Forex FOREX PRO WEEKLY, May 25 - 29, 2020

Sive Morten

Special Consultant to the FPA

Situation on markets becomes too confusing as more and more inputs to fundamental model come. In general factors could be distributed in groups - recovery after limitations, vaccine development that is common to all markets and group "other events", such as new US-China tensions, political events, talking on Covid relapse in autumn etc.

This week there are few important events have happened. First of all, we need to take a look at recent statistics. There are a lot of information - Inflation data in EU and UK, jobless claims, Sentiment indexes such as ZEW and PMI and other stuff. Second - let's try to find out the vaccine's story and what's going on in reality. Finally, situation Covid in different countries and economy dynamic after easing of restrictions.

Political background and change in EUR/USD balance

The coronavirus crisis may have dealt a lethal blow to the idea that the euro could one day replace the dollar as the world’s preferred currency, by exposing euro zone frailties and cementing the U.S. Fed’s role as global lender of last resort. These months have highlighted - and possibly entrenched - the dollar’s dominance of global commerce, investment, borrowing and central bank reserve savings, not least because of the differing U.S. and European responses to the crisis.

Yes, Germany and France, whose agreements usually pave the way for broader EU deals, proposed that the European Commission borrow the 500 billion euros ($546.90 billion) on behalf of the whole EU. The commission is expected to outline their proposal for the fund before a European Summit scheduled for May 27.

European clashes over how to handle the economic impact of the COVID-19 crisis raised fears for the bloc’s future, but a Franco-German proposal aimed at helping the worst-hit states represents a pivotal moment. The markets want to the see the details, however. All eyes will be on the European Commission, which on Wednesday presents its pandemic recovery plan.

The task is to ensure weaker states such as Italy can access funding without adding to their debt burden. But EU states remain divided over whether recovery funds should be funnelled through loans or transfers. If those opposed to big spending manage to water down the plan, the euro and southern European bonds will take a knock. The change in Germany’s previously hardline stance was momentous. Now it’s the turn of others such as Austria and the Netherlands to decide whether they are ready to cross the Rubicon. Meetings starts at 27th of May and all financial world will keep an eye on results.

This week’s proposals for a European Union recovery fund financed by jointly issued debt may burnish the euro’s international role if it leads to more cohesion within the bloc. But economists say that even if the proposal makes it past a late-May EU meeting, squabbling, whether over budget spending or the issuance of coronabonds to aid poorer states, has re-ignited fears that the euro could even break up.

“The crisis has again demonstrated that the euro may not be forever,” said Joachim Fels, global economic adviser at Pimco, the world’s biggest bond manager. “The dollar reigns even more supreme as the (world’s) reserve currency.”


Already in recent years the euro’s share in global finance has shrunk - International Monetary Fund data shows its weight in allocated central bank reserves at around 20%, down from nearly 26% in 2010, though negative European Central Bank interest rates are partly to blame. The dollar, meanwhile, has a 61% share.

An ECB index of the euro’s international role has tumbled from over 27% in the early 2000s to below 22% in 2017, the last time the measure was updated.


The euro has also steadily lost ground in forex trading and currency derivatives, and lags the dollar in international borrowing. Latest SWIFT data shows it accounts for 31% of global payments versus over 40% in 2012. The dollar's share has risen to 44% from 30%.

The world’s dollar dependence was underscored during the March market panic when businesses dashed for greenback liquidity to pay bills, redeem debt or just increase their buffers.

It was proof that access to dollars is paramount in times of crisis, so “central banks will anticipate that, going forward, they will need to hold dollars,” said Brad Setser, senior fellow for international economics at the Council on Foreign Relations.

The rush, which sent the dollar up 8% in 10 days, only eased after the Federal Reserve activated hundreds of billions of dollars in swap lines to central banks to ensure greenbacks continued flowing, with other central banks also seeking swap lines with the Fed. To other countries which needed emergency dollars, it offered repo loans, if they had Treasury bonds to post as collateral.

Elina Ribakova, deputy chief economist at the Institute of International Finance, contrasted the Fed’s actions with the “timid” ECB.
“If you look at what’s happening now versus in 2008, the Fed made lightening progress in recognising its role as the lender of last resort,” Ribakova said. In recent months the ECB has only established swap lines with Bulgaria and Croatia, but “there isn’t a similar conversation about what happens if euro funding dries up,” she added.
“You have to be more proactive if you ever want to challenge the dollar’s position.”

