Sive Morten
Special Consultant to the FPA
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Fundamentals
(Reuters) - The dollar slipped against a basket of currencies on Friday and was set for its biggest weekly drop in a month as investor disappointment that implementation of part of a planned big U.S. tax overhaul may be delayed until 2019 put a brake on the currency’s recent rally.
The dollar index, which tracks the greenback against six major currencies, was down 0.08 percent at 94.37. For the week, the index was down 0.6 percent, on pace for its worst performance since the week ending Oct. 13.
The greenback has also lost 0.5 percent against the Japanese yen this week.
U.S. Senate Republicans unveiled a tax plan on Thursday that differed from the House of Representatives’ version on several fronts, including deductions for state and local taxes, and the estate tax.
Complicating a Republican push for the tax revamp, senators said that, like the House, they wanted to slash the corporate tax rate to 20 percent from 35 percent, but in 2019 rather than right away.
“It just highlights the challenge in reconciling the two (plans),” said currency strategist Erik Nelson of Wells Fargo Securities in New York.
The House was set to vote on its measure next week after its tax-writing Ways and Means Committee approved the legislation on Thursday along party lines, with Democrats united in opposition.
The Senate’s timetable was less clear, with a formal bill yet to be drafted in that chamber, where Republicans have a much smaller majority and a narrower path to winning approval for any legislation, let alone one as contentious as a tax package.
“I think the markets are becoming concerned that this is not a serious piece of legislation and that there really is no political support necessary to pass it,” said Boris Schlossberg, managing director of FX strategy at BK Asset Management in New York.
The dollar index gained about 3 percent from mid-September through the end of last week, boosted by hopes of tax cuts.
“This week was a bit of a reality check for currency markets,” Wells Fargo’s Nelson said.
Sterling closed the week on firmer ground, climbing around half a percent against the dollar on Friday as better-than-expected data on British industry and rising confidence in the progress of Brexit talks supported the currency.
The pound was up 0.37 percent at $1.3197.
US Outlook Unchanged After Key Developments Last Week
by Fathom Consulting
Our forecasts for US GDP growth and monetary policy are unchanged following progress on tax reform, the nomination of Jerome Powell for Fed Chair, and the employment report for October.
Nonfarm payrolls rebounded last month, as we expected, suggesting that most of the damage to the labour market from the recent hurricanes was short-lived. For more see ‘How Hurricanes Harvey and Irma affected the US economy’. The US economy added 261,000 net payrolls last month, which may have been a little less than our forecast of a gain of 300,000, but there were a combined 90,000 upward revisions to payrolls gains in the previous two months. The six-month moving average edged higher suggesting that the labour market remains in decent shape.
The earnings figures for October were soft — annual growth in average hourly earnings dropped from 2.8% to 2.4% — but this appears to be due to the large reversal in payroll employment in the leisure and hospitality sector, where workers earn a lot less than the national average. The unemployment rate edged down to 4.1%, the lowest level since December 2000. We expect earnings growth to resume its upward trend before long and we think that it is only a matter of time before this is reflected in core inflation.
Meanwhile, the tax bill presented by Republicans may not reduce federal revenues by as much as some had expected, but changes with the biggest economic impact, such as corporate tax cuts, are still included in last week’s bill — the inevitable horse-trading among members of Congress is likely to delay its passage into law until next year. In the absence of further progress this year, the US dollar and US equities are likely to drift sideways.
Finally, assuming Jerome Powell’s nomination for Fed Chair is approved by the Senate, we see little change in the outlook for US monetary policy — Mr Powell has served on the Board for the last five years and has supported current Fed Chair Janet Yellen’s stance.
COT Report
Now we do not see new tendencies in EUR sentiment data. As EUR has reached extremely bullish position in summer at ~100K contracts net, it was limited in upside continuation. With announcement of different policies by Fed and ECB our expectations of meaningful retracement have increased. Last 4 weeks we see gradual decreasing of as open interest as net long position, which means slow long closing by market participants.
