Forex FOREX PRO WEEKLY, November 08 - 12, 2021

Sive Morten

Special Consultant to the FPA
Messages
15,515
Fundamentals

So, really-really tough week is passed. Markets have got a lot of new information and now we see just first, emotional reaction while major reaction follows later when investors take in-depth view and understand its application to portfolios and assets rebalancing. At the first glance it seems that all data that we've got is supportive to riskier assets and minimize possible shock of turning to tightening environment. Central banks choose gentle way to manage interest rates, while economy is improving.

Market overview

All Central Banks this week have shown more dovish performance compares to expected one. Australia's dollar weakened on Tuesday after the country's central bank dampened investor hopes for a hawkish pivot. The central bank stressed that inflation was still too low, although it also omitted its previous projection that rates were unlikely to rise until 2024 and dropped a key target for the April 2024 government bond.

"The RBA have made every effort to sound dovish" in the policy statement, "so in that sense there's clearly an attempt to push back on market pricing," said Ray Attrill, head of FX strategy at National Australia Bank in Sydney. "The risk is that we could see some further slippage in the Aussie dollar near term."

The same inflation dilemma hangs over other central banks.

"The elephant in the room is headline and underlying inflation, which are higher than the (Fed) was anticipating," said Standard Chartered's head of G10 FX, Steve Englander. We expect the (Federal Open Market Committee) to state that the Fed is ready to act decisively if inflation is not moving towards target levels when tapering ends, but it still expects inflation to fall as supply constraints ease. We think investors will see this as advancing the likely timing of Fed rate hikes," he said.
We expect FX markets to react to the implied Fed threat of rates moving off zero but discount inflation optimism. This adds up to a dollar-positive combination of higher real rates and increased risk-off positions."

Trader positioning points to bets on higher rates, with speculators crowding in to short the Japanese currency.

"That's a bet that interest rate trends will continue to move against the yen as they rise elsewhere, particularly in the U.S.," said Societe Generale strategist Kit Juckes.
"In other words, there's a majority that thinks the bond selloff isn't over yet. It's also, to a smaller extent, a bet that risk sentiment will survive the experience."

The Federal Reserve on Wednesday said it will begin trimming its monthly bond purchases in November with plans to end them in 2022, but held to its belief that high inflation would prove “transitory” and likely not require a fast rise in interest rates. However, the U.S. central bank nodded to global supply difficulties as adding to inflation risks, saying that those factors “are expected to be transitory,” but would need to ease to deliver the anticipated drop in inflation. A small change in language indicated Fed officials see the process taking longer.

What the minutes described as an "illustrative tapering path" would trim the purchases by $15 billion per month beginning in November or December, a pace and starting point that would end the program by June or July.

Of more note now is how the Fed changes other parts of its policy statement, and particularly its description of inflation as "largely reflecting transitory factors."
But in recent weeks Fed officials have acknowledged the risks to that outlook. The jump in inflation this year has already lasted longer than anticipated; headline rates are running at twice the Fed's 2% target; and rising rents, low business inventories, and large numbers of workers still waiting on the sidelines may mean the high pace of price increases will continue for now.

JXZCBY2YZRI4DEJDEFV42CWFOU.png



The dilemma facing the U.S. central bank is whether inflation eases before policymakers feel compelled to step in with interest rate increases to curb it. Investors are acting as if the Fed's patience will run out soon.

"Will they hold on to the transitory description of inflation? My best guess is they will," in order to keep their commitment to support the economic recovery until the economy is closer to full employment, said Aneta Markowska, an economist at Jefferies. "If they were being intellectually honest they would probably drop it, but given what is happening in the market the Fed has to tread carefully."

Push back too hard on the current market expectations, by emphasizing the 5 million U.S. jobs still missing from before the pandemic, and it could "unhinge" the market outlook for inflation, she noted. Lean too hard on inflation risks, and it could push rate hike expectations even higher, begin to restrict credit and borrowing, and slow the recovery.

RWW2EL6TEJIEFJ7CXZYEEZ34XY.png


The labor market rebound has also taken on a different course than Fed officials expected. Despite near-record numbers of job openings, labor force participation is improving only slowly - with workers by choice or family necessity taking more time to return to jobs, and using savings elevated by pandemic benefit payments to cover the bills in the meantime.

The employment-to-population ratio is still 2.4 percentage points below where it was at the outset of the pandemic in February 2020, less than half the ground needed to be covered to return to the previous level.

QDEIPPD2YBJI7H6GWEQETYNBEI.png


The debate will then turn to how much more the job market can improve, how fast it can be done, and whether COVID-19 has changed the economy in ways that mean higher inflation with fewer people working.

