkin, speaking at the same event with Kaplan, both stuck to their positions that more hiring needs to take place before they’d be ready to discuss a bond purchase “taper.”

“Right now we are not in a position where that’s in play for moves,” Bostic said, a view that is currently a near consensus at the Fed, even as some begin to warn of a possibly overheating economy.

COT Report

CFTC data shows bullish tendency by investors' positions, as speculators as hedger's ones. Thus, this week open interest has jumped for 36.3K contracts which is about 2% of total market capitalization and this is big enough value. Speculators have added 10K+ long positions, while hedgers behavior was mixed. Yes, there were more positions against EUR growth, but also there were enough the opposite ones. It means that hedgers do not treat current bullish environment as long-term and stable, as they see changes in Fed mood and official statistics. This view is totally corresponds to our position as we think that dollar is coming to major upside reversal.

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Source: cftc.gov
Charting by Investing.com


Next week to watch

PCE Index


The dollar is on the ropes, having erased its gains for 2020 versus a basket of currencies. The reversal stems from the Federal Reserve's apparent resolve to keep printing money at the current pace despite signs of an economic and inflation rebound.

Fed officials mostly dismiss higher prices as transitory and stemming from base effects. That view will be tested on May 28 by the latest reading of the personal consumption expenditures (PCE) index. The core PCE, excluding food and energy, is the Fed’s preferred inflation measure for its 2% flexible average target. It was up 1.8% in the 12 months to March.

If the Fed sticks to its guns even in the face of a blowout PCE print, the dollar could lurch lower still. That should add fuel to the commodity rally and boost equity sentiment. But watch the crypto market - a repeat of this week's wobbles could bring back the safe-haven bid.

ECB

Germany's 10-year Bund yield is fast approaching 0% . A big deal? - Yes and no.

Germany would actually be the last of the euro zone sovereigns to see negative 10-year borrowing costs turn positive. It's evidence that the entrenched pessimism about the region's economy is finally fading.

That, alongside the rise in inflation expectations explains why the ECB doesn't appear too worried about the moves. And with stimulus still in place, the scope for a further rise in borrowing costs should be limited.

Still, watch ECB talk in the days ahead. A sharper, more protracted move that takes Bund yields above 0% could put an end to any talk of slowing emergency bond buys in the near future.

Analysis: Rising bond yields, calm ECB - this time is different

KIWI


New Zealand's virus-elimination strategy has delivered an economic recovery way ahead of expectations, meaning it may soon join Norway and Canada in beginning to plan rate rises.

At the February meeting of the Reserve Bank of New Zealand, rate hikes were not on the radar but the one on May 26 comes on the heels of a stimulatory budget, roaring business and inflation indicators and a government directive to consider the housing market while setting policy.

Swaps markets are pricing rate rises from 2022. The bank may not go so far as speaking of those but what's possible is taper talk or a timeline that puts the RBNZ ahead of most of its developed-world peers.
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So, based on fundamental data that we have right to this moment we could say that pressure is growing. It is a hidden pressure and it is partially material and partially psychological. Fed minutes shows appearing of disagreement among members. Although follower of the tapering stand in minority by far, but their appearing is already important sign. Second is, statistics. It brings more and more proves again and again that economy is heating up. We could argue on a way how and when reversal point will be achieved, but not on the fact of achieving per se.

First scenario that seems more probable to us, suggests weaker NFP data and moderate PCE report next week that supports existed downside trend of the dollar. As these data releases happen soon - the FOMC sentiment can't change drastically and the majority remains on the conservators' side. Besides, we're coming in vacation period when market activity and sensitivity is decreasing. This gives Fed the time gap to fit their policy to reality. Our long-term target of DXY should be reached particularly because of mentioned driving factors.
Alternatively, if PCE and NFP data will be outstanding and rise more euphoria around coming tapering, dollar could show temporal/perpetual bounce up before reaching of 87.40 target later in the year, or even could turn up earlier. In this case we either should get sharp early upside reversal or, large butterfly "Buy" pattern. We threat this scenario as less probable. Although butterfly is very good to our long-term view. So, the question is around "BC" leg, whether it happens or not... I would prefer bad PCE and NFP data (as it was hinted by the Fed representatives) and classic completion of weekly AB=CD pattern directly. Anyway we're ready to any scenario. The differences that we have right now are mostly tactical and brings no change to the strategy that suggests bullish DXY reversal within few months.


