Forex FOREX PRO WEEKLY, November 01 - 05, 2021

Sive Morten

Special Consultant to the FPA
Messages
15,515
Fundamentals

This week markets mostly were watching for Central Banks' meeting - Canada and EU in particular and important statistics, across the Globe, such as US GDP, Consumer spending and some other. The drama has happened on Friday, when EUR has turned on a dime and re-established the status quo. Indeed although we've got some reasons day before that could trigger rally that we saw on EUR, but at the same times, all factors were not as strong as the rally was looking like. This has brought the fruits right on next day. And this price action better fits to our general view on EUR. Miracle has not happened and ECB remains the white crow keep lagging all other Central Banks.

Market overview

The Aussie dollar jumped on Wednesday as surprisingly strong inflation data raised the possibility of sooner-than-planned rate hikes, while the yen was calm as Japan's central bank is seen retaining its easy monetary policy stance later this week. Data showed Australian core inflation rose at its fastest annual pace since 2015 in the September quarter, and quicker than the Reserve Bank of Australia's projections.

The data backed markets' view that the RBA is behind the curve on inflation and may have to tighten monetary policy earlier than it has been publicly planning for.

"The stronger trimmed mean print will put some pressure on the RBA to rethink its forward guidance for the cash rate," wrote ANZ analysts in a note.

The Reserve Bank of Australia meets on Tuesday of next week and market pricing is at odds with RBA policymakers' insistence that there will be no rate hikes before 2024. RBA declined to buy a government bond at the heart of its stimulus program, fanning speculation the central bank will allow rates to rise earlier than expected. The central bank again resisted buying the key bond earlier on Friday.

Not all central banks are as far off from tightening policy however. Significantly, the U.S. Federal Reserve looms large for markets as they prepare for policymakers to announce next month it will start tapering its massive asset purchase programme.

"We think the dollar is going to turn lower from here especially when the Fed does start tapering as people start to 'sell the fact'" said Daniel Lam senior cross-asset strategist, at Standard Chartered Wealth Management. "That's already happening as people kind of front run it," he said.

The Bank of Canada also has a policy announcement, with investors expecting it will raise its inflation forecast and largely end stimulus from its pandemic-era bond buying program, making it the first central bank from a G7 country to do so. The Canadian dollar was steady, having eased a little in recent days as traders worry the BoC will temper investor expectations.

"While the market is likely correct in expecting another C$1bn cut in the pace of asset purchases, the more sensitive question is on the policy rate, and here we think it might be next to impossible for the Bank of Canada to validate market pricing on lift-off timing," Michael Hsueh, research analyst at Deutsche Bank in New York, said in report.

Canada signaled that it could hike interest rates sooner than it had thought. Before the announcement, which was viewed by some as surprisingly hawkish, the Canadian dollar had weakened to its lowest level in nearly two weeks against its U.S. counterpart.



"You're going to see more FX volatility and swings here," said Ed Moya, senior market analyst at broker OANDA. Traders will have different expectations for inflation in each region, Moya said, adding: "Interest rate differentials are going to be really hard to calculate for some currencies."



The Bank of Canada comments could be the first trigger for new assessments of how interest rates will change and impact currencies as central bankers try to support the pandemic recovery without unleashing sustained inflation.

Currency markets had moved little in the first two days of this week as traders paused for monetary policy announcements from major central banks around the world, including the U.S. Federal Reserve, which meets next week.

The German government cut its 2021 growth forecast for this year, as supply bottlenecks for semiconductors and rising energy costs delay recovery in Europe's largest economy. Germany's 10-year bond yield fell to its lowest in more than a week and its yield curve flattened.



Similarly, the U.S. yield curve flattened with the spread between yields on two- and 10-year Treasuries narrowing to fewer than 104 basis points, the least since August. The 10-year yield dipped below 1.53%. It had reached 1.70% last week.

Flattening yield curves in developed markets this week may reflect concern, analysts say, that central banks will err if they tighten policy too early in the face of higher inflation that proves temporary.