But, at the same time, we do not see bearish reversal on EUR. It means that current long closing could be preparation for end of fiscal year in many funds, profit taking etc. But, major bets on USD strength has not been done yet. This is a signal for us as well - time for major reversal on EUR has not come yet, and we should be ready for any surprises, possible upside action EUR etc.
Some signs we also see on technical picture right now...
Technical
Monthly
Last week EUR has shown shy activity that mostly had no impact on monthly and weekly charts. As major breakout of 1.14-1.15 support has not been done, our analysis of long-term charts mostly stands the same.
Last week market has continued downside action and November is becoming 3rd month of decreasing, although drop is not too fast by far. On monthly chart we do not see any reasons to change our analysis by far. Mostly it stands as we've suggested. Recent upside breakout to 1.21 area closer and closer comes to be treated as "failure" and "bullish trap" according to classical interpretation.
Market has dropped below lows of both - September and August. They were "indecision" candles. It means that we probably is getting new direction right now.
At the same time there are not many tools exist here, on monthly. Beyond of all-time support/resistance zone that cuts EUR/USD history by 1.20 edge, we have - rectangle consolidation and upside reversal swing. Making parallel to DXY chart, where we have downside reversal swing, here we also should suggest deep retracement down. This, in turn will push price back inside rectangle, which will be not good sign for bulls.
In this case rectangle space will be open for price fluctuation and now it is impossible to say whether it will be deep retracement or real return back to lows.
Recent action, accompanied by fundamental background and parallel analysis of key financial markets mostly shows bearish picture and suggests downside action that could take large part of 2018 action.
Now market still feels support of 1.16 area, but as it will dive deeper - downside action could accelerate. So, we're still waiting when this will happen
Weekly
Although last week was mostly inside one, but it brings very important nuance that could put shadow on price action on coming week.
Those of you who follows our weekly analysis should remember that previously we've discussed chances to see here DRPO "Sell" pattern here. In general it's appearing would be logical, because it corresponds by it's nature to H&S pattern that we have on daily.
But the problem with this pattern stands around strong upside action which should happen as second top of DRPO needs to be formed here. Another important condition - price should not reach important Fib support of DRPO's thrust. Both of these moments hardly could be combined with H&S pattern that we have on daily chart. Because its target stands around 1.1450 and if it will be achieved we will not get DRPO...
It means that either DRPO or H&S will be vanished. Two weeks ago it was seemed that DRPO will be cancelled as EUR has shown strong downside impulse on breakout of H&S neckline.
But now we see a bit curious price action as on weekly chart as on daily, which a bit irrational in relation to patterns that have been formed. Take a look that price has not reached Fib level, reversed up in "free area" with no real support below it, except may be, previous tops @ 1.16.
In beginning of the week EUR has tried to drop lower but couldn't do it by different reasons and turned up again. This situation smells like chance for DRPO. Currently it is very difficult to make far going conclusions, as market has formed very small candle and may be it will be just minor bounce up, but the way how this has happened and place where it has happened could really lead to serious changes and even upside action back to 1.21 tops...
Daily
The same situation stands here. Trend has turned bullish and price action shows irrational behavior in relation to H&S pattern. After neckline has been broken with strong plunge we've anticipated minor upside bounce as EUR has appeared to be around OS. As re-testing of neckline has happened - everything has started well last week.
Indeed, we've got "222" Sell pattern on intraday charts and within 1-3 sessions of last week EUR was dropping. But, as EUR has moved already through K-support area it suddenly has stopped and turned up.
This is warning moment and it stands in contradiction to normal market mechanics of H&S pattern. When neckline is broken you expect downside continuation.
All this stuff makes us think about DiNapoli "Ooops!" pattern. Briefly we've mentioned it last week, but now it really could work. This pattern describes bears' trap, when right under H&S neckline strong K-support area stands. This K-area prevents normal downside continuation and puts prices in opposite direction back above neckline again. That's what we're worrying about.
Daily picture means that no shorts should be taken until situation with "Oops!" pattern will be clarified. Bulls could try to trade it and take position against recent lows.