"If the Fed projects that inflation will not revert to target within a reasonable amount of time, then the Fed could step up the tightening schedule even if employment is short of the mandate," Tim Duy, chief U.S. economist at SGH Macro Advisors, wrote ahead of the policy decision... In practice, the Fed has made pretty clear it is waiting for more inflation data" to see if the "transitory" narrative holds.

SSUA2EVIIFPNXKLZVMB5HOOH64.png


The European Central Bank is very unlikely to raise interest rates next year as inflation remains too low, European Central Bank President Christine Lagarde said on Wednesday, pushing back on market bets for a move as soon as next October.

With inflation running at a 13-year-high, markets are increasingly betting that the ECB will retreat from its ultra easy monetary policy and raise rates next year for the first time in over a decade.

"In our forward guidance on interest rates, we have clearly articulated the three conditions that need to be satisfied before rates will start to rise," she told an event in Lisbon. Despite the current inflation surge, the outlook for inflation over the medium term remains subdued, and thus these three conditions are very unlikely to be satisfied next year."

Lagarde's comments come after she failed last week to push back market expectations and investors even briefly priced in two rate hikes in 2022.

The Bank of England kept interest rates on hold on Thursday, wrong-footing investors who had been convinced that it would be the first of the world's big central banks to raise borrowing costs after the COVID-19 pandemic. The BoE kept alive the prospect of a move soon, saying it would probably have to raise Bank Rate from its all-time low of 0.1% "over coming months" if the economy performed as expected.

But seven of its nine policymakers voted to leave rates unchanged for now - even as they forecast inflation would reach almost 5% in April - so they can see how many people lose their jobs after the recent end of the government's furlough scheme. The announcement sent shockwaves through markets, sending sterling towards its biggest fall since the early days of the COVID-19 pandemic in March 2020.

Investors responded to the BoE's announcement by putting a roughly two-thirds chance on a rate hike in December, much less than the 100% chance they had seen for a hike at November's meeting. By contrast, a Reuters poll of economists last week showed the average expectation was for the BoE to keep rates on hold.

"The market has really had to reset itself as far as exactly how quickly some of these major central banks are going to be tightening policies," said Edward Moya, a senior market analyst at Oanda.

"I think most people would have been looking for a dip to buy the dollar," said Kit Juckes, a macro strategist at Societe Generale.

"The BoE rate decision was a lot more impactful in FX than the FOMC decision," said Kathy Lien, managing director at BK Asset Management. The Fed gave the market plenty of time to discount taper. They were very effective in their forward guidance. The Bank of England, on the other hand, had been hawkish and the fact that they did not deliver on the hawkishness today went against market expectations," she said.

U.S. employment increased more than expected in October as the headwind from the surge in COVID-19 infections over the summer subsided, offering more evidence that economic activity was regaining momentum early in the fourth quarter.

Nonfarm payrolls increased by 531,000 jobs last month, the Labor Department said on Friday. Data for September was revised higher to show 312,000 created instead of the previously reported 194,000. Economists polled by Reuters had forecast payrolls rising by 450,000 jobs. Worker shortages persisted, even as federal government-funded unemployment benefits wound down in early September and schools reopened.

The dollar jumped on Friday to hit its highest level in more than a year, after data showed stronger U.S. job growth than expected in October, but retreated a bit in late trading as risk appetite improved and stocks rallied.

"The payrolls print is certainly in line with Powell's statement at the Fed press conference, where he noted that job gains of this magnitude are consistent with the notion of making substantial further progress," TD Securities strategists said in a note. The conditions are in place for a broad grind higher in the dollar, which also meshes with the seasonal trend for November, they said.

One soft spot in the U.S. employment report was a flat participation rate, which could end up spurring the Fed into action faster than expected, said Sal Guatieri, senior economist at BMO Capital Markets The trend here could determine the course of Fed policy, as continued weakness in participation will only grease the jobless rate's decline ... which could very well lead to a faster pace of tapering and earlier rate hikes," he said.

After a daylong standoff, Democrats set aside divisions between progressives and centrists to pass a $1 trillion package of highway, broadband and other infrastructure improvement, sending it on to President Joe Biden to sign into law. The 228-to-206 vote late on Friday is a substantial triumph for Biden's Democrats, who have bickered for months over the ambitious spending bills that make up the bulk of his domestic agenda.

Are inflation expectations slipping their anchor?
by Fathom Consulting.

Western advanced economies are dealing with a period of above-target inflation which central banks expect to be transitory. However, for a while Fathom has been pointing out that households have built up vast savings during the pandemic, which if unleashed would push up aggregate demand and create further upward pressure on inflation. Even if those savings remain unspent, there are still clear upside risks to the inflation outlook. One of those risks is the de-anchoring of inflation expectations.