The dollar languished near its weakest level in a month against major peers on Friday, hurt by a stronger euro as traders bet on earlier European interest rate hikes and as an equity rally sapped demand for safer assets.

The euro was propelled on Thursday after comments by European Central Bank President Christine Lagarde were interpreted in some quarters as not going far enough in affirming the central bank's dovish stance.

Lagarde's "pushback was not forceful enough," opening the way for the euro to test $1.1680 in the near term, TD Securities strategists wrote in a note. However, "extrapolating (euro strength) beyond that seems like a big ask a week ahead of the Fed's meeting where taper will be announced," they said.

European Central Bank President Christine Lagarde acknowledged on Thursday that inflation will be high for even longer but pushed back against market bets that price pressures would trigger an interest rate hike as soon as next year. With central banks around the world signalling tighter policy amid rising prices, Lagarde said the ECB had done much "soul-searching" over its stance but concluded that inflation was still temporary, so a policy response would be premature.

She identified higher energy prices, a global mismatch between recovering demand and supply, and one-off base effects such as the end of a cut in German sales taxes as the three main factors temporarily driving euro zone inflation.

"While inflation will take longer to decline than previously expected, we expect these factors to ease in the course of next year ... We continue to see inflation in the medium term below our 2% target," Lagarde said.

But policymakers speaking in private were more cautious, warning that there was a risk that price growth would come down at an even slower rate than predicted and inflation would stay above 2% in 2022, two sources familiar with the discussion told Reuters. Some even see a risk that inflation could stay close to target in 2023, even if the mainstream view among policymakers was for a lower rate, the sources added.

Lagarde also took aim at market expectations for an interest rate hike next October, arguing they are out of line with the bank's policy guidance, which says rates will not rise until inflation across the 19-country euro zone is seen back at target by the middle of the forecast period and set to hold there.

"Clearly under the current analysis (those conditions) are not satisfied and certainly not in the near future," Lagarde said, adding that it was not for her to say whether markets were getting ahead of themselves.

Although Lagarde's words appeared timid, sources close to the discussion said no member of the rate-setting Governing Council agreed with market views.

"Lagarde clumsily read from paper that market bets on interest rates were not in line with the ECB's guidance," Nordea economist Jan von Gerich said. If her intention was to bring market pricing more in line with the ECB’s guidance, she failed miserably."

Signalling that the ECB is not indifferent to the global environment, Lagarde said its 1.85 trillion euro Pandemic Emergency Purchase Programme (PEPP) was likely to end as scheduled next March. Such a move is widely expected by investors. With other central banks around the world are already reacting to higher inflation, the ECB is likely to remain an outlier.

The Bank of Canada indicated on Wednesday it could hike interest rates as soon as April 2022 and said inflation would stay above target through much of next year. The U.S. Federal Reserve and the Bank of England have also signalled policy tightening while several smaller central banks, from Norway to South Korea, have already hiked rates.

The euro’s losses deepened on Friday, retracing nearly half of its gains in the previous session, as euro zone inflation shot past expectations this month to equal its all-time high, creating a policy dilemma for the European Central Bank. The single currency which has broadly struggled against its rivals on Friday, slipped to more than one-year lows against the Swiss franc as Italian bond yields resumed their upward march a day after the European Central Bank struck a dovish note at a policy meeting.

President’s Christine Lagarde’s failure to push back against market expectations of higher interest rates has brought out the bears with Danske Bank strategists expecting the euro to fall to $1.10 over the next 12 months saying “if inflation proves longer-lasting, the comments today makes us less confident that ECB would not change policy rates eventually.”

Data on Friday showed inflation in the 19 countries sharing the euro rose to 4.1% in October from 3.4% a month earlier, beating a consensus forecast of 3.7%. That reading is the highest since 2008 and equals the all-time-high for the time series launched in 1997.