Also keep in mind daily OB level - 1.1830. It could be useful for upside target estimation.
4-hour
Right now, guys, we will not look over horizon of 1.1830 area, because it is not very interesting for coming week. And currently we're mostly interested in nearest target that could be achieved within a week, rather than perspectives of weekly DRPO.
That's why we limit our view by 1.1830 daily OB ceil.
Here we have a kind of Double Bottom (or reverse H&S) pattern right at daily K-support and accompanied by MACD divergence. It means that bears should sit on the heads while this pattern is valid. Upside potential of this pattern equals distance between bottom and neckline - and, it coincides with the same 1.1830 level.
Around 1.17-1.1725 area we also have strong resistance. This is not just K-area, this is also daily neckline and monthly PP. This area is very important and probably will become a target of market makers. Usually when H&S stands on market and neckline is broken, many traders move stops lower, just above neckline. Existing of K-area is very good place to hide stops. Thus, pushing price slightly above it could lead to upside chain reaction.
Hourly
At the same time it will be very good check point. As you can see on hourly chart - market has completed reverse H&S ultimate 1.618 AB-CD target. Right above it neckline stands (dot line), that has been tested already. Normally, bearish market in such circumstances should not go higher. This is quite enough retracement.
Here is two moments to watch for. If it will be Double bottom, then retracement should not be too deep - not lower than K-support around WPP.
If price will drop lower, then another pattern could be formed - reverse H&S. In this case EUR should get support around WPS1 and 1.1580 area. Keep this in mind if your trading plan will suggest entry around WPP.
Breaking below 1.1550 will re-establish normal bearish behavior and should cancel any upside action.
Conclusion:
As market shows not quite rational behavior in relation to H&S pattern, we should be ready for upside action on next week and watch for some important patterns and levels.
The technical portion of Sive's analysis owes a great deal to Joe DiNapoli's methods, and uses a number of Joe's proprietary indicators. Please note that Sive's analysis is his own view of the market and is not endorsed by Joe DiNapoli or any related companies.
(Reuters) - The dollar slipped against a basket of currencies on Friday and was set for its biggest weekly drop in a month as investor disappointment that implementation of part of a planned big U.S. tax overhaul may be delayed until 2019 put a brake on the currency’s recent rally.
The dollar index, which tracks the greenback against six major currencies, was down 0.08 percent at 94.37. For the week, the index was down 0.6 percent, on pace for its worst performance since the week ending Oct. 13.
The greenback has also lost 0.5 percent against the Japanese yen this week.
U.S. Senate Republicans unveiled a tax plan on Thursday that differed from the House of Representatives’ version on several fronts, including deductions for state and local taxes, and the estate tax.
Complicating a Republican push for the tax revamp, senators said that, like the House, they wanted to slash the corporate tax rate to 20 percent from 35 percent, but in 2019 rather than right away.
“It just highlights the challenge in reconciling the two (plans),” said currency strategist Erik Nelson of Wells Fargo Securities in New York.
The House was set to vote on its measure next week after its tax-writing Ways and Means Committee approved the legislation on Thursday along party lines, with Democrats united in opposition.
The Senate’s timetable was less clear, with a formal bill yet to be drafted in that chamber, where Republicans have a much smaller majority and a narrower path to winning approval for any legislation, let alone one as contentious as a tax package.
“I think the markets are becoming concerned that this is not a serious piece of legislation and that there really is no political support necessary to pass it,” said Boris Schlossberg, managing director of FX strategy at BK Asset Management in New York.
The dollar index gained about 3 percent from mid-September through the end of last week, boosted by hopes of tax cuts.
“This week was a bit of a reality check for currency markets,” Wells Fargo’s Nelson said.
Sterling closed the week on firmer ground, climbing around half a percent against the dollar on Friday as better-than-expected data on British industry and rising confidence in the progress of Brexit talks supported the currency.
The pound was up 0.37 percent at $1.3197.