5.11.2021-UK-and-US-consumer-prices.jpg


The majority of measures of household inflation expectations in the US and UK are elevated, with the two series in the chart below being over two standard deviations above their respective averages. Most surveys of expectations among businesses and financial markets have also risen since the start of the year. If households take their higher cost of living expectations into wage negotiations, this is likely to result in rising costs for firms and potentially higher prices for consumers. According to the Employment Cost Index, US firms’ costs of employment rose by around 4% in the year to 2021 Q3.

5.11.2021-Household-consumer-price-one-year-expectations-1.jpg


We can also formulate a transition mechanism of how expectations influence outturns of inflation in a model. A New Keynesian Phillips curve, simply stated, equals expected inflation plus surprise inflation. Surprise inflation comes from shocks to things such as oil prices or the exchange rate, as well as unanticipated overshoots in aggregate demand. Expected inflation depends on the beliefs of firms and consumers. If they think inflation is firmly anchored (whether because of highly credible central banks or for other reasons) then inflation will tend to revert quickly to its anchor after any surprises have washed out. But if they do not think that, then expected inflation will be influenced partly by the perceived target and partly by last period’s inflation outturn. The degree to which expectations are determined by previous inflation, a level of inflation persistence denoted as ‘beta’ in the following chart, plays an important role in determining how long spikes in actual inflation can last. If that ‘beta’ is 1, inflation expectations are de-anchored and the future path for inflation is anybody’s guess — it will depend on the pattern of future inflation surprises. But inflation returns to target if ‘beta’ is less than 1, and the closer ‘beta’ is to 0, the faster it reaches that stable level.

5.11.2021-Simple-US-inflation-projections.jpg

he question is, therefore, to what extent do household expectations mirror actual inflation? Measured inflation persistence, the ‘beta’, had fallen to around zero around the time of the GFC, though has risen slightly since. And expectations appear to broadly track recent inflation, using the US University of Michigan survey measure as an example. The scatter chart below indicates two key aspects to US inflation expectations. Firstly, household expectations tend to remain unphased by inflation between -1% and 3%, broadly expecting year-ahead inflation to return to the Fed’s 2% target. However, if inflation rises above 5%, household expectations rise too. While most data points since 1996 on the chart are around the flatter segment of the trend, where households tolerate modest outturns of inflation, we cannot reject the possibility that expectations become increasingly de-anchored as inflation rises. We are potentially on the cusp of finding out whether this upward trend holds.

5.11.2021-US-household-inflation-expectations.jpg


If this period of above-target inflation keeps expectations elevated, there is the risk that inflation may persist longer than central banks currently expect. In that scenario, central banks would face a dilemma as to whether or not to react by tightening policy. But if expectations fall back, above-target inflation will probably prove to be transitory.

NEXT WEEK TO WATCH

#1 US inflation data

The U.S. consumer price index out on Wednesday, is forecast to have climbed 0.5% in October after a 0.4% rise in September as Americans paid more for food, rent and other goods. Whether the current rise in prices is fleeting, stemming from temporary effects as the economy emerges from the pandemic, or signals the start a new upward trend, remains to be seen.

The Federal Reserve's latest meeting held to the belief that high inflation would prove "transitory" though it acknowledged that global supply difficulties add to inflation risks. It has managed to unveil a tapering of monthly bond buys without triggering a market "tantrum." A strong inflation print that renews rate-hike talk could change that.

QHPVGYWTSVMJ5NHBQMF7ARU6UY.png



So, not occasionally we've dedicated a lot of time to inflation analysis. Based on recent comments from the Fed it seems it will be the cornerstone of its policy. Try to stand on Fed's place, what would you do, if you need the rising of employment to pre pandemic levels, but inflation occasionally jumps too strong, while you also see that it might be temporal but do not know where particular it starts to decrease again? The most logical decision is to wait and stretch the time with adoption of very gentle measures, such as tapering. It means that Fed carefully will be watching for all next inflation reports. So markets do either. This policy holds until the employment target is reached or until inflation goes out of control. But, as time is ticking, inflationary pressure could start decreasing as Fed hopes.

This week we see harmonic dovish move from all Central Banks, even among those who was standing close to rate change, as BoE, for instance. All investors hopes for RBA, BoE are deceived. With this new background, ECB is not an outlier anymore. Yes, maybe be BoC and BoE could make step earlier than the others, but hardly we will see the cycle. Most probably it will be single standing move with following rhetoric to "watch and see".

So, it was clear signal to market society to "Hold its tightening horses", which panders to demand for riskier assets and lets markets to breath easier, especially of those that are sensitive to interest rates, such as gold and stocks, for instance. It means that within nearest months, till the end of the year and in IQ of 2022, markets should get good chances to show moderate retracement. Because if even we will see the mismatch between inflation statistics and Fed's inaction - it needs time to shape. Inflation has to start dropping by the end of IQ of 2022. Otherwise, Fed will have to act despite employment situation as its "temporary" theory failed.