“Investors are just not buying what the ECB is saying,” said Marios Hadjikyriacos, a senior investment analyst at brokerage XM. With inflation expectations going ballistic, markets are betting the central bank will be forced to take its foot off the gas sooner, first by slashing asset purchases and then with tiny rate increases.”

Money markets are nearly fully pricing in a 10 bps rate hike from the European Central Bank by July 2022 and nearly two rate hikes by October 2022. A week ago, markets were pricing in barely one rate hike by October 2022 and less than half a rate hike by July 2022.

The dollar continued to rebound from prior-day losses on Friday as the euro plunged and currency and bond markets tried to sort through inflation reports and
central bank comments amid end-of-month position adjustments.

U.S. Treasury yields rose after the government's index of core personal consumption expenditures - the Fed's preferred inflation measure - climbed 0.2% in September, showing an increase of 3.6% over 12 months.

U.S. consumer spending increased solidly in September, but was partly flattered by higher prices, with inflation remaining hot as shortages of motor vehicles and other goods persisted amid global supply constraints. Inflation pressures are broadening out, with other data on Friday showing employers boosted wages by the most on record in the third quarter as they competed for scarce workers. The industry-wide surge could undercut Federal Reserve Chair Jerome Powell's long-held view that high inflation is transitory.

The strength in consumer spending at the end of last quarter, together with falling COVID-19 infections and recovering consumer confidence bode well for a pickup in economic activity in the final three months of the year, though shortages and more expensive goods pose risks. The economy grew at its slowest pace in more than a year in the third quarter.

"The economy has a supply problem not a demand problem," said Christopher Rupkey, chief economist at FWDBONDS in New York. "The economy has money to burn and that is why inflation will be hard to extinguish."

Consumer spending, which accounts for more than two-thirds of U.S. economic activity, rose 0.6% last month after rebounding 1.0% in August, the Commerce Department said. Economists polled by Reuters had forecast consumer spending increasing 0.5%.

In the 12 months through September, the so-called core PCE price index increased 3.6% for a fourth straight month. The core PCE price index is the Fed's preferred inflation measure for its flexible 2% target. When adjusted for inflation, consumer spending rose 0.3% after gaining 0.6% in August.

Background for the Fed action

Federal Reserve officials face a ticking clock in their ability to ignore high inflation and are now navigating between their own senses of patience and risk, and a U.S. economy stymied by tangled supply chains, slow hiring and strong consumer demand. The combination of supply bottlenecks and a surge in household incomes fueled by pandemic-related government aid pushed the personal consumption expenditures price index, a key measure of inflation, to a 30-year high on a year-on-year basis in August.

Policymakers still largely expect the pace of price increases to ease without the Fed nudging the process by raising interest rates sooner and higher than expected.

Yet that judgment now hinges on a race, in effect. Will disruptions, such as the 100-ship backup at the Los Angeles-Long Beach port complex in California, disappear before households run out of an estimated $2 trillion in excess savings accumulated during the pandemic? And will that happen before recent price hikes show up in public expectations about future inflation?

The latter may already be starting. A Fed index of inflation expectations tracked by top officials at the U.S. central bank has risen for an unprecedented five straight quarters. At 2.06%, it is above the Fed's 2% target, and likely rising. Consumer expectations have jumped, too. The Conference Board reported on Tuesday that its 1-year consumer inflation expectations survey for October hit 7.0%, the highest since July 2008.

Bond markets, also anticipating more inflation, are pricing an earlier start and faster pace to Fed interest rate hikes.

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"Early on, patience was easy," Fed Governor Randal Quarles said last week. "The fundamental dilemma that we face ... is this: Demand, augmented by unprecedented fiscal stimulus, has been outstripping a temporarily disrupted supply." Yet the economy's "fundamental capacity" remains intact, and Fed officials want to keep interest rates low as long as possible to let employment rise. "Constraining demand now, to bring it into line with a transiently interrupted supply, would be premature," Quarles said, but "my focus is beginning to turn more fully ... to whether inflation begins its descent."

