Forex FOREX PRO WEEKLY, May 31 - 04, 2021

Sive Morten

Special Consultant to the FPA
Messages
14,726
Fundamentals

So, we've passed through relatively calm week, as only two events have triggered jump in volatility - Fed view on inflation right in the beginning of the week and PCE data release. As a result, the deeper drop on EUR that we've discussed in our videos has started. The good thing is that we have mostly tactical issues this time, with no relation to longer-term background.

Market overview

The dollar hit 4-1/2 month lows against a basket of peers on Tuesday, as softer-than-expected U.S. data and insistence from Federal Reserve officials that policy would stay pat allayed investor fears about inflation forcing interest rates higher. Investors are heavily short dollars in the belief that low U.S. rates will drive cash abroad as the world recovers from the pandemic. They have become leery of adding to positions after an April leap in inflation cast doubt on the policy outlook, but seemed to find reassurance in data and Fed remarks overnight.

"They (Fed speakers) are maintaining the transitory inflation narrative which is pushing back any notion of tapering, which is keeping U.S. nominal yields on the defensive but breakevens are moving higher so real yields are moving further into negative territory and that's maintaining the weaker dollar narrative," said Jeremy Stretch, head of G10 FX strategy at CIBC.

The U.S. national activity index reading of 0.24 against expectations above 1, as well as dovish comments from Fed speakers, provided some backing for the view that any policy tightening is not happening any time soon.

"I think there will come a time when we can talk more about changing the parameters of monetary policy, I don't think we should do it when we're still in the pandemic," Federal Reserve Bank of St. Louis President James Bullard said overnight.

New Zealand's currency jumped after the central bank hinted at a potential interest rate hike by September next year in its monetary policy statement. The kiwi last traded 1.1% higher at $0.73072.

"There are now several central banks that appear to be closer to a tightening cycle than the Federal Reserve, and markets are sensing that," said Imre Speizer, Westpac's head of New Zealand strategy. He identified the currencies of New Zealand, Canada and Norway as driven by aggressive central bank expectations.

Following the RBNZ's "hawkish surprise," Speizer said he may revise up his forecast for the kiwi to finish the year at $0.76.

That contrasts with a host of Fed officials who overnight echoed the sentiments of Chair Jerome Powell that a spike in inflation will be transient and ultra-easy policy continues to be warranted.

"I have not seen anything yet to persuade me to change my full support of our accommodative stance," Chicago Fed President Charles Evans said in a speech on Tuesday.
"Right now, policy is in a very good place," San Francisco Fed President Mary Daly told CNBC the same day. "We need to be patient."

"Confidence in the outlook for the recovery in the Eurozone has been increasing," Rabobank strategist Jane Foley wrote in a report. "This is underpinning market speculation that the topic of tapering with respect to the pace of asset purchases will be on the table at the forthcoming June 10 ECB meeting.
The conviction of Fed officials that this year’s price pressure will be transient suggests there is no real reason to suspect any significant rowing back of monetary policy accommodations in the near-term," which is undermining the dollar, she said.


The dollar gave up gains from early on Friday as traders tidied positions ahead of month-end and a holiday weekend after seeing new economic data confirm expectations about U.S. inflation and the recovery from the COVID-19 pandemic.

The data showed that consumer prices increased in April far beyond the Federal Reserve’s 2% annual rate target. The inflation readings had been widely anticipated and were not expected to have an impact on policy from the Fed, which has viewed recent price increases as adjustments for the reopening of the economy.

The next big event for the markets is the Fed’s monetary policy meeting on June 15 and 16, which could provide clues to when U.S. interest rates will increase.

Fed officials could show projections for stronger economic growth. That would point toward the central bank tapering its purchases of bonds and allowing longer-term interest rates to rise, which would support the dollar, said Joseph Trevisani, senior analyst at FXStreet.com. “The Fed is trying to prepare the markets for the inevitability of tapering,” Trevisani said.

The British pound held firm near a three-month high against the dollar on Friday on rising expectations of an earlier than expected rate hike by the Bank of England after a policymaker said the central bank was likely to raise rates well into next year. Gertjan Vlieghe also noted an increase could come earlier if the economy rebounds more quickly than expected.

Signs of optimism for the EU
By Fathom consulting

Recovery has been slower to arrive in the European Union than in other advanced Western economies. The EU was three months later than the UK and US to place its first order for vaccines, and nearly a month late to approve a vaccine for use, leading to a late and slow roll out of its vaccination programme. Economic outcomes have followed suit, with EU GDP in 2021 Q1 well below its pre-COVID level, while the US economy had recovered nearly all its lost ground.

