Forex FOREX PRO WEEKLY, May 27 - 31, 2024

[Sive Morten]

Fundamentals

This week we have fewer economical events, although we can't say the same about political ones. In fact, the most resonance has been triggered by the Fed minutes release. And the most surprising was some voices calling to hike the rate instead of cutting it. This was a kind of cold shower for the markets. Structural crisis in the US lasting for 2+ years already, and it seems that gradually the understanding of the problem is coming. But, unfortunately 2024 is an election year and not only the US domestic policy stands on the table. Elections could and probably will impact on global politics. So, we do not exclude scenario when Biden's team just twists Fed's hands and force it to cut rate prior elections, but choose the moment so to get positive economy and sentiment boost effect prior elections but inflation after elections. It seems that summer period is best moment for this decision. Besides, during vacation time markets activity decreasing, so, it could be done quieter.

Market overview

The U.S. dollar edged up against the euro on Tuesday, as Federal Reserve policymakers said it is prudent for the U.S. central bank to wait several more months to ensure that inflation really is back on a path to the 2% target before commencing interest rate cuts. Fed Governor Christopher Waller told the Peterson Institute for International Economics in Washington, on Tuesday, he would need to see several more months of good inflation data before he would be comfortable supporting an easing in the stance of monetary policy.
Atlanta Fed Chair Raphael Bostic also spoke on Tuesday and warned against cutting rates too quickly. The Fed, he said, needs to be cautious about approving its first rate cut to be sure it does not touch off pent-up spending among businesses and households, and put the central bank in a position where inflation starts "bouncing around."

"Amid a paucity of economic data catalysts this week, trading ranges have narrowed across currency markets. The dollar remains on a solid footing however, bolstered by a drumbeat of high for long messages from Fed officials," said Karl Schamotta, chief market strategist, at Corpay in Toronto.

Federal Reserve officials at their last policy meeting indicated they still had faith price pressures would ease, if only slowly, according to the minutes of the U.S. central bank's April 30-May 1 session. "Participants ... noted that they continued to expect that inflation would return to 2% over the medium term," the minutes said, but "the disinflation would likely take longer than previously thought." While the policy response for now would "involve maintaining" the central bank's benchmark policy rate at its current level, the minutes, released on Wednesday, also reflected discussion of possible further hikes.

"The minutes confirmed what most traders were already thinking prior to the U.S. CPI report a week ago," said Amarjit Sahota, director at foreign exchange risk management firm Klarity FX in San Francisco. That is, FOMC members were becoming increasingly frustrated with the disappointing inflation reading in the first quarter, but felt that policy was restrictive enough," Sahota said. "The inclusion that some officials were willing to tighten policy further has given the USD a further uplift since the minutes were released," he said.

While markets remain hopeful that U.S. inflation will continue to cool, personal consumption expenditures data due on May 31 will be a crucial test, analysts said. It follows separate data earlier this month that showed monthly consumer prices increasing less than expected, which kept alive investors' hopes for rate cuts at some point this year, after hotter-than-expected inflation reports in the first quarter.

Thursday data showed U.S. business activity accelerated to the highest level in just over two years in May, suggesting that economic growth picked up half-way through the second quarter. S&P Global said that its flash U.S. Composite PMI Output Index, which tracks the manufacturing and services sectors, jumped to 54.4 this month. That was the highest level since April 2022 and followed a final reading of 51.3 in April.

"The currency action shows the market still responds to strong U.S. economic data in the expected way," said Marc Chandler, chief market strategist at Bannockburn Global Forex LLC. "I think the dollar has some more room on the upside," Chandler said.

Data on Thursday also showed the number of Americans filing new claims for unemployment benefits fell last week, pointing to underlying strength in the labour market that should continue to support the economy.

The preliminary EU composite Purchasing Managers' Index for the currency bloc came in above the 50 level separating growth from contraction for the third month in a row, with even struggling manufacturing showing a recovery.

"The EU PMI figures took a little pressure off of the stagflation theme, but it still feels a little stagflation 'lite' if you will, and we need to see more on the growth side there," Brad Bechtel, global head of FX at Jefferies, said in a note.

The corporate sector in Japan has been grappling with the weak yen, and nearly half of Japanese firms find the yen's slide beyond 155 to the dollar harmful to their business, roughly double the percentage of those who see the currency's weakness as a positive, a Reuters survey showed on Thursday.

On Friday traders booked profits after recent gains but the U.S. currency remained well-placed for further advances, supported by strong U.S. economic data that has prompted markets to dial back expectations for interest rate cuts. Data showed that new orders for key U.S.-manufactured capital goods rebounded more than expected in April and shipments of these goods also increased, suggesting a pickup in business spending on equipment early in the second quarter.