1621677013351.png


Technicals
Monthly

So, above we've specified two scenario for DXY, but, as EUR takes 70% of the index, these scenarios are applicable to the EUR at the same degree. I mostly tend to upward direct scenario because of few reasons. First is, market easily forget any dollar supportive data right now. Recall recent CPI report - reaction last just for 1-2 sessions and then price reversed in previous direction. Second, Bullard hints on weak NFP numbers not only in June, but in few consequences months. This should support existed trend on the dollar. Finally PCE numbers are not as important as CPI and also hardly bring long lasting effect.

Another reason is timing. We suggest that Fed should start acting within 6-7 months but it is too few bars to form the butterfly and complete it around 1.28 area. It is not impossible but EUR needs to show extremely wide range months to do this, but this is not common thing on EUR. Taking it all together, make me think that gradual direct upside continuation to our long-term target has more chances to happen.

As said already, we suspect that an exceptional event exists that could let EUR to extend this time. This is more aggressive ECB rhetoric in June. Previously we said that Canada already starts tightening policy, BoE on the way and June might become a clash of the titans - ECB vs. Fed. Early verbal action from ECB might push EUR higher, if Fed will keep its mantras, and probably it will, as we see by recent NFP report and reaction on CPI data as well.

As we've said earlier, despite that market has come very close to 1.16 vital area - EUR was able to stay above it and shows perfect recovery. MACD trend stands bullish. From technical point of view, this is good sign that price is jumping up from YPP.

Taking the parallel view on Dollar Index - EUR has corresponding upside AB-CD with 1.2860 OP, standing near Yearly Pivot Resistance of 1.26. If our suggestion is correct - 1.26-1.28 is an area that corresponds to DXY 87.40 target.
eur_m_24_05_21.png


Weekly

This week price performance was slower but in general it makes no negative impact on overall situation. Price has moved slightly higher, and stands above broken 5/8 level. Bullish divergence stands in place, suggesting taking out of the previous top. Market is not at overbought which means that EUR has no technical barriers for upward continuation.

"Three white soldiers" also relatively rare and strong pattern that usually appears in the beginning of extended upward action.

eur_w_24_05_21.png


Daily

Obviously here we have wedge pattern on top and in early times, it always was a bearish pattern. Nowadays, wedges are tricky. It could work as classically as to show strong upward breakout. By indirect signs, it seems that downside action has more chances to happen still, as we have here bearish MACD Divergence as well, and on intraday charts, on Friday downside action was rather deep.

In current circumstances, despite that we have bullish context and trend by MACD, I wouldn't hurry up with taking new long position. It would be better to wait for clarity, whether we get finally reverse H&S and chance to buy around 1.1975 or, market just breaks 1.2250-1.2275 area directly and keep going higher. Daily chart doesn't bring absolute clarity on this sub. Thus if you're not sure - better to stay aside and wait for more hints and signs.

As a compromise solution it might be taking of very small long position - 10-15% of your common size. But this is only if you feel more comfortable to be possessed on the market for surprising upward action.

Absolutely perfect would be spike and W&R to COP target and then drop back to 1.1975. So, let's see what EUR brings us on coming week.

eur_d_24_05_21.png


Intraday

So there is our wedge pattern, and here we also have bearish divergence. Also, it seems that we have failure attempt to break the wedge:
eur_4h_24_05_21.png


On 1H chart our butterfly is alive by far. At the same time we have too strong downside action and failed attempt to bounce from inner 5/8 Fib support. Yes, market still stands at K-support area, but overall situation doesn't inspire my to buy and makes us better to wait a bit. Although situation stands mixed, but patterns and signs are weak on both sides that makes it not attractive to immediate trading.

Of course, there are ways how to deal with it. For instance you could buy with butterfly and placing very close stops just below it. In a case of success this is going to be perfect trade. Alternatively you could place Stop "Sell" order for the case of downside breakout of 1.2150 area and it also could be successful. But - all these setups are based on attempt to foresee the direction while price shape doesn't show it yet.
eur_1h_24_05_21.png
 

RahmanSL

Major
Messages
2,823
Hi Sive.....excellent report & analysis a always which is very much appreciated. Thank you.

Based on my expectation, I did took a couple of long positions before Friday market closing at the 2.16 & 1.217 level with TP at 1.223 & 1.224 level. Hopefully your butterfly pattern will work out next week.