Since the euro’s birth in 1999, its backers have pushed to end the dollar’s post-World War Two dominance. The calls got louder when President Donald Trump resorted to weaponising the dollar in overseas dealings, such as the trade spat with China or while re-imposing sanctions on Iran.

Francesco Papadia, former market operations director-general at the ECB, said the dollar’s “ultimate safe asset” role gave it an advantage “not even the incompetence and vagaries of the U.S. President can offset”. The current crisis may hurt the euro’s international position further, he added, if the U.S. policy response fuels a faster recovery than in Europe.

But it also offered a chance to address one of the euro’s drawbacks for reserve managers: the lack of a big pool of ‘safe’ assets, comparable with U.S. Treasury bonds.
Central banks usually hold reserves in bonds denominated in their chosen currency. U.S. government bonds, with $17 trillion-plus of AAA-rated paper in circulation, are the closest thing to a risk-free asset.

German, French and Italian bond markets combined come to less than half that size and only Germany carries the top AAA score. Even increased borrowing to fund COVID-19 recovery programmes will not bring Germany’s debt pool anywhere close to that of Treasuries. Backing for the Franco-German recovery fund plan may lay the foundation for joint euro bonds, which could eventually offer reserve managers a viable risk-free alternative to Treasuries.

In the near term, renewed Sino-U.S. tensions could discourage China from holding the majority of its reserves in dollars, according to Barry Eichengreen, economics professor at the University of California, Berkeley, who has long argued that there is room for more than one major reserve currency. “I wouldn’t write off the Europeans quite yet,” Eichengreen added. “As the father of European integration, Jean Monnet, famously said, ‘Europe is forged in crises’.”

But right now we see the opposite picture. Growing Sino-U.S. tensions, with President Donald Trump saying the United States would react strongly if China imposes national security laws for Hong Kong in response to last year’s often violent pro-democracy protests, supported the dollar.

Beijing’s control has long been a sore point for some Hong Kongers. Its latest proposal for a tougher national security regime for the city will almost certainly lead to further violent confrontations on the streets and open a new venue for Sino-U.S. tension. Only this time it may be worse, which is why the Hang Seng index was hit harder on Friday than even the worst days in the March selldown. China has replaced the leadership in its Hong Kong Liaison office and, foreign envoys reckon, quietly doubled the number of staff there.

The United States has already warned of a tough response. Investors will look there, and to the situation on the ground for cues. As for markets, Hong Kong's property index posted its worst drop in 11.5 years on Friday. European luxury shares and banks such as HSBC also took a hammering on Friday, meaning ripples could spread.

So, on a political and fiscal background dollar stands in better position, no doubts. And this is understandable - the single country is easy to act and make decisions than the gathering of different countries, especially when they are few dozens and all of them have different economy conditions. Strong countries do not want to pay for weak countries and I would argue on ‘Europe is forged in crises’ statement.

Besides, US and EU has absolutely different financial power. 500Bln plan is a pie to the elephant, it's nothing compares to trillions of dollars that feed Global financial system, including the EU by the way. All this stuff confirms that we've said earlier. Now we do not see any single factor in favor of EUR in long-term perspective. In short-term - yes, it could be pullbacks, retracement for 5-10 points on the market, but in long-term trends hardly break of tendency is possible.

Now overall situation makes me think that we could get global financial system based on USD. Dollar could turn from major reserve currency to global currency, especially if we will get Covid relapse in autumn. Investors easily accepted almost doubling of US debt and asked now questions. Now governments could say - let's write-off all debts as pandemic impact was strong and, if US dollar already fuels global economy, let it stay as global currency. It's a kind of Marshall's plan but in the scale of the whole planet. Now it seems difficult to achieve, but not impossible.

Vaccine run

Another hot topic is vaccine's run. About a dozen of companies are trying to make it - Gilead, Sanofi, Moderna to name some. On Monday market has fell in euphoria on positive tests of vaccine from Moderna company. With governments scaling back lockdown restrictions, investors grew optimistic that economies could soon return to normal:

Moderna Inc’s experimental COVID-19 vaccine, the first to be tested in the United States, produced protective antibodies in a small group of healthy volunteers.
“The market’s positive reaction to the report is understandable as finding a vaccine for COVID-19 is the search for the Holy Grail. It would allow a return to normal at a much faster pace and significantly reduce long-lasting damage to the global economy,” Hardman said.