But there are signs of improvement across the continent. Again, this is most obviously seen in the vaccination data. After its widely-reported delays in obtaining supplies of vaccines earlier in the year, the EU has caught up with the UK in its rate of new vaccinations and actually overtook the US in May. In March, Fathom estimated that the EU was one financial quarter behind the UK and US in terms of completing the process of providing first vaccinations to its populations. This gap has shortened to around one month in latest estimates.

1622371380543.png


One of the early obstacles to the EU’s vaccine rollout was significant levels of vaccine hesitancy amongst EU nations. In December 2020, only 24% of French citizens polled said they would get vaccinated. Now, however, YouGov polls indicate that vaccine acceptance in the EU is rising markedly. In the latest May poll, 64% of French people said they either have or would submit to a COVID jab, with similar increases in polls across the continent, as the evidence continues to mount that the vaccines are safe and effective.
1622371389169.png


This is positive news for health outcomes, so are economic outcomes going to improve too? Early indicators seem to suggest so. The IFO survey of German businesses shows that confidence is high, even compared to pre-pandemic levels, and rising. Increases in optimism are most notable in the services sectors, which bore the brunt of the restrictions through the pandemic. And this positive news in economic sentiment is broader based than just Germany. Fathom’s Economic Sentiment Indicators show growing economic confidence across the major EU countries, as businesses and individuals have begun to feel the benefits of the withdrawal of restrictions.
1622371398660.png


But the EU’s economic output has a lot of ground to make up, and worryingly there is an increasing divergence between countries in the speed of recovery. The core European economies of France, Germany, the Netherlands, Belgium, and Austria saw smaller losses of output at the height of the pandemic, and have recovered more swiftly than their southern European counterparts in Spain, Italy, Portugal, and Greece. Should this divergence continue to widen, a two-speed recovery could create political tensions across the region which could find expression in the ballot box. There are upcoming elections in Germany and France this year and next respectively, whilst all the southern European countries are due to go to the polls in 2023.

However, a return of foreign visitors to the tourism-dependent economies of southern Europe could put a different complexion on things. As restrictions are lifted across Europe, pent-up demand for holidays is likely to be unleashed. Last summer, foreign visitor stays at hotels were as much as 86% below 2019 levels in southern Europe, which took a harder hit than central European counterparts. But with increasing number of people vaccinated, and with large savings pots available to be spent, there’s a case to be made for better news to come for the European tourism industry in 2021.

With the recovery across Western economies very much underway, there’s increasing optimism that the EU recovery will start to pick up the pace. Fathom expects the euro area to reach pre-crisis output levels by the end of the year, albeit probably still behind the pace of recovery in the US. But possible risks remain on the horizon, in the form of variants of concern and tensions arising from a divergence between EU countries.

COT Report

Despite increased volatility overall sentiment stands positive on EUR. CFTC data this week shows another increase as in open interest as in net bullish speculative positions. Hedgers also have increased positions against EUR appreciation:

1622371468479.png



As a result, net speculative position shows gradual but stable dynamic:

Next week to watch

#1 NFP report

How fast is the U.S. recovery? Friday's U.S. monthly jobs report will add fuel to the debate.

In April, U.S. job growth unexpectedly slowed, possibly because of shortages of workers and raw material. Non-farm payrolls added a mere 266,000 jobs compared to predictions for more than 3-1/2 times that.

Optimism over jobs has offset concerns about rising inflation and diminishing government financial support, lifting May U.S. consumer confidence to a 14-month high.

For May jobs, a Reuters poll predicts a 621,000 rise. Strong data could again raise concerns of an earlier-than-expected stimulus unwind by the Fed.

#2 Bulk of EU Inflation data

Tuesday's euro zone flash inflation is sure to grab attention as the next European Central Bank meeting nears.

Inflation in the bloc is approaching its 2% target - the fastest in years - thanks to higher spending and base effects stemming from the 2020 oil price crash. Strong data could spark excitement or fear that a new era of inflation is dawning.

Not so fast, others argue. ECB Chief Economist Philip Lane, for one, has pushed against the inflation-is-back narrative, stressing labour markets will take years to return to pre-crisis levels and that stimulus is still needed to secure the recovery.

The data could pave the way for a lively June ECB meeting.

1622371504735.png



#3 Bank of Australia meeting

The Reserve Bank of Australia meets on Tuesday and focus is on whether it will provide any hawkish hints, given a strong economic rebound and moves from peers towards slowing stimulus.

Few expect Australia to follow neighbour New Zealand, which signalled a potential rate hike in 2022. But investors are seeking clues on the RBA's asset-purchase plans ahead of its July meeting when it is due to decide whether to expand its quantitative easing programme.