Now, half of the 18 policymakers project a hike in 2022, a move that would come as Democratic President Joe Biden's administration is financing new spending and likely before employment has returned to pre-pandemic levels. That could complicate Democrats' efforts to keep control of Congress in the Nov. 8, 2022 elections.

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Fed Chair Jerome Powell has noted the emerging "tension" between the central bank's employment and inflation goals. Fed Vice Chair Richard Clarida, asked in April when he would worry that the Fed's expectation of "transitory" inflation might be wrong, cited "the end of the year." Fed Governor Chris Waller last week set the same timeline.

"We seem at an inflection point and the question is whether some of the old problems are coming back to haunt us," said Peter Ireland, an economics professor at Boston College.

It's a choice Fed officials hoped to skirt with a new policy framework built to capture job gains they feel were missed in past business cycles when interest rates were raised too soon. That framework depends on inflation, job markets, and other parts of the economy behaving as they had before. For now at least, the pandemic has put some doubt around that premise.

It's not just things like a global computer chip shortage, capacity constraints in warehouse construction, or other supply issues that have stretched the Fed's "transitory" inflation narrative. The behavior of households and elected officials' actions also cloud the horizon.
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Fed officials, as a result, seem increasingly open to the uncomfortable possibility that the inflation they thought they had vanquished will prove to have returned more quickly than the jobs and workers their policies were intended to entice back.

"It goes without saying that the Fed feels burned by the last business cycle," Ethan Harris, global economist at Bank of America, wrote recently. Interest rates were raised, but inflation never reached the Fed's 2% target and potential job gains were left on the table.

But between possible shifts in household preferences, restructuring because of the pandemic, and some signs inflation expectations may be rising, Harris wrote, "the Fed's narrative faces challenges along a number of fronts.

Continued in the next post...
 

Sive Morten

Special Consultant to the FPA
Messages
15,515
NEXT WEEK TO WATCH

#1 Fed Taper announcement on Wed
#2 NFP Report on Fri


The Federal Reserve is widely expected to announce a pullback in asset purchases when its policy meeting ends on Wednesday. Plans to "taper" $120 billion in monthly purchases of Treasury bonds and mortgage-backed securities are well telegraphed. But that stimulus has been a significant prop for asset prices, so removing it could have unforeseen results.

Investors are also keen for hints about when the Fed might start raising interest rates. Its chief Jerome Powell has said that while it is time to start cutting asset purchases, it's too early to touch the interest rate dial. We will also get a view of the jobs market from Friday's monthly payrolls report -- especially interesting following below-forecast Q3 GDP and September's steep drop in job creation.

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#3 BoE rate Hike (or not)

he Bank of England is preparing to join the ranks of central banks that have embarked on raising interest rates. The question is only whether it will move at its Thursday meeting or give itself more time.
An expansionary budget may have given the green light for a hike. But BoE action hinges on whether it thinks inflation - forecast to top 5% as the British economy motors out of the pandemic - will prove as transitory as forecast.
Soaring inflation and hawkish comments from policymakers including Governor Andrew Bailey have sparked a dramatic repricing of rate expectations - a 0.15% rate rise to 0.25% is priced for Thursday, with another move expected in December.

Fragile economic growth means the BoE must tread carefully. But absent a rate hike, anything short of a significantly hawkish message could prove painful for sterling.

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#4 OPEC+ meeting

With $80-plus crude prices lifting inflation and clouding growth prospects, governments of energy-consuming nations are urging OPEC+ to stump up more oil. But the group, meeting on Thursday, is likely to stick to the script and raise output in December by no more than what was previously agreed.

Russian Deputy Prime Minister Alexander Novak told Reuters recently he expected the alliance to add 400,000 barrels per day of production, as previously agreed.

Saudi energy minister Prince Abdulaziz bin Salman too has dismissed calls by consumer nations to speed up the rate of production increases. The group does not see crude shortages in the market, he said. Unsurprisingly, oil price forecasts are nudging higher.