Cheers & all the best!
 

chalo

Private, 1st Class
Messages
31
Hi Sive,

Thank you very much for your work and fundamental perspective it is immensely appreciated. Enjoy your weekend.
 

Tchurik

Private
Messages
17
.........and the story about the DOLLAR SMILE, is that off the table now?
I guess no
"Alternatively, if PCE and NFP data will be outstanding and rise more euphoria around coming tapering, dollar could show temporal/perpetual bounce up before reaching of 87.40 target later in the year, or even could turn up earlier. In this case we either should get sharp early upside reversal or, large butterfly "Buy" pattern."
 

Sive Morten

Special Consultant to the FPA
Messages
14,731
.........and the story about the DOLLAR SMILE, is that off the table now?
Hi Freddy,

No, it is valid. In fact, this is our central scenario. We're just waiting for starting moment. By technical analysis, it should start when DXY hits 87.40 long-term target. It should happen within few months.
qY8qCHLQ
 

Sive Morten

Special Consultant to the FPA
Messages
14,731
I guess no
"Alternatively, if PCE and NFP data will be outstanding and rise more euphoria around coming tapering, dollar could show temporal/perpetual bounce up before reaching of 87.40 target later in the year, or even could turn up earlier. In this case we either should get sharp early upside reversal or, large butterfly "Buy" pattern."

Tchurik,
"Turning up earlier" is the starting of Dollar Smile. Don't worry. Everything is valid. Now some uncertainty exists just around precise shape, how it starts.
 

Sive Morten

Special Consultant to the FPA
Messages
14,731
Morning everybody,

So, after the holiday, market is coming back to live and on EUR there are two new moments that we need to consider. First is, on daily chart - at least on my FX Choice one we do not have the grabber. But, I've checked this on CME Futures and bingo - there we have one. It means that upward breakout is more probable now.

Besides, tight consolidation right under resistance area always suggests attempt of breakout. So, we have the answer on the 1st question - it seems that COP will be reached first. The 2nd question is about retracement, whether we will get it or not.
eur_d_25_05_21.png


To my mind, chances on reverse daily H&S pattern is melting. Because reaction on COP could not happen at all just because market is long time stands just few pips below it. 2nd and major reason is 4H wedge pattern. In fact, this is the pattern that should become a background and starting point of retracement. But, now it seems we will get strong upward breakout that leaves no room for deep retracement:
eur_4h_25_05_21.png


Our 1H butterfly, despite that it was at the edge of default, is working now showing acceleration to 1.27 target. When this happens, usually price resumes action to 1.618 target as well. Thus, currently we treat chances on deep drop as minimal and it seems that we should prepare for position taking on pullback once butterfly will be completed:
eur_1h_25_05_21.png
 

Sive Morten

Special Consultant to the FPA
Messages
14,731
Morning guys,

So, COP has been hit, but market unfortunately (or fortunately) keeps dual patterns, which makes situation a bit difficult for decision making. Since we're mostly trade on daily/4H, I speak only for this time frames. Shortly speaking - I would wait for either drop to 1.1975 and H&S pattern or upside breakout of 1.23 area. It is everything clear with H&S as we've talked a lot about it. Speaking on upside breakout scenario - it will be relatively safe chance to buy, because all this stuff around COP etc will stay in the past while market will be aimed on the 1.24 top. And while we are stand in between, it is area of "free run" that makes buying almost riskless.
eur_d_26_05_21.png


Still, let's consider what else we have and why we do not buy right now. First is - the same wedge on 4H chart that is still valid and divergence. Second, recent action theoretically could be W&R, because right now here we have bearish reversal bar and DRPO "Sell" pattern, that yet to be confirmed. If price drops in previous consolidation - it will be bearish, and recent hit of COP might be treated as false upside breakout.
eur_4h_26_05_21.png


At the same time, on 1H chart price stands in triangle consolidation that potentially is bullish. Besides, on 4H chart we should keep an eye on possible bullish grabber:
eur_1h_26_05_21.png


So, intraday context is weak on both sides. At the same time no side is totally cancelled. Thus, for intraday trading bears could consider DRPO and reversal bar for position taking with stops above it, while bulls could wait for the grabber and if price keeps flirting inside the 1H triangle - try to go long with stops below the grabber or triangle lows.

But this is only if you want to do something right now. Above we already explained why some patience could be more useful in current situation.
 
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