So the question is how far we stand for vaccine and is it really Moderna so close to get it. Beside the immediate impact on shares prices of biotech companies, the likelihood of a vaccine is of huge importance for the global economy, and for sustaining market valuations increasingly underpinned by hope as much as fundamentals.

Historically, looking at all drug developments, the probability of success for a vaccine trial to move from stage 1 to approval is one of the highest at 33%, rising to 42% after reaching stage 2. Given the efforts underway and base rate probabilities, the prospects for a vaccine seem a matter of when rather than if. However, timing is fundamental when it comes to the economy and socially starved crowds, but it also comes with a healthy dose of caution.

Taken together, it seems difficult to assign a base rate forecast much greater than 5% to the probability of a vaccine being approved within the next twelve months by simply eyeballing and cumulating the distribution charts of historical precedents (see Fig. S15 on p. 26 here). Perhaps even more pessimistically, the stage 2 trial from Moderna that got markets excited this week is based on technology (mRNA) that holds a lot of promise (also here), but it has not yet been successfully used to commercially develop any vaccine on any disease.

Overall, it seems to us that consensus may be confusing optimism about the development of a vaccine with the reality of developing one fast enough. Whilst unquestionably rooting for a speedy solution, finding effective ways to manage the worst side effects of COVID while avoiding a second wave remains the most likely path to something resembling normality.

Economy statistics

Flash PMI surveys from Europe and the US provided fodder for both the bulls and the bears. Composite readings of activity generally increased from record lows in April but remained well below 50, which is the number that separates contraction from expansion. Taken at face value, activity continued to decline in May but at a slower rate than in April. It seems possible that firms are answering the survey by comparing activity levels to normal, thus understating potential improvements in May. it is possible that economic activity will increase, albeit from historic low levels in April. That would be consistent with DG ECFIN’s survey of euro area consumer confidence, which posted a record monthly gain in May (+3.9). However, that was only enough to recover a third of April’s monthly drop (-11.1).

The economic outlook in the coming months will depend in large part on whether the easing of lockdowns results in an increased spread of COVID-19. There is some reason for initial confidence. In first-mover countries, such as Austria and Denmark, there is little to suggest that easing has increased new cases.

While European countries have tended to reduce their daily cases to very low levels before re-opening, the same is not true of the US. Daily new cases remain elevated. Nonetheless, almost all states have announced some withdrawal of restrictions. What’s next? The US is likely to follow the path of Sweden — not suffering a big rise in cases but not supressing the virus either. Initial evidence from both suggest there has been a less severe initial hit to economic activity than elsewhere.

The US composite PMI was 36.4 in May, compared to figures of 30.5 and 28.9 in the euro area and UK, respectively. However, activity remains depressed compared to normal, even in those states that have opened up. The result could be a more protracted period of weakness than in places that suffered sharper initial declines in economic activity but brought cases to very low levels.

The UK claimant count jumped by 856k in April. This amounts to 2.3% of the workforce in one single month. Yet, more traditional, forward-looking economic indicators such as the ZEW survey in Germany (also released yesterday) show a clear divergence between current and expected conditions with expectation firming up around a swift recovery to pre-COVID-19 conditions.

In financial markets, large drops in volatility appear to further validate this consensus. This is promising as a swift return in confidence among consumers and investors alike is probably a necessary condition for any recovery to take hold. But it is also potentially bad news, particularly for markets, if expectations run too far in one direction given the prevailing significant and irreducible uncertainty associated with a disease that is leaving medical experts still with more questions than answers.

Even if expectations seem to be quickly converging towards a path consistent with a swift normalisation, there remain notable disparities in how people, countries and assets are responding to the COVID pandemic. For example, a recent BIS paper neatly demonstrates how similar policies aimed at reducing the spread of the virus may have drastically different economic impacts across Europe. France, Italy, Spain and Greece appear significantly more at risk of seeing longer lasting disruptions in employment relative to Germany, Northern Europe, the UK and even most of Eastern Europe because of a greater prevalence of small businesses in vulnerable sectors (e.g. hospitality, tourism). This heterogeneity is important for gauging the potential permanent damage to certain economies. It should also prove invaluable to policymakers in constructing more targeted policies addressing supply as well as demand constraints. In this regard yesterday’s announcement of a European €500bn rescue fund is a step in the right direction even though full details are still a little vague.