Technicals
Monthly


Every time, when something dovish to USD happens - we recall the long-term DXY downside target around 87.40. And every time the question rises - "May be this time market hits it?" Now it seems that background for the EUR improves. EU has its own problems on foreign arena, such as trade relationships with UK, expensive gas and oil prices that holds industrial production etc. But, in terms of fiscal policy they come closer to Fed due the recent comments of the latter. Today we want to show you another monthly chart of EUR and just illustrate the hypothesis, because some common signs with 2000's reversal exist:

eur_m_08_11_21.png


Of course, nothing is decided yet. And to be sure that picture above is working - we need to get a lot of confirmation signs on lower time frames. Also we need moderate Inflation statistics within few months.

Meantime, EUR picture remains bearish as monthly MACD trend still watching down, and price stands slightly under YPP. September was a bearish reversal month, so we also should not discredit it by far. If now signs of recovery form soon, downside drop opens road to YPS1, which is around 1.10 area.

Thus, its fine that we have inspiring theory on the chart above, but now our task is to closely watch for patterns on weekly and daily chart. They should shed the light on whether something will change or not.

Weekly

On weekly chart we have bearish reversal week, mentioned last time, trend still stands bearish, which potentially suggests downside action, or at least, makes us stay on hold with bullish positions. But, on Dollar Index we see few moments that are positive for the pullback. First is grabber has been completed and market re-tested major weekly resistance. Finally - minor W&R stands around previous top. Very probable that on lower time frames we have divergence:
1636194845629.png


Daily

It is still few bullish signs on the market to make decision on long entry. We have just W&R here and DXY at strong weekly resistance (i.e. support for the EUR). Hence, if we see not just temporal reaction on $1Trln pack approvement and EUR indeed intends to go higher - some more extended pattern should be formed. For example, Double Bottom. Whatever it will be, market should hold the lows to pretend on bullish background. Until this happens, we could consider bullish setups on intraday charts. Here, as Friday's reaction stands sharp, despite that trend is bearish on all time frames, we are not considering position taking right now.
eur_d_08_11_21.png


Intraday

Although it is a lot of soft spots in longer-term picture - in shorter term everything looks more simple. Market has set important lows that have vital meaning for the bullish context. Now EUR comes to K-resistance area that should trigger the downside retracement:
eur_4h_08_11_21.png


On 1H chart we could recognize H&S shape, so pullback to 1/2-5/8 Fib support levels should be the ones that bulls could consider for the long entry against recent lows. This what we going to consider in the beginning. Downside drop, acceleration re-establishes bearish status quo.

eur_1h_08_11_21.png
 

RahmanSL

Major
Messages
2,852
Fundamentals

So, really-really tough week is passed. Markets have got a lot of new information and now we see just first, emotional reaction while major reaction follows later when investors take in-depth view and understand its application to portfolios and assets rebalancing. At the first glance it seems that all data that we've got is supportive to riskier assets and minimize possible shock of turning to tightening environment. Central banks choose gentle way to manage interest rates, while economy is improving.

Market overview

All Central Banks this week have shown more dovish performance compares to expected one. Australia's dollar weakened on Tuesday after the country's central bank dampened investor hopes for a hawkish pivot. The central bank stressed that inflation was still too low, although it also omitted its previous projection that rates were unlikely to rise until 2024 and dropped a key target for the April 2024 government bond.



The same inflation dilemma hangs over other central banks.



Trader positioning points to bets on higher rates, with speculators crowding in to short the Japanese currency.



The Federal Reserve on Wednesday said it will begin trimming its monthly bond purchases in November with plans to end them in 2022, but held to its belief that high inflation would prove “transitory” and likely not require a fast rise in interest rates. However, the U.S. central bank nodded to global supply difficulties as adding to inflation risks, saying that those factors “are expected to be transitory,” but would need to ease to deliver the anticipated drop in inflation. A small change in language indicated Fed officials see the process taking longer.

What the minutes described as an "illustrative tapering path" would trim the purchases by $15 billion per month beginning in November or December, a pace and starting point that would end the program by June or July.

Of more note now is how the Fed changes other parts of its policy statement, and particularly its description of inflation as "largely reflecting transitory factors."
But in recent weeks Fed officials have acknowledged the risks to that outlook. The jump in inflation this year has already lasted longer than anticipated; headline rates are running at twice the Fed's 2% target; and rising rents, low business inventories, and large numbers of workers still waiting on the sidelines may mean the high pace of price increases will continue for now.

