Forex FOREX PRO WEEKLY, November 28 - 02, 2022

Sive Morten

Special Consultant to the FPA
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Fundamentals
So, the passed week was short due Thanksgiving and we haven't got a lot of new information. Things that should to be considered are Fed minutes and coming ECB rate decision. Because here we see few layers of information, especially on Fed minutes. First layer is expectation of softer policy, but there is another layer exists that explains why Fed wants to slow down despite the high inflation.

Market overview

The U.S. dollar extended losses on Thursday after the minutes from the Federal Reserve's November meeting supported the view that the central bank would downshift and raise rates in smaller steps from its December meeting. The eagerly awaited readout of the Nov. 1-2 meeting showed officials were largely satisfied they could now move in smaller steps, with a 50 basis point rate rise likely next month after four consecutive 75 basis point increases.

"The Fed will be happy to move rates by 50 basis points in December and 25 basis points from the first meeting next year," said Niels Christensen, chief analyst at Nordea, noting that the Fed will still feel it needs to do more to bring inflation down. As long as the Fed see a stronger labour market, they don't have a big concern about tightening," Christensen said. "There are not that many dollar buyers around these days after the correction higher in euro-dollar in the first half of November," Nordea's Christensen added.

The euro held onto gains after the account of the European Central Bank's October meeting showed policymakers feared that inflation may be getting entrenched, justifying their outlook for further rate hikes.

Meanwhile, billionaire investor Bill Ackman said he's betting the Hong Kong dollar will fall and that its peg to the U.S. dollar could break. Since May, the Hong Kong dollar has been pinned near the weaker end of its band, although it has lifted a bit in recent weeks as markets start to price a peak in U.S. rates. It was last at 7.8102 per dollar.

Fed Minutes

A "substantial majority" of policymakers at the Federal Reserve's meeting early this month agreed it would "likely soon be appropriate" to slow the pace of interest rate hikes as debate broadened over the implications of the U.S. central bank's rapid tightening of monetary policy, according to the minutes from the session. The readout of the Nov. 1-2 meeting, at which the Fed raised its policy rate by three-quarters of a percentage point for the fourth straight time, showed officials were largely satisfied they could move rates in smaller, more deliberate steps as the economy adjusted to more expensive credit and concerns about "overshooting" seemed to increase.

"A slower pace ... would better allow the (Federal Open Market) Committee to assess progress toward its goals of maximum employment and price stability," said the minutes, which were released on Wednesday. "The uncertain lags and magnitudes associated with the effects of monetary policy actions on economic activity and inflation were among the reasons cited."

More important than the size of coming rate increases, the minutes noted, was an emerging focus on just how high rates will need to rise to lower inflation - and the need to calibrate that carefully in coming months.

"With monetary policy approaching a sufficiently restrictive stance, participants emphasized that the level to which the Committee ultimately raised the target range ... and the evolution of the policy stance thereafter, had become more important considerations ... than the pace," the minutes stated.

That ultimate landing spot for policy will hinge heavily on the path of inflation in coming months, and whether recent lower-than-expected readings become an established trend down. Fed staff economists raised their inflation projections for "coming quarters" and noted also that a recession in the next year was "almost as likely" as the baseline outlook for sluggish economic growth.

Contracts tied to the Fed's policy rate showed investors maintaining bets for a half-percentage-point increase at the Dec. 13-14 policy meeting.

The minutes also showed an emerging debate within the Fed over the risks that rapid policy tightening could pose to economic growth and financial stability, even as policymakers acknowledged there had been little demonstrable progress on inflation and that rates still needed to rise.

While "a few participants" said slower rate hikes could reduce risks to the financial system, "a few other participants" noted that any slowing of the Fed's policy tightening pace should await "more concrete signs that inflation pressures were receding significantly." By the Fed's preferred measure, inflation continues to run at more than three times the central bank's 2% target. While recent data suggest inflation has now peaked, a slowdown in price pressures will be gradual.

In its Nov. 2 policy statement, the Fed hinted at emerging concerns about the risks of policy tightening, saying the "pace of future increases" would "take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments."

"Many participants commented that there was significant uncertainty about the ultimate level of the federal funds rate needed to achieve the Committee's goals" the minutes said, language suggesting Fed officials were shifting focus from the size of individual rate hikes to trying to calibrate a stopping point.

At the meeting in December, in addition to a policy statement, the central bank will also release new policymaker projections for the path of interest rates, inflation and unemployment.

Ok, hold on... do you understand at least something from these minutes? Here clearly was said that "Fed staff economists raised their inflation projections for coming quarters" and then we read that "recent data suggest inflation has now peaked". So has it peaked or not? Then we see absolute mess fro suggestions - few members tell that we should to wait while others suggest that we should keep until inflation drops. Let's try to get down to bed-rock. Inflation, has it peaked? Let's take a look at our favorite PPI Commodities index. Last time we've acknowledged the positive effect, but agreed to watch for the pace of declining:
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Indeed, we see good effect of inflation decreasing. So, if this is the inflation peak, why Fed members still "do not know" the final rate level and suggest that terminal rate could be higher that it was suggested initially, and why they do not see strong signs of inflationary pressure easing? Here are few more "minutes" comments:

  • Members agreed that there were few signs of an easing of inflationary pressure.
  • As monetary policy approaches a "fairly restrictive" level, members stressed that the final destination of the federal funds rate has become more important than the inflation itself.
  • The members agreed that the risks to the inflation forecast are still shifted upward.
  • Many members expressed considerable uncertainty about the final level of the Fed funds rate needed to contain inflation, with various members suggesting that it was higher than previously expected.
  • Several Fed officials predicted that interest rates would peak at a higher level.
Thus, it seems that inflation is not peaking yet?Or what? Why they have decided to slow down the horses? In fact, there are two major conclusions that we could make.. The first is Fed members realize that the rate will need to be raised very high to reduce inflation. Mostly because the inflation reacts poorly to the tightening of monetary policy. We've mentioned it last time and you could see corresponding statement above - "members see few signs of an easing of inflationary pressure."