Thus, Economic data continue to provide evidence that the worst may be behind us even if the actual numbers are not even remotely close to any definition of ‘normal’. Still the foundation of recovery still seems fragile. Additional risk that we see is rising Covid emidemic in Emerging countries, especially in Africa and Latin America. Taking in consideration of huge refugees migration to EU from South Africa, Middle East and illegal migration to US through Mexico - it is unclear how developed countries could open borders, start flights, at least until situation is stabilized in LatAm and Africa.


Speculators’ net bearish bets on the U.S. dollar shrank in the latest week, according to calculations by Reuters and U.S. Commodity Futures Trading Commission data released on Friday. The net short dollar position was $7.66 billion for the week ended May 19, compared with a net short position of $9.08 billion for the week before that.

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 of $6.58 billion, down from $8.06 billion a week earlier.

Speaking about our two currencies - GBP and EUR, EUR shows no big changes in net position, because it has got support from Franc-Germany act, while GBP shows rising of net bearish positions due to difficulties that we've discussed last week.


Charting by

So, guys - try to put together all information background and not break your brains. Really... Too much inputs to make definite scenario. Following to common sense, we probably could say that economy condition is more or less similar in all developed countries. Yes, EU has better Covid statistics than US, but US have more direct and strong financial measures, while EU countries differ a lot as in terms of economy conditions as in terms of Covid situation. Good Covid situation is mostly in Austria and Germany. Besides, I do not exclude that under bad US Covid statistics is hidden something. May be they need it to make next political step. For example, calculation of Covid financial impact let them to withdraw big part of the debt on a force-major background, accuse China and force them to make reparations etc. Who knows...
Anyway, now I have a skeptic view on EUR perspectives in long-term, due, as I said, absence of factors that definitely could prove the advantage of EU and EUR to measures that US takes. This makes doubtful and bullish long-term tendency of EUR/USD rate.

Second conclusion that we could make today is vaccine. It is too early to celebrate and it means that the rally that we've got should fade soon.

Technical analysis in next post

Sive Morten

Special Consultant to the FPA

While emotions run high around fundamental and macroeconomic data, technical picture barely has changed since last week. On monthly chart EUR is forming 3rd consecutive inside month in a row. 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.



So, it is short music played around EU 500 Bln bonds programme and EUR brings us bad surprise this week. Not only previous top that we've marked was not broken but we've got another bearish grabber this week. Now we could speak on new bullish scenario here only if price finally breaks 1.10 resistance. Until this happens, context stands bearish on weekly chart. And this is potential hazard to monthly chart as well. Trading range is becoming narrower - it means that sooner rather than later releasing of energy should be and strong breakout in some direction. Weekly chart suggests it down...

Thus, we could repeat the same things that we've said last week:
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.



MACD trend stands bullish, but it seems that bears have better background on coming week. First, bulls was not able to push price above resistance having vaccine and 500Bln EUR news on the back. Now bears have K-resistance area, weekly grabber and coming Wed EU meeting where Franc-German plan should be discussed. We think that Wednesday discuss could be decisive for EUR. Any uncertainty and missing of approvement of this act by bureaucrats push EUR lower.

Technically, as well, EUR is moving the range and dropping out from the upper border. As we said last week - failure to turn up from 1.0885-1.09 level push EUR down. Only reversal in the middle of the range and turning back to the top could keep bullish context valid:


This chart keeps few negative moments from the bullish scenario point of view. As we've said - retracement should not be too deep and set the level - around 1.09. On a way down market has ignored K-support and small butterfly totally failed. This moment tells on bearish power. Second - we have downside acceleration right to OP target, and, finally - EUR has formed downside reversal swing here.

Now we could build AB-CD pattern and see that XOP creates Agreement with major 5/8 support @ 1.0850 level. Downside breakout tells that bullish scenario is doomed. So, as we've talked about long position around this level and somebody probably already have taken it - move stops to breakeven. Some upside respect of these levels should happen. Better to not open new long positions because sentiment is changing, bullish euphoria is fading and many things depends on Wed EU meeting.



About long-term perspective we could say that economic situation is mostly similar in all developed countries, it is not less that 12 month till vaccine and USD has more advantages compares to EUR by many factors.

In shorter-term we keep close eye on Wed EU meeting that should provide clarity on Franc-German pact. Lack of consensus will push EUR lower as it was major bullish driving factor last week.