JXZCBY2YZRI4DEJDEFV42CWFOU.png



The dilemma facing the U.S. central bank is whether inflation eases before policymakers feel compelled to step in with interest rate increases to curb it. Investors are acting as if the Fed's patience will run out soon.

"Will they hold on to the transitory description of inflation? My best guess is they will," in order to keep their commitment to support the economic recovery until the economy is closer to full employment, said Aneta Markowska, an economist at Jefferies. "If they were being intellectually honest they would probably drop it, but given what is happening in the market the Fed has to tread carefully."

Push back too hard on the current market expectations, by emphasizing the 5 million U.S. jobs still missing from before the pandemic, and it could "unhinge" the market outlook for inflation, she noted. Lean too hard on inflation risks, and it could push rate hike expectations even higher, begin to restrict credit and borrowing, and slow the recovery.

RWW2EL6TEJIEFJ7CXZYEEZ34XY.png


The labor market rebound has also taken on a different course than Fed officials expected. Despite near-record numbers of job openings, labor force participation is improving only slowly - with workers by choice or family necessity taking more time to return to jobs, and using savings elevated by pandemic benefit payments to cover the bills in the meantime.

The employment-to-population ratio is still 2.4 percentage points below where it was at the outset of the pandemic in February 2020, less than half the ground needed to be covered to return to the previous level.

QDEIPPD2YBJI7H6GWEQETYNBEI.png


The debate will then turn to how much more the job market can improve, how fast it can be done, and whether COVID-19 has changed the economy in ways that mean higher inflation with fewer people working.

"If the Fed projects that inflation will not revert to target within a reasonable amount of time, then the Fed could step up the tightening schedule even if employment is short of the mandate," Tim Duy, chief U.S. economist at SGH Macro Advisors, wrote ahead of the policy decision... In practice, the Fed has made pretty clear it is waiting for more inflation data" to see if the "transitory" narrative holds.

SSUA2EVIIFPNXKLZVMB5HOOH64.png


The European Central Bank is very unlikely to raise interest rates next year as inflation remains too low, European Central Bank President Christine Lagarde said on Wednesday, pushing back on market bets for a move as soon as next October.

With inflation running at a 13-year-high, markets are increasingly betting that the ECB will retreat from its ultra easy monetary policy and raise rates next year for the first time in over a decade.



Lagarde's comments come after she failed last week to push back market expectations and investors even briefly priced in two rate hikes in 2022.

The Bank of England kept interest rates on hold on Thursday, wrong-footing investors who had been convinced that it would be the first of the world's big central banks to raise borrowing costs after the COVID-19 pandemic. The BoE kept alive the prospect of a move soon, saying it would probably have to raise Bank Rate from its all-time low of 0.1% "over coming months" if the economy performed as expected.

But seven of its nine policymakers voted to leave rates unchanged for now - even as they forecast inflation would reach almost 5% in April - so they can see how many people lose their jobs after the recent end of the government's furlough scheme. The announcement sent shockwaves through markets, sending sterling towards its biggest fall since the early days of the COVID-19 pandemic in March 2020.

Investors responded to the BoE's announcement by putting a roughly two-thirds chance on a rate hike in December, much less than the 100% chance they had seen for a hike at November's meeting. By contrast, a Reuters poll of economists last week showed the average expectation was for the BoE to keep rates on hold.







U.S. employment increased more than expected in October as the headwind from the surge in COVID-19 infections over the summer subsided, offering more evidence that economic activity was regaining momentum early in the fourth quarter.

Nonfarm payrolls increased by 531,000 jobs last month, the Labor Department said on Friday. Data for September was revised higher to show 312,000 created instead of the previously reported 194,000. Economists polled by Reuters had forecast payrolls rising by 450,000 jobs. Worker shortages persisted, even as federal government-funded unemployment benefits wound down in early September and schools reopened.

The dollar jumped on Friday to hit its highest level in more than a year, after data showed stronger U.S. job growth than expected in October, but retreated a bit in late trading as risk appetite improved and stocks rallied.





After a daylong standoff, Democrats set aside divisions between progressives and centrists to pass a $1 trillion package of highway, broadband and other infrastructure improvement, sending it on to President Joe Biden to sign into law. The 228-to-206 vote late on Friday is a substantial triumph for Biden's Democrats, who have bickered for months over the ambitious spending bills that make up the bulk of his domestic agenda.

Are inflation expectations slipping their anchor?
by Fathom Consulting.

Western advanced economies are dealing with a period of above-target inflation which central banks expect to be transitory. However, for a while Fathom has been pointing out that households have built up vast savings during the pandemic, which if unleashed would push up aggregate demand and create further upward pressure on inflation. Even if those savings remain unspent, there are still clear upside risks to the inflation outlook. One of those risks is the de-anchoring of inflation expectations.