While stronger-than-expected U.S. economic data has led traders to push out the timing of the first Fed rate cut to September, expectations for rate cuts by other central banks have also slipped.

"For as much as expectations of easing from the Federal Reserve have cooled off over the last week, it's a similar story for central bankers around the world - ECB rate cut changes have also downshifted after lots of official commentary since Monday," said Helen Given, FX trader at Monex USA in Washington. Despite Friday's retreat, the near-term outlook for the dollar was upbeat, analysts said. This theme of the U.S. exceptionalism is still playing out," Convera's Kovacevic said.

So it is an an extraordinary turnabout in just five months, financial markets now fully price just one quarter-point interest rate cut from the Federal Reserve this year - compared to the six built into futures prices at the start of 2024. With just 35 basis points of Fed easing now priced for the year, two-year Treasury yields climbed back to within 4bps of the 5% threshold.

Even though the European Central Bank is still nailed on to deliver its first rate cut next month, unexpected strength in May business readings and a surprising acceleration of negotiated wage settlements in the first quarter have dragged market pricing for full-year ECB easing back below 60bp. Although Nagel said that wage raising will not prevent June rate cut -

An increase in a key euro zone wage indicator is not particularly worrisome and the European Central Bank should be in position to cut interest rates on June 6, Bundesbank President Joachim Nagel said on Friday. Still if the ECB cuts interest rates in June, as many expect, the next rate cut should not occur until September.

Societe Generale economists predicted the ECB will cut rates in June and September but then pause to wait for the Fed to implement its first rate cut and assess inflationary risks from rising wages. Market pricing is less clear on when that second rate cut might come.

"With wage growth running high and the Fed forced to hold off rate cuts for now, we expect the language from the ECB to remain hawkish," the SocGen team said.

The rethink of the Bank of England's trajectory this week has been even more dramatic as sticky UK inflation readings combined with news of a snap election for July 4. Although Friday's data showed UK retail sales plunging far more than forecast last month, money markets have wiped out chances of a BoE cut next month and now only see a 1-in-3 chance of a move in August.

RESULTS OF THE WEEK

So, obviously the Fed minutes have become a cold shower for market society. Just last week everybody celebrated CPI decreasing, while we've said that this is "temporal" and it is too early to deny EUR/USD parity idea. But, the Fed Committee opinion comes not from the thin air, and not from falsificated "adjusted" CPI. They do know what is going on and do know the real situation with Inflation. You do not need to have PhD degree to find information about inflation. Here is just a few examples:

...The Economist magazine has been conducting such research since 1986. The Big Mac is used by the magazine's experts as a standard for two reasons: McDonald's is represented in most countries of the world, and the Big Mac itself contains a sufficient amount of food components (bread, cheese, meat and vegetables) to be considered a universal cast of the national economy. Its cost in each country depends on production volumes, rental prices, raw materials, labor and other factors... [about the Big Mac Index]

87.7% is 15% average annual growth over 4.5 years. The average annual growth of CPI over the same 4.5 years is 4.3%, and the “food” component of the CPI index has an average annual growth of 5.3%. Basically, that's all you need to know about inflation statistics. And Fed members know it.

But it is not only about inflation. All components that looks strong in official statistics, in reality appear to be not as strong. Job market... Americans are about to receive a harsh wake-up call.51% of Americans say it is a bad time to find a quality job, the highest share since April 2021. Since 2022, the share of respondents saying their job situation is getting worse jumped by 25%, per Gallup.

The NFIB Small Business Sentiment Index is also near its 10-year low. It’s quite easy to look at companies from the S&P500, especially those that are under hype, but we must remember that the basis of their economy is small and medium-sized businesses and it is they who primarily determine the risk of a recession.

Another indicator signals an upcoming or already occurring recession. Samm's rule identifies signals associated with the onset of a recession when the three-month moving average of the national unemployment rate (U3) rises 0.50 percentage points or more from its low over the previous 12 months. In principle, there were false signals in the mid-80s and during the “non-recession” of 1998, but they, of course, were not as strong as they are now.

Taking it all together we see two camps of the next Fed step. First camp are "economists" and they argue in favor strict policy for longer and even higher rates, because inflation is not defeated, it is raising. And very soon, despite all adjustments of CPI, expensive commodities will find the way into domestic prices. Besides, even without the new inflation spiral, the existing one remains elevated. Second camp are "politicians", they follow political reasons. Elections are right around the corner and they need the picture of wealth, strength and prosperity. Thus, they argue for rate cut, appealing to signs of recession and inflation slowdown. Obviously political camp is stronger and, easily could twist hands to the Fed and force it to cut rate. As we said in the beginning - the best moment for that is somewhere in summer. It will be about 5 months until elections that should let positive effect to manifest and bring more voices to Democrats . Second - the negative effect of easing will appear later, probably in 2025. If it comes earlier, the Fed and US Treasury could use existed reserves around ~800 Bln to plug holes and fight fire, keeping the image of success.