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Technicals
Monthly


So, miracle has not happened and "Priori Incantate(m)" has not worked. On Friday EUR has totally reversed upside action and it seems that it puts the foundation for deeper downside action. Current level is crucial for the EUR as it stands at Yearly Pivot. October still was not able to become a reversal, showing tight price action. Once pause has been taken - the September reversal month should start showing its power.

Downside drop opens road to YPS1, which is around 1.10 area. The same level was mentioned above in some comment from one of the big companies.

Trend remains bearish and market shows two bearish signs right in single month - confirms downside pennant breakout. Second - forms bearish reversal month in September. With the first rate change anticipation only in June 2022 and only for 0.1% it is difficult to find the reasons for long term investments in EUR.

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Weekly

Although we haven't got the bearish grabber here that I was looking for, but we do not need it, as weekly time frame joins the monthly one. Here we also now have bearish reversal week and valid MACD bearish trend that promise nothing good to the bulls. Another sign that it makes sense to worry about is tight standing around K-support area. As tight standing under the strong level is the sign of coming upside breakout - as tight pattern above strong support is a bearish sign. Strong supports should trigger moderate bounce. If no pullback happens - this is indirect bearish signal.

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Daily

Now we should look at how reversal week plays out. Until it is valid it would be better to not consider any bullish positions. Many things depend on Fed comments. That could as accelerate downside action as to cancel it. By technical view - we have simple bearish engulfing pattern which we intend to trade correspondingly. In fact, now the combination of weekly/daily trends represents DiNapoli "Minesweeper" entry setup, when daily trend is faded against weekly at major Fib level. As daily price turns down, the next step is to control MACD shift to bearish and - watch for minor intraday pullback for entry.

At the same time, we do not deny totally EUR ability for drastic shift as a result of FED+NFP, but we just acknowledge that chances for that are more phantom rather than real now. Besides, the shift needs more time to be formed, and current engulfing pattern in this case will become the part of some bigger pattern. Thus, we're starting with the engulfing and then we will see. The only thing is obvious right now that EUR has to jump above 1.17 top to start changing situation.

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Intraday

As EUR is not at oversold at any time frame - here we do not wait for deep retracement this time and it seems that 1.1595 nearest Fib level, accompanied by previous consolidation resistance should be suitable to consider short entry there. If retracement happens fast, we could get B&B "Sell" pattern as well.

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Coming week should be really exciting as a lot of big events happen. Fed meeting stands as culmination. NFP probably gets less attention as it happens after the Fed. Now many traders suggest that US dollar meets sell-off as soon as Fed announces tapering. We disagree. First is, because this sell-off already has happened last week - recall we already discussed it. Second, tapering is totally priced in, and EUR/USD performance depends on Fed comments during press conference. This will be the real driver. With core consumption hits new highs and inflation beats the records - hardly J. Powell ignores it, which makes chances to be real to hear more hawkish notes in Fed statement. So, we keep mind open for any scenario and even ash rising for EUR but at the same time we wake up for the facts and see that chances of downside acceleration looks higher.
 

Sive Morten

Special Consultant to the FPA
Messages
15,515
Morning everybody,

So, markets just enter into tough week and already start to generate the problems. Now our bearish setup on EUR has big flaw - bullish grabber on the daily chart. But this is not the all yet. The same grabber we have on the dollar index, the Gold (!!!!). Besides, maybe be you do not watch our Gold researches, but - last week it was 10% upward jump in open interest and boost of net bullish position.