US Outlook Unchanged After Key Developments Last Week
by Fathom Consulting
Our forecasts for US GDP growth and monetary policy are unchanged following progress on tax reform, the nomination of Jerome Powell for Fed Chair, and the employment report for October.
Nonfarm payrolls rebounded last month, as we expected, suggesting that most of the damage to the labour market from the recent hurricanes was short-lived. For more see ‘How Hurricanes Harvey and Irma affected the US economy’. The US economy added 261,000 net payrolls last month, which may have been a little less than our forecast of a gain of 300,000, but there were a combined 90,000 upward revisions to payrolls gains in the previous two months. The six-month moving average edged higher suggesting that the labour market remains in decent shape.
The earnings figures for October were soft — annual growth in average hourly earnings dropped from 2.8% to 2.4% — but this appears to be due to the large reversal in payroll employment in the leisure and hospitality sector, where workers earn a lot less than the national average. The unemployment rate edged down to 4.1%, the lowest level since December 2000. We expect earnings growth to resume its upward trend before long and we think that it is only a matter of time before this is reflected in core inflation.
Meanwhile, the tax bill presented by Republicans may not reduce federal revenues by as much as some had expected, but changes with the biggest economic impact, such as corporate tax cuts, are still included in last week’s bill — the inevitable horse-trading among members of Congress is likely to delay its passage into law until next year. In the absence of further progress this year, the US dollar and US equities are likely to drift sideways.
Finally, assuming Jerome Powell’s nomination for Fed Chair is approved by the Senate, we see little change in the outlook for US monetary policy — Mr Powell has served on the Board for the last five years and has supported current Fed Chair Janet Yellen’s stance.
COT Report
Now we do not see new tendencies in EUR sentiment data. As EUR has reached extremely bullish position in summer at ~100K contracts net, it was limited in upside continuation. With announcement of different policies by Fed and ECB our expectations of meaningful retracement have increased. Last 4 weeks we see gradual decreasing of as open interest as net long position, which means slow long closing by market participants.
But, at the same time, we do not see bearish reversal on EUR. It means that current long closing could be preparation for end of fiscal year in many funds, profit taking etc. But, major bets on USD strength has not been done yet. This is a signal for us as well - time for major reversal on EUR has not come yet, and we should be ready for any surprises, possible upside action EUR etc.
Some signs we also see on technical picture right now...
Technical
Monthly
Last week EUR has shown shy activity that mostly had no impact on monthly and weekly charts. As major breakout of 1.14-1.15 support has not been done, our analysis of long-term charts mostly stands the same.
Last week market has continued downside action and November is becoming 3rd month of decreasing, although drop is not too fast by far. On monthly chart we do not see any reasons to change our analysis by far. Mostly it stands as we've suggested. Recent upside breakout to 1.21 area closer and closer comes to be treated as "failure" and "bullish trap" according to classical interpretation.
Market has dropped below lows of both - September and August. They were "indecision" candles. It means that we probably is getting new direction right now.
At the same time there are not many tools exist here, on monthly. Beyond of all-time support/resistance zone that cuts EUR/USD history by 1.20 edge, we have - rectangle consolidation and upside reversal swing. Making parallel to DXY chart, where we have downside reversal swing, here we also should suggest deep retracement down. This, in turn will push price back inside rectangle, which will be not good sign for bulls.
In this case rectangle space will be open for price fluctuation and now it is impossible to say whether it will be deep retracement or real return back to lows.
Recent action, accompanied by fundamental background and parallel analysis of key financial markets mostly shows bearish picture and suggests downside action that could take large part of 2018 action.
Now market still feels support of 1.16 area, but as it will dive deeper - downside action could accelerate. So, we're still waiting when this will happen
Weekly
Although last week was mostly inside one, but it brings very important nuance that could put shadow on price action on coming week.
Those of you who follows our weekly analysis should remember that previously we've discussed chances to see here DRPO "Sell" pattern here. In general it's appearing would be logical, because it corresponds by it's nature to H&S pattern that we have on daily.