Fathom consulting also tells about this:

Economic surprises have generally been trending downward recently. All told, the data are moving in a direction that appears consistent with a FOMC rate cut this year. For now, investors are pricing that to occur in September. But with a hotly contested presidential election due in November, the FOMC might be tempted to move sooner rather than later, opening up July as a potentially underpriced month for a policy easing.

Fed could cut rates after 1 or 2 months, said Alexandre Tavazzi, head of the CIO office and macro research at Pictet Wealth Management, discusses the Federal Reserve’s next interest rate move. JPMorgan Chase & Co. and Citigroup Inc. are among the few holdouts still forecasting a July move.

The opposite opinion is presented by GS. The Federal Reserve will only start cutting interest rates in September, according to economists at Goldman Sachs Group Inc., who pushed back their call from July amid signs the economy is still too resilient to justify easing. Goldman Sachs still expects the Fed to deliver two cuts in total through 2024, with one per quarter, or every other meeting. That means the second reduction would now come in December, according its economists.

“Earlier this week, we noted that comments from Fed officials suggested that a July cut would likely require not just better inflation numbers but also meaningful signs of softness in the activity or labor market data,” economists including Jan Hatzius wrote in a note.

Goldman Sachs Chief Executive Officer David Solomon is even more hawkish than his economists, saying that he doesn’t expect any cuts this year. Earlier this week, Nomura Securities also pushed their call from July to September, saying “the threshold for rate cuts appears to have risen.”

Such a polarized view on optimal Fed policy tells that it is impossible to make any objectively optimal decision at the level of economic or financial analysis. On the one hand, inflation is not just not falling, but rising. That is, the rate needs to be raised. On the other hand, industry, like the entire economy, is in recession and this means that the rate needs to be lowered. At the same time, we note that real inflation is much higher than official figures, but we will leave this on the conscience of the statistical authorities of the United States.

Since the Fed's leadership, after all, are financiers, it would seem that they should worry more about inflation, rather than stagnation of the real sector (within the framework of the Fed's second "mandate" to increase employment). But given the elections in November, it is very possible that the White House has made a political decision to lower the rate … And the financiers in the Fed's leadership proceed from the same logic, while more politically engaged officials tend to listen to the opinion of the Biden administration. However, there is still no good solution.

With the exception of these collisions, the overall picture almost coincides with the picture of previous weeks: there is a classic structural recession. Which will continue for several more years. And the only factor that can accelerate it will be the collapse of financial markets. Which will happen in the medium term - this is relation between JOLTS and S&P 500 index:

CONCLUSION:

To keep it short - more signs stand in favor of the rate cut in July. We can't make the only correct decision based only on economical situation as it is explained above. As an economist I would keep rates at current level for longer. And if we wouldn't be near elections, I would stay for more restricted policy for longer. But... why the Fed still could start cutting rates and why we shouldn't ignore this scenario despite fundamental reasons?

First is political reasons and this is dominant power at this point. Second is, started trading war with China will boost Trading balance deficit, could lead for export contraction and, consequently reducing production due decrease of Chinese demand. As a by-product of this, Chinese goods could raise in price in the US due additional import taxes, that could increase inflation but in some spheres, mostly EV and technology sectors. Finally, technical reasons - recall that we get May bullish grabber on EUR/USD. When you can't find the precise answer in fundamentals - it makes sense to take a look at technicals. Anyway, in trading routine we have to follow to big patterns but not go against them. All these moments together makes us think that rate cut in July has more chances to happen rather than not to happen. But, of course, this is not a frozen picture. As we will get more data through the time, situation could change... For example, if any controlled collapse on stock market starts (or it could be provoked intentionally) - more chances and reasons for earlier rate cut come... Conversely, if no rate cut happens n July we could get sharpest reversal on EUR/USD in decade... Let's keep in mind quarterly bearish grabber pattern. Sounds too complex? Yep. But the same does situation in the world, big uncertainty here. We can succeed, if we don't try to swallow the cow at once. So let's go step by step and first deal with current bullish tendency and patterns that we already have.

 

[Sive Morten]

Technicals
Monthly

First is - here our quarterly grabber pattern, just to remind you. Meantime, monthly picture looks static, mostly the same as last week. It is just five sessions, including US Memorial Day until the end of the May, so chances to get grabber's confirmation stand high.

For the truth sake, we have to say, that its minimal target is just above 1.0980 March top. So, it could happen so that as monthly grabber will be completed as quarterly one remains valid. But anyway, this is good enough target to follow in day-by-day trading. Having extended target always makes process simpler.