5.11.2021-UK-and-US-consumer-prices.jpg


The majority of measures of household inflation expectations in the US and UK are elevated, with the two series in the chart below being over two standard deviations above their respective averages. Most surveys of expectations among businesses and financial markets have also risen since the start of the year. If households take their higher cost of living expectations into wage negotiations, this is likely to result in rising costs for firms and potentially higher prices for consumers. According to the Employment Cost Index, US firms’ costs of employment rose by around 4% in the year to 2021 Q3.

5.11.2021-Household-consumer-price-one-year-expectations-1.jpg


We can also formulate a transition mechanism of how expectations influence outturns of inflation in a model. A New Keynesian Phillips curve, simply stated, equals expected inflation plus surprise inflation. Surprise inflation comes from shocks to things such as oil prices or the exchange rate, as well as unanticipated overshoots in aggregate demand. Expected inflation depends on the beliefs of firms and consumers. If they think inflation is firmly anchored (whether because of highly credible central banks or for other reasons) then inflation will tend to revert quickly to its anchor after any surprises have washed out. But if they do not think that, then expected inflation will be influenced partly by the perceived target and partly by last period’s inflation outturn. The degree to which expectations are determined by previous inflation, a level of inflation persistence denoted as ‘beta’ in the following chart, plays an important role in determining how long spikes in actual inflation can last. If that ‘beta’ is 1, inflation expectations are de-anchored and the future path for inflation is anybody’s guess — it will depend on the pattern of future inflation surprises. But inflation returns to target if ‘beta’ is less than 1, and the closer ‘beta’ is to 0, the faster it reaches that stable level.

5.11.2021-Simple-US-inflation-projections.jpg

he question is, therefore, to what extent do household expectations mirror actual inflation? Measured inflation persistence, the ‘beta’, had fallen to around zero around the time of the GFC, though has risen slightly since. And expectations appear to broadly track recent inflation, using the US University of Michigan survey measure as an example. The scatter chart below indicates two key aspects to US inflation expectations. Firstly, household expectations tend to remain unphased by inflation between -1% and 3%, broadly expecting year-ahead inflation to return to the Fed’s 2% target. However, if inflation rises above 5%, household expectations rise too. While most data points since 1996 on the chart are around the flatter segment of the trend, where households tolerate modest outturns of inflation, we cannot reject the possibility that expectations become increasingly de-anchored as inflation rises. We are potentially on the cusp of finding out whether this upward trend holds.

5.11.2021-US-household-inflation-expectations.jpg


If this period of above-target inflation keeps expectations elevated, there is the risk that inflation may persist longer than central banks currently expect. In that scenario, central banks would face a dilemma as to whether or not to react by tightening policy. But if expectations fall back, above-target inflation will probably prove to be transitory.

NEXT WEEK TO WATCH

#1 US inflation data

The U.S. consumer price index out on Wednesday, is forecast to have climbed 0.5% in October after a 0.4% rise in September as Americans paid more for food, rent and other goods. Whether the current rise in prices is fleeting, stemming from temporary effects as the economy emerges from the pandemic, or signals the start a new upward trend, remains to be seen.

The Federal Reserve's latest meeting held to the belief that high inflation would prove "transitory" though it acknowledged that global supply difficulties add to inflation risks. It has managed to unveil a tapering of monthly bond buys without triggering a market "tantrum." A strong inflation print that renews rate-hike talk could change that.

QHPVGYWTSVMJ5NHBQMF7ARU6UY.png



So, not occasionally we've dedicated a lot of time to inflation analysis. Based on recent comments from the Fed it seems it will be the cornerstone of its policy. Try to stand on Fed's place, what would you do, if you need the rising of employment to pre pandemic levels, but inflation occasionally jumps too strong, while you also see that it might be temporal but do not know where particular it starts to decrease again? The most logical decision is to wait and stretch the time with adoption of very gentle measures, such as tapering. It means that Fed carefully will be watching for all next inflation reports. So markets do either. This policy holds until the employment target is reached or until inflation goes out of control. But, as time is ticking, inflationary pressure could start decreasing as Fed hopes.

This week we see harmonic dovish move from all Central Banks, even among those who was standing close to rate change, as BoE, for instance. All investors hopes for RBA, BoE are deceived. With this new background, ECB is not an outlier anymore. Yes, maybe be BoC and BoE could make step earlier than the others, but hardly we will see the cycle. Most probably it will be single standing move with following rhetoric to "watch and see".