But the problem with this pattern stands around strong upside action which should happen as second top of DRPO needs to be formed here. Another important condition - price should not reach important Fib support of DRPO's thrust. Both of these moments hardly could be combined with H&S pattern that we have on daily chart. Because its target stands around 1.1450 and if it will be achieved we will not get DRPO...
It means that either DRPO or H&S will be vanished. Two weeks ago it was seemed that DRPO will be cancelled as EUR has shown strong downside impulse on breakout of H&S neckline.
But now we see a bit curious price action as on weekly chart as on daily, which a bit irrational in relation to patterns that have been formed. Take a look that price has not reached Fib level, reversed up in "free area" with no real support below it, except may be, previous tops @ 1.16.
In beginning of the week EUR has tried to drop lower but couldn't do it by different reasons and turned up again. This situation smells like chance for DRPO. Currently it is very difficult to make far going conclusions, as market has formed very small candle and may be it will be just minor bounce up, but the way how this has happened and place where it has happened could really lead to serious changes and even upside action back to 1.21 tops...
Daily
The same situation stands here. Trend has turned bullish and price action shows irrational behavior in relation to H&S pattern. After neckline has been broken with strong plunge we've anticipated minor upside bounce as EUR has appeared to be around OS. As re-testing of neckline has happened - everything has started well last week.
Indeed, we've got "222" Sell pattern on intraday charts and within 1-3 sessions of last week EUR was dropping. But, as EUR has moved already through K-support area it suddenly has stopped and turned up.
This is warning moment and it stands in contradiction to normal market mechanics of H&S pattern. When neckline is broken you expect downside continuation.
All this stuff makes us think about DiNapoli "Ooops!" pattern. Briefly we've mentioned it last week, but now it really could work. This pattern describes bears' trap, when right under H&S neckline strong K-support area stands. This K-area prevents normal downside continuation and puts prices in opposite direction back above neckline again. That's what we're worrying about.
Daily picture means that no shorts should be taken until situation with "Oops!" pattern will be clarified. Bulls could try to trade it and take position against recent lows.
Also keep in mind daily OB level - 1.1830. It could be useful for upside target estimation.
4-hour
Right now, guys, we will not look over horizon of 1.1830 area, because it is not very interesting for coming week. And currently we're mostly interested in nearest target that could be achieved within a week, rather than perspectives of weekly DRPO.
That's why we limit our view by 1.1830 daily OB ceil.
Here we have a kind of Double Bottom (or reverse H&S) pattern right at daily K-support and accompanied by MACD divergence. It means that bears should sit on the heads while this pattern is valid. Upside potential of this pattern equals distance between bottom and neckline - and, it coincides with the same 1.1830 level.
Around 1.17-1.1725 area we also have strong resistance. This is not just K-area, this is also daily neckline and monthly PP. This area is very important and probably will become a target of market makers. Usually when H&S stands on market and neckline is broken, many traders move stops lower, just above neckline. Existing of K-area is very good place to hide stops. Thus, pushing price slightly above it could lead to upside chain reaction.
Hourly
At the same time it will be very good check point. As you can see on hourly chart - market has completed reverse H&S ultimate 1.618 AB-CD target. Right above it neckline stands (dot line), that has been tested already. Normally, bearish market in such circumstances should not go higher. This is quite enough retracement.
Here is two moments to watch for. If it will be Double bottom, then retracement should not be too deep - not lower than K-support around WPP.
If price will drop lower, then another pattern could be formed - reverse H&S. In this case EUR should get support around WPS1 and 1.1580 area. Keep this in mind if your trading plan will suggest entry around WPP.
Breaking below 1.1550 will re-establish normal bearish behavior and should cancel any upside action.
Conclusion:
As market shows not quite rational behavior in relation to H&S pattern, we should be ready for upside action on next week and watch for some important patterns and levels.
The technical portion of Sive's analysis owes a great deal to Joe DiNapoli's methods, and uses a number of Joe's proprietary indicators. Please note that Sive's analysis is his own view of the market and is not endorsed by Joe DiNapoli or any related companies.
Thank you very much.