Weekly

This chart also brings nothing new to our analysis. In fact, we've got inside week. Trend already has turned bullish and market erased downside reversal week. Here bullish context remains:

Daily

Major riddle for us is the daily picture. Nominal trend has turned bearish, but market is forming bullish flag pattern. Despite some doubts - Friday's 3-Drive "Buy" has worked perfect. Now the major question, whether EUR will keep going higher, forming small right arm, or we will get downside AB=CD to more common levels:

Intraday

Once again, idea of gradual entry works better. In most cases it gets better results. In recent time market ignores many important points - upside XOP, K-support area and another XOP on 1H chart. Overall action looks like retracement, rather than direct bearish reversal. Here we also have some bullish MACD divergence.

Taking it all together we could say the following. If this is real upside continuation and "small" shoulder on daily chart - market has to keep moving higher, daily trend should turn bullish in a few sessions. It means that in the beginning of the week we could consider this reverse H&S as 2nd chance to enter after 3-Drive. It will work, if we're dealing with real upside reversal.

If H&S fails and EUR drops to 1.0780 support, we should get more harmonic daily H&S shape, with more natural right arm placement. Perfectly if it will be around 1.0740. So, this is the first step in the plan for coming week.

 

[Sive Morten]

Morning everybody,

So, not much to say today... On daily chart EUR starts showing signs of bullish dynamic pressure. So, it seems that it goes with our 1st scenario, as we've said in weekend:

If this is real upside continuation and "small" shoulder on daily chart - market has to keep moving higher, daily trend should turn bullish in a few sessions.

IT seems that we gradually should turn attention from small H&S here to the bigger one, with the neckline around 1.0950 area, which will be our nearest target:

On 4H chart we do not exclude appearing of butterfly pattern. It potentially will have two extensions, and 1.618 is also at 1.0950:

Those who already have long positions - just think how to manage it. For a new entry in a case of butterfly appearing we need to keep an eye on these levels:

...and 1.0840 of course, because it EUR favorite 50% support. 3-Drive is done already. Our 1H H&S has worked, but maybe due holidays or some other reasons - here we also get very small right arm... so, levels that we've discussed in weekend for long entry have not been reached.

 

[Sive Morten]

Morning guys,

Take a look what an interesting performance we have on EUR. Suddenly the bearish grabber has appeared. It means that we have to postpone our bullish thoughts on better times. WIth the grabber in place, the reverse H&S that we thought is done already, take a second chance. As grabber suggests drop at least to 1.08 area.

If you take a look at DXY chart, you'll see that it has the opposite grabber which makes situation a bit tricky. I think that this is just an occasional combination of technical tools. Besides, with the performance of US yields, and recall - weekly grabber on the same DXY, I suggest that downside action on EUR is more probable now:

Despite that we've got the retracement that we've discussed yesterday, maybe it make sense to wait with the new long position. On 1H chart we could get H&S pattern (while I was writing this post - it breaks down):

That's being said, we suggest that it would be better to wait for bulls. Bears unfortunately a bit late on this H&S, but still could watch for any 2nd chance for entry. Because it is pretty solid distance until 1.08. Besides, DXY and 10-year bonds have weekly patterns, so 1.08 might be not the final point...

 

[Sive Morten]

Morning everybody,

So, bearish context works accurate. Even daily grabber's target is completed. Still, as DXY and 10-year bonds patterns stand on weekly chart, chances that EUR will keep going lower are significant. Our H&S here give the 2nd chance to be formed, so, 1.0740 area is the one to watch for here:

Meantime, EUR completes downside OP, hitting strong 1.0780 K-support area. CD leg shows clear signs of acceleration which is good for downside continuation. Take a look that XOP stands around 1.0737 - precisely where the bottom of right arm should be... Still, today we could get tactical bounce due strong support area:

As a possible target we could initially consider 1.0830 K-resistance and watch for 2nd short entry. 1H H&S target is done as well...

 

[Sive Morten]

Morning everybody,

So, EUR has reached 1.0830 resistance that we've discussed. But action was fast and personally I would wait for more bearish signs before considering position taking.

That's why today I decide to take a look at GBP instead, because it is forming really nice bearish trading setup. First is, recall our AB=CD pattern that we've discussed a week ago. Now it has reached the target and we've got "222" Sell pattern. Usually this pattern suggests at least 30% pullback, which means ~1.2610 area:

On 4H chart we see nice H&S on top that probably becomes the pattern that should trigger downside action:

H&S has the target around 1.2635 which is very close to 1.2610. This is about direct traditional action. But also, as usual, we will keep an eye on possible H&S failure. If it happens instead, then we're going to buy GBP with 1.29 target...