Australia's pluses? A relatively low COVID-19 caseload and rising commodity prices. China's yuan at a three-year highs and signs of Beijing's comfort with the exchange rate bodes well for commodity exports too. The risk? A weaker Australian dollar versus the yuan, potentially spelling higher inflation.

Conclusion:

Based on recent events we see few interesting and important moments for us. First is, as PCE as core PCE data confirms our hypothesis that inflationary pressure is growing as it stands in a row with recent CPI report. Michigan data also shows great sentiment and taking it all together with previous released statistics we confirm that US and global economy stands in reversal and dollar is coming to the breakeven point when trend should change to the upside.

In a shorter-term we have few tricky moments. Previously we already mentioned it briefly, few weeks ago when we said that additional bearish factor for dollar could come outside, not because of domestic statistics or Fed policy but because of rivals. Indeed, EU situation is improving as well. Now we see hints and rumors on rate change from BoE, Canada, Australia and NZ. The first check we'll get on 10th of June when ECB should update its view on EU economy perspectives. And on 15-16th of June we should get the same mantras from the Fed. Together they could play bad trick with US Dollar.

Besides, recall our previous report when J. Bullard talked on weak NFP numbers. He said that within few months market should count on good NFP data due to the consequences of pandemic employment difficulties as small business is just started re-opening. Thus, this is great that economists expect 600K+ NFP numbers next week, but chances that they appear to be weaker are high. Which is additional point in favor of the bears.
Thus, some hawkish tones from the ECB and worse NFP data could trigger deeper action on US Dollar, which totally fits to our long-term view as
we suggest reaching of 87.4 by dollar index before reversal starts.

Finally, on Australian dollar - be aware of Thursday. We have bearish technical context on ausie, so its not the fact that Central Bank definitely will talk on tightening. Comments could be dovish as well. This is for those who trade AUD currency.

Technicals

Monthly

So, last week we've specified two scenarios for DXY, but, as EUR takes 70% of the index, these scenarios are applicable to the EUR at the same degree. We 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. Recent PCE report also has triggered short-term reaction. James Bullard hints on weak NFP numbers not only in June, but in few consequences months. This should support existed trend on the dollar.

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, it makes me think that gradual direct upside continuation to our long-term target has more chances to happen.

As we said already, we suspect that an exceptional event exists that could let EUR to contract 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 "accommodative rhetoric", 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_30_05_21.png


Weekly

Price action was mostly "inside" one as trading range was almost the same as on previous week. EUR now has no technical barriers - OB level stands higher and major 5/8 resistance is broken. It seems that EUR stopped due PCE numbers. Bullish divergence stands in place, suggesting taking out of the previous top. "Three white soldiers" also relatively rare and strong pattern that usually appears in the beginning of extended upward action.

In general EUR shows no retracement on weekly time frame, standing near the top. Besides, we have only bullish signs on a way down - candlestick pattern and following bullish reversal bar. Thus, on the weekly chart we have no reasons to suspect any bearish context by far.

eur_w_30_05_21.png


Daily

Friday's spike down might become more important to us than it seems that first glance. I give you the hint. Let's suppose, market is bearish and we expect deep downside action. Suddenly we get strong PCE numbers. The question is - how "supposedly bearish" market should behave? Answer you could see on the chart.

If market is really bearish, and strong bearish data should trigger solid plunge as it is more than enough strong driving factor when market sentiment is ready and just wait for the final signal. But here we do not see anything of this kind. After the data release market has shown very short-term reaction and returns right back up. What does it mean? Right - market is not quite bearish. And CFTC data confirms this. This "irrational" market response to PCE data release suggests that hardly we get deep drop and upward action could continue at any time. If, of course, no new negative data will be released.

So, for short-term perspective recent spike's low plays decisive role. If everything that we've said here is correct, that price should stay above it. This is our indicator for coming week.

eur_d_30_05_21.png


Intraday

Here is how our wedge been broken down. As we warned through the previous week - we should wait for more signs before taking the long position. Now, 4H chart market mostly has completed 50% retracement and formed strong bullish engulfing pattern. In current conditions and based on the situation that it has appeared from, I would consider it as "rejection of price as well".

eur_4h_30_05_21.png


On 1H chart market barely has not reached the OP target, which, actually perfectly agrees with 4H 50% support area. The logic is very simple here. This bullish pattern and current lows are the clue. Once market stands above it - it has chances to reverse up and continue upward action. Thus any bullish patterns that we have here could be used for long entry - minor retracement, possible reverse H&S, enter by market - anything that stand against recent lows. Downside drop suggests deeper downside action. So, if you have bullish view - this is the time to make a decision.
eur_1h_30_05_21.png
 

Sive Morten

Special Consultant to the FPA
Messages
14,726
Morning everybody,

Today we take a look at GBP as it stands at the eve of historical breakout. As we have positive fundamental background, it seems that market is aiming on challenge of 1.14350 top this week.