Thank you sir. What a read. Was bearish on EURUSD friday and was looking to continue that. I'm looking for retest of the 1.1 before wednesday then ride it either way after the news

Sive Morten

Special Consultant to the FPA
Morning everybody,

Today we talk on GBP. On EUR - fortunately price jumps out from our level and those who have long positions now could take relief breath and move stops to breakeven. It is important to do as tomorrow will be very important moment of Franc-Germany supportive pact discussion in EU.

Now on GBP... price shows nice performance on intraday charts, but it is not as safe as it seems. Recall that two weeks ago we've got strong sell-off and tail close on weekly chart. On daily market turns between OP and XOP targets and has not reached major 5/8 level. This is a bit curious. On daily chart pay attention to possible bearish grabber that could be formed today:

On 4H chart market returns back to K-resistance area. If bearish scenario happens - it should fail to break it up and in this case we will get downside butterfly on daily that should complete XOP.

Conversely, if K-area will be broken, indeed, we could get upside reversal, based on our major scenario, or, at least AB=CD action as it is shown here:

On 1H chart GBP shows perfect reversal, right from our predefined area. Thus, if you already in - move stops to breakeven. If you're not - it is more difficult decision due our doubts. So, if you still decide to jump in - try to get retracement on most recent upside swing. For example, it would be just perfect, if we would get deep retracement and a kind of reverse H&S pattern here. In this case stop could be placed very close, just under the XOP and 5/8 Fib level. Other words speaking - try to minimize the risk, move stops to breakeven as soon as possible, because situation right now is not simple, chances on downside continuation exist.

Sive Morten

Special Consultant to the FPA
Morning everybody,

So, by some miracle, but EUR has completed the only possible bullish scenario that we've discussed in weekend - it turned up in the middle of the daily range, keeping bullish scenario valid. Now, traders stand inspired today's EU meeting and approvement of Franc-German 500Bln pact.
Technically picture looks bullish - reversal in the middle of the range suggests attempt of upside breakout:

On 4H chart our elder targets are still valid - this is AB=CD and potential big butterfly (not shown here) with target around 1.11. Since market was able to hold above 1.09 level - now it becomes crucial for bullish context and price has to stay above this level. Theoretically we could get 1.618 butterfly in a case of breakout that has the same target:

It means that those who have longs could keep them with b/e stop, while others could consider position taking around major levels. The most simple way is to split position in parts and buy at both levels. My preferable way to act here - Buy at K-support with stops slightly below it then, at upside bounce move stop to breakeven. If K-area will be broken - consider entry at 5/8 level.

Sive Morten

Special Consultant to the FPA
Morning everybody,
So, EUR stands in positive mood as EU Commission has approved 1.85 Trln help pack. Now price is coiling around K-area and COP target. Theoretically price already was above it, but now mostly stands in the same area:

As you know we consider 1.1060-1.11 target cluster and hope that EUR should have enough power to complete it. Although price is stuck around resistance - the fact that it stands around the top tightly and doesn't drop is a good sign.

On 1H upward action indeed has started from our K-support, as we've said yesterday. This is another example why we call to split entry on parts. This is easier and trader avoids psychological pressure, scaring to miss the entry. And this tactic has served us well again.

Now we need to estimate new vital point for bullish context. I would suggest that this is the low of thrusting bar. It means that to take new long position we could consider only two levels - 1.0995 and 1.0970 K-area with stops below major 5/8 Fib level 1.0930.
The low of thrusting bar is important because of daily chart as well. If price drops below it - EUR appears in trading range again showing fake upside breakout. This will be bearish sign. Current momentum should be enough to reach 1.1090 targets till the end of the week...

Sive Morten

Special Consultant to the FPA
Morning guys,

After two weeks of action we could say that EUR was able to hold at the edge of bullish context and rescue. Not once but two times - as action around 1.09 was also quite nervous. Now - price stands above 1.10 K-area, hits our targets for this week.
As price is not at overbought and has no solid resistance areas till 1.12 level - this is our next target here. 1.1230 target cluster - OP, Fib level and few intraday targets:

On 4H chart 1.27 butterfly target has been hit as well as inner AB-CD OP level. Today we expect the retracement but it should be small, no dramatic drop should happen, if bullish context is valid. Here we also could set new invalidation point. Now this is broken K-area and border of daily range - 1.10 area:

Happy owners of long positions could hold them and tight stops below 1.10 K-support area, while those who wants to initiate new ones could consider first K-support around 1.1040 level.