So, it was clear signal to market society to "Hold its tightening horses", which panders to demand for riskier assets and lets markets to breath easier, especially of those that are sensitive to interest rates, such as gold and stocks, for instance. It means that within nearest months, till the end of the year and in IQ of 2022, markets should get good chances to show moderate retracement. Because if even we will see the mismatch between inflation statistics and Fed's inaction - it needs time to shape. Inflation has to start dropping by the end of IQ of 2022. Otherwise, Fed will have to act despite employment situation as its "temporary" theory failed.


Technicals
Monthly


Every time, when something dovish to USD happens - we recall the long-term DXY downside target around 87.40. And every time the question rises - "May be this time market hits it?" Now it seems that background for the EUR improves. EU has its own problems on foreign arena, such as trade relationships with UK, expensive gas and oil prices that holds industrial production etc. But, in terms of fiscal policy they come closer to Fed due the recent comments of the latter. Today we want to show you another monthly chart of EUR and just illustrate the hypothesis, because some common signs with 2000's reversal exist:

View attachment 70511

Of course, nothing is decided yet. And to be sure that picture above is working - we need to get a lot of confirmation signs on lower time frames. Also we need moderate Inflation statistics within few months.

Meantime, EUR picture remains bearish as monthly MACD trend still watching down, and price stands slightly under YPP. September was a bearish reversal month, so we also should not discredit it by far. If now signs of recovery form soon, downside drop opens road to YPS1, which is around 1.10 area.

Thus, its fine that we have inspiring theory on the chart above, but now our task is to closely watch for patterns on weekly and daily chart. They should shed the light on whether something will change or not.

Weekly

On weekly chart we have bearish reversal week, mentioned last time, trend still stands bearish, which potentially suggests downside action, or at least, makes us stay on hold with bullish positions. But, on Dollar Index we see few moments that are positive for the pullback. First is grabber has been completed and market re-tested major weekly resistance. Finally - minor W&R stands around previous top. Very probable that on lower time frames we have divergence:
View attachment 70516

Daily

It is still few bullish signs on the market to make decision on long entry. We have just W&R here and DXY at strong weekly resistance (i.e. support for the EUR). Hence, if we see not just temporal reaction on $1Trln pack approvement and EUR indeed intends to go higher - some more extended pattern should be formed. For example, Double Bottom. Whatever it will be, market should hold the lows to pretend on bullish background. Until this happens, we could consider bullish setups on intraday charts. Here, as Friday's reaction stands sharp, despite that trend is bearish on all time frames, we are not considering position taking right now.
View attachment 70513

Intraday

Although it is a lot of soft spots in longer-term picture - in shorter term everything looks more simple. Market has set important lows that have vital meaning for the bullish context. Now EUR comes to K-resistance area that should trigger the downside retracement:
View attachment 70514

On 1H chart we could recognize H&S shape, so pullback to 1/2-5/8 Fib support levels should be the ones that bulls could consider for the long entry against recent lows. This what we going to consider in the beginning. Downside drop, acceleration re-establishes bearish status quo.

View attachment 70515
Hi Sive.... as usual, most helpful report and analysis to make sense of the muddy market ahead. Thank you very much.
Frankly, I have been on wait-and-see trading mode on the EUR/USD for the past few weeks and have instead focus my attention on the USD/JPY since, in my opinion, is much more predictable. Both are safe haven currency, but the Japanese need a weak yen for their exports but yet, at the same time, the yen cannot be too weak as that would be costly for their imports on essentials, especially for fuel oils & gas whose prices have risen quite substantially lately. With a new government and also onset of winter, the Japanese will have some balancing act to perform on their currency.

All the best!
 

Sive Morten

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

So, we're watching for upward action on EUR right now, suggesting that in the mid term, the change of fundamental background and market sentiment should let EU currency to show more extended upward retracement.
So, upward action starts well, but we suggest that not everybody was in time to step in, as price has not shown as deep retracement as we have discussed in report.

On daily chart we're keep watching for bullish patterns. And the one that we could guess the shape of is Double Bottom. This pattern suggests no return to the lows and it makes more easy to analyze intraday performance.
eur_d_09_11_21.png


First, let's take a look at 1H and our start-up H&S. Now it comes to the OP (and initial OP is already reached). So manage your position if you have it. Others who have missed the entry - don't upset too much. Here we intend to watch for pullback and 1.1575 area looks good to consider the long entry here:
eur_1h_09_11_21.png


4H chart explains why we choose 1.1575. First reason is Agreement resistance. This is relatively strong combination and it makes market to pullback a bit deeper. Second - we could get another H&S of greater scale here, and 1.1575 stands in a right place of potential right arm's bottom. Finally, this is former K-resistance area that has been broken w/out respect. Now it works like additional support in this area. Thus, if you consider long entry - maybe 1.1575 is the area that you could watch for.
eur_4h_09_11_21.png
 

netbusinessman

Corporal
Messages
73
Hi Sive sir as usual most helpful report and analysis, Thank you

I have one question do you suggest any good Forex cross pair for beginner, as i am trading only major pairs or some time gold but due to less trading pairs getting very less trading opportunity.
 