On weekly chart we could see that response to strong 1.42 area is over and market is moving higher. But above 1.42 price has no solid barriers till 1.47-1.48 area. It means that another top of 1.4350 should be challenged soon:
gbp_w_01_06_21.png


It might be some pullback out from it later, but hardly we get major downside reversal. Still, as a short-term target we use 1.27 butterfly and daily overbought:
gbp_d_01_06_21.png


Inside the butterfly we also have AB-CD pattern with XOP around 1.4395 that also might be reached at the same time as butterfly extension because of triggering stops above the daily top. This is actually the same AB-CD that we've traded last week and "222" Sell pattern.
gbp_4h_01_06_21.png


For position taking we could consider reverse H&S pattern on 1H chart and bullish grabber that already stands in place:
gbp_1h_01_06_21.png


So, if you think about buying of GBP, maybe this setup will be helpful
 

Sive Morten

Special Consultant to the FPA
Messages
14,726
Morning everybody,

on GBP very short-term bullish setup has been erased, but nothing is lost on daily chart, we just need to keep an eye on major support levels. GBP should turn up sooner rather than later.

On EUR currency upward action also lasts not too long, now price stumbles after completion minimum intraday target. As we have a lot of fundamental driving factors ahead - Lagarde speech and ADP report today, NFP report tomorrow, it seems market just waits for the clarity...
eur_d_02_06_21.png


For very short-term setup, EUR has completed minimum AB-CD target and stands now at culmination point that provides best risk/reward ratio. If market is bullish it has to stay above 1.22 area, as it is rather strong support on 1H chart. Otherwise, we have to wait for retracement to deeper standing levels:
eur_1h_02_06_21.png


In a case of downside breakout we could get deeper downside action, at least back to the previous support, or maybe lower. Because this downside action will be triggered by some fundamental information:
eur_4h_02_06_21.png


Thus, if you have bullish view - you could consider setup on 1H chart with stops below "C" point. Additionally it makes sense to watch for bullish patterns on 5-15 min chart, such as reverse H&S, for example.

In a case of downside breakout this short-term context will be broken and we should wait for deeper standing support areas on the higher time frames.
 

Sive Morten

Special Consultant to the FPA
Messages
14,726
Morning everybody,

EUR and other markets show weakness. It might be from high expectations on coming ADP and NFP numbers. Although it is not the fact yet that we get 500-600K. Anyway, based on pure technical picture I wouldn't consider taking of new long position right now. Mostly because the short-term bullish context has been erased without solid reasons for that:
eur_d_03_06_21.png


On 4H chart I should just theoretical pattern that might be formed. But it is important to understand that this scenario is totally depend on NFP and ADP numbers. They have to be weak to make this scenario real:
eur_4h_03_06_21.png


Based on pure technical factors, price looks heavy - short-term AB-CD pattern has been erased and price has formed bearish reversal swing. Second - recent pullback from lower standing 5/8 Fib support area also has been erased. So, it seems that new bears are stepped in and this is the reason why I'm not inspiring to go long right now.
eur_1h_03_06_21.png


Only if you would like to bet on NFP results, it is possible to consider position taking right now. But this is more relates to gambling rather than context trading.
 

Sive Morten

Special Consultant to the FPA
Messages
14,726
Morning everybody,

So, downside action has happened still. Currently we keep watching for suitable levels where is possible to consider long entry. On daily chart it seems that 1.2050 K-area is good one. It agrees with oversold level and few intraday targets as well. So, if even EUR stops there for few sessions - chances on upward bounce are high, that let us to move stops to breakeven.

Ultimately it might be 1.1950 again (recall our H&S pattern here), but as market in recent days shows very short-term reaction on dollar supportive events, this time it could happen again:
eur_d_04_06_21.png


On 4H chart OP target and 1.27 butterfly extension are done. But as we have strong acceleration and could get more from coming NFP data - it makes sense to count on XOP target. Together with 1.618 butterfly extension they perfectly agree with daily K-area:
eur_4h_04_06_21.png


We do not intend to go short here, but if you consider this scenario - use the same 1.2050 area a target. For entry it is possible to use one of the Fib levels on 1H chart. Re-testing of PCE release lows last week might be the one to consider.
eur_1h_04_06_21.png
 
Top