Taking all these moments together, we suggest that conservative approach is to ignore the bearish setup by far. If you still would like to try - just follow our trading plan from weekly report. Now it is time to consider the entry. But, in this case success or defeat mostly depends on BoE, Fed and NFP data. So, some gambling stand with this position:

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On 1H chart the retracement that we've suggested is done. It was triggered by DRPO "Buy" that hits 50% resistance of the thrust. If you would like to take long position here, with the daily grabber - just try to catch some minor pullback. Stops have to be under the lows...
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Markets now stand nervous, showing indecision by forming contradictive patterns in both directions. It means that result will be based not on the quality of technical interpretation but from results of fundamental events that is impossible to foresee. That's why currently it is wrong to say that bearish setup doesn't work or, the bullish one... This is not the technical analysis issue any more. Based on what I said in the beginning, it seems that market is preparing to something and IMO bullish scenario seems preferable, and it is easier and cheaper to trade it. But, I could be wrong as well. So, think twice and don't listen to anybody ;)))
 

Sive Morten

Special Consultant to the FPA
Messages
15,515
Morning folks,

So tricky game is continuing, right? Yesterday we've talked a lot about how to deal with current situation. And come to conclusion that both trades are possible, depending on your view on coming fundamental events. Because these events in particular will set the net result of this week. Absolutely the same situation we have on the Gold market....

So, yesterday bearish setup is started accurately and now you could move stops to breakeven and watch the movie. Today is time for the bulls to enter....

On daily chart we've got 2nd bullish grabber in a row:
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On 4H chart is another one...
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On 1H chart minimum downside action target is done, as market hits 50% support of the thrust (which was DRPO "Sell", as we've discussed) and hits Agreement support completing downside AB-CD.

Next Agreement stands around XOP as well, but it is just 10 pips difference between this levels :)

So, in general 1.1565-1.1575 is potential entry area for those who would like to trade grabbers and suggest that Fed decision and NFP will be dovish for the US Dollar. Stop should be, as usual, below the lows of 1.1535. Just 40 pips risk for this trade... I'm not treading on you - make decision by yourself. We just provide the background explanation.
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Sive Morten

Special Consultant to the FPA
Messages
15,515
Morning everybody,

So, Fed meeting has brought no surprises, everything was 100% as expected. That's the reason why we see relatively quiet reaction on EUR. Yesterday another bullish grabber has been formed, and now bullish context on intraday charts is still valid, but we need to control some levels that could signal us about its validity:

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Because, despite all these grabbers, market stands at tight consolidation near the bottom of the weekly flag, which looks bearish. That's why on 4H chart keep an eye on 1.1585 K-area and 1.1565 lows. They are not vital, but still important. The logic is simple - K-area power should be enough to hold retracement of supposedly bullish market. If k-area can't do it, what the chances that single standing level does it?
Thus, K-area breakout could be early signal that upward action is over. But, right now bullish setup is valid and suggests at least action to 1.1645 OP. So, you could manage existed positions. If you just intend to buy - consider 1.1585 as well.

For the bears... as market now stands at not very comfortable place for short entry, we suggest that it would be better to wait either for completion of bullish scenario or its failure. NFP and BoE are ahead, so anything could happen...
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Sive Morten

Special Consultant to the FPA
Messages
15,515
Greetings everybody,

So, yesterday clarity has come very fast. As we said - watch the 1.1585 area and this tells you what happens. Once market has broken it down - all other levels, and even lows have been taken out very fast.

With this performance we do not consider long positions right now by three reasons. First is - erasing of all bullish grabbers that were formed there. Second - existence of weekly bullish grabber on DXY that suggests taking out of recent lows on EUR. We do not know - it might be just W&R or direct breakout, but anyway it suggests some downside continuation here.

Finally, recall that we have bearish reversal week on weekly EUR as well. All these moments together make downside continuation to 1.13 level real.

Today we get final test with NFP data. As usual, beyond major numbers keep an eye on hourly earnings (wage inflation), participation rate and unemployment level. ADP was good, so NFP has great chances to be positive as well.
This is weekly DXY grabber:
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On 4H chart and below, we have no clear patterns now. 1.1585 K-resistance might be interesting in a case of upside pullback and appearing of some bearish continuation pattern, such as "222". Desperados could try to use Stop "Sell" orders for downside breakout of daily lows during NFP release. ;) Somewhere around 1.1525-1.1530...
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