Sive Morten

Special Consultant to the FPA
Messages
15,515
Hi Sive sir as usual most helpful report and analysis, Thank you

I have one question do you suggest any good Forex cross pair for beginner, as i am trading only major pairs or some time gold but due to less trading pairs getting very less trading opportunity.
Hi mate,
Personally, I deal only with majors. So, maybe our forum members could advise something. Many people like GBP/JPY and as very volatile and directional, but I can't say for sure. Speaking on DiNapoli directional patterns application - you probably could use any major crosses (that consist of major currencies).
 

Sive Morten

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

So, once we've started to talk about possible bullish context and so on, as we've got the hit, which is definitely not pleasant to the bulls (but maybe pleasant to the bears, as usual). I'm talking about daily bearish grabber that suggests drop below the lows. The same grabber we have on the Dollar Index. But this is not all yet.

As a result of this grabber, daily trend has not turned bullish yesterday and now we do not have even formal context to buy EUR on daily chart. Weekly and monthly trends are also bearish and we have no directional bullish patterns.

eur_d_10_11_21.png


Yesterday market has shown great performance around our K-support of 1.1575. Bounce was great and more than enough to move stops to b/e. Still, as market was not able to break 1.1610 resistance, deeper downside action has solid chances to happen.
On 4H chart the crucial level is 1.1560. Because this is the harmonic low of potential arm's bottom.
eur_4h_10_11_21.png


1H chart shows that this is also 1/2 Fib support and Agreement area, including 1.27 butterfly target.
eur_1h_10_11_21.png


How we could use this information? Well, for taking the long position on daily chart we do not have necessary context. Probability stands in favor of the deeper drop and breaking first signs of bullish preparations on daily chart. But on intraday chart, if you want to - it is possible to make attempt to buy from 1.1560. First reaction should be up as tactical respect on the level's strength.

So, it is suitable for intraday trading. Just do not forget to move stops at breakeven.

Finally, once pullback from 1.1560 happens - those bears who intends to trade daily grabber, could think about stepping in.

This is the approximate plan for both sides. Just lets see what happens around 1.1560.
 

Sive Morten

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

Exceptional session yesterday... In fact, everything what we've said about Inflation role in our weekly report is coming to reality very fast, even with this recent CPI numbers. Inflation is so important now that markets are shaking the boat, pressing on the Fed, while Fed is still waiting. it seems that December meeting will be very important...

Speaking on technical background - our worry was not in vain yesterday as grabber has worked fast. Still, the intraday bullish setups were not erased and shown acceptable results as you will see below.

Now, no doubts, we have bearish context and next target around 1.13-1.1365 area. Weekly K-support was broken totally right now and it seems that monthly reversal bar starts to build an expansion. As price is not at support nor Oversold - retracement today hardly becomes too extended.
eur_d_11_11_21.png


On 4H chart market has completed primary OP and target of daily bearish engulfing pattern. (We also have secondary OP a bit lower). Since downside momentum is strong and price is not at OSold or support area, upward bounce hardly exceeds 1.1520 Fib level. XOP stands around 1.1367:
eur_4h_11_11_21.png


On 1H chart - you could see market reaction on all our intraday targets and levels that we said to be suitable for scalp long trading - 1.1560 op reaction was nice, the same is around XOP.... But they are not suitable for daily scenario as you could see right now. That's why we ignore them as we're mostly focused on daily / hourly time frame pair.

Now, downside thrust is good, so B&B or DRPO could be formed around. We ignore bullish patterns here and watch for pullback to sell the rally.
eur_1h_11_11_21.png
 

Sive Morten

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

So, yesterday market was not able to show any reasonable bounce, creeping lower. In general, we suggest reaching lower levels, as major targets and support stands around 1.12-1.13 area. As overall sentiment stands weak around EUR, we do not consider long entry on daily/weekly basis and mostly watch for pullback for long entry.

Still, although we do not have major supports around current price level - few minor daily levels exist. Also we have support of daily trend line. thus, maybe around 1.14-1.1430 we could get more or less reasonable bounce:
eur_d_12_11_21.png


On 4H chart we turn to "secondary" OP that is a bit more extended. We've mentioned it yesterday... It creates Agreement with daily minor support level. As we have great thrust down, it makes sense to consider DiNapoli directional patterns as well - B&B or DRPO. It could be used as for separate intraday trading as well. So, maybe this time some reasonable bounce happens and we consider short entry aiming on lower targets:

eur_4h_12_11_21.png
 
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