The second is they really want positive changes to happen on autopilot, and therefore it is not worth rushing to raise the rate, what if a miracle will happen …

But on the chart above we see that PPI inflation is slightly above 10% (and six months ago it was more than 23%) — this is a very good result, and it would seem, you don't have to worry. But there is a very dangerous nuance. Previously we've shown few times that the US industry is stagnating and in this situation, a decrease in inflation can be a serious sign of the beginning of deflationary processes, as in Germany (we show it below, in EU report section)!

Recall that the crisis of 1929-32 has started after the Fed began a program of monetary tightening (in order to somewhat limit the overheated stock market). Now the monetary tightening is at record level. Money supply has been cut drastically:
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And, it seems the Fed is scared to repeat of the old scenario.

We believe that the analogue of the structural crisis of 1930-32 has started a year ago and, moreover, the decline of the US economy is also underway. The only difference is the direction of inflation. In 1930's it was deflationary scenario while right now we have inflationary scenario. That's why the collapse of the markets is yet to happen. And, artificial under-reporting inflation indicators allows to hide the decline that has begun in nominal figures. Still, we cold see it from other macroeconomic indicators. if you Fed keep going with the tightening, they easily could "fall" into the early 30s scenario.

That's why they do not know what the terminal rate will be. That's why they talk about "few signs of inflationary pressure decrease" and about "interest rates peak at higher levels" and necessity of higher interest rates. They already see that rate is near 5% but inflation as was standing around 6-7% as it keep standing at the same level. And they are coming to some threshold, because they said - "the final destination of the federal funds rate has become more important than the inflation itself." It means that we're coming to the point where it becomes impossible to rise rate, despite what inflation level will be. As inflation is not dropping anyway, whether they rise rate or not - it makes sense to take a pause. This is the second layer of the Fed minutes, guys. But markets see only the first "optimistic" layer.

Let's add another few moments, concerning Job market. Fed members above have said that -"the situation in the labor market remains tense; many noted preliminary signs that it may be gradually moving towards a better balance of supply and demand." Just to remind you, "the better balance" means rising of the unemployment and decreasing of consumer demand. We do not see yet any hints in NFP data, but as initial claims as continued claims (that seems more important) confirm that. They are rising for 6-8 weeks in a row and not at few months' peak:

Initial claims
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Continued claims

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Meantime, markets are hopeful the Federal Reserve will soon slow the pace of its aggressive rate hikes. Friday's November jobs data could put that expectation to the test. The U.S. economy likely created 200,000 new jobs, a Reuters poll of economists forecasts found, in what would be the smallest gain since December 2020. Estimates ranged from 150,000 to 240,000.

A higher-than-expected 261,000 new jobs were created in October, even as the pace of job growth slowed and the unemployment rate rose to 3.7%, suggesting some loosening in labor market conditions. Still, five of the last six jobs reports have topped consensus estimates and another strong number could spell trouble for U.S. stocks. The dollar, weakened by expectations that rates could soon peak, may head higher.
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EUROPE Situation

Here is situation stands a bit different. While in the US we see Inflation peaking, at least based on indicators, in EU it is still on an upward trend. Recently we've shown you this chart - Germany PPI. Although it is still showing very high 34.5% - it has dropped down from 45.8% last month. This has happened for the first time after the record sequence: March — 30.9%, April — 33.5%, May - 33.6%, July - 37.2% and August — 45.8%. And take a look how this recent change looks at the chart:
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It is 4.3% drop just in a month - the record change for the whole history of observation. Should we treat it as ECB achievement? Absolutely not. So drastic change is not a positive sign. it is a powerful deflationary symptom, suggesting the degradation beginning of the real sector.

U.S. inflation may be close to peaking, but euro area price pressures remain strong, Wednesday's preliminary November estimate of inflation in the bloc is likely to show. Inflation in the euro zone was 10.6% in October, more than five times the European Central Bank's 2% target. An underlying measure stripping out volatile food and energy prices remains well above target.

ECB Vice-President Luis de Guindos warns that the persistency of inflation pressures should not be underestimated. The ECB has hiked rates by 75 basis points at each of its last two meetings, lifting rates by 200 bps to 1.5% in just three months. Markets price in an 80% chance of another 75 bps hike in December. Indeed, the Fed may be getting ready to slow the pace of its rate hikes, but the ECB is not there yet.

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Inflation in Germany may well remain in double digits into next year despite the government's efforts to curb energy prices, the Bundesbank said on Wednesday.
With consumer prices in Germany rising by 11.6% last month, their fastest pace since the early 1950s, Berlin is trying to cap a surge in energy bills that mirrors an explosion in the market price for natural gas.

The plan, in which 80% of households' and small companies' gas consumption will be subsidised, may knock 1 percentage point off inflation. But only while it lasts.

"As soon as the gas and electricity price brakes expire, the effect on the inflation rate will reverse," the Bundesbank said.

European Central Bank policymakers feared that inflation may be getting entrenched at their last policy gathering so rates would need to rise further, the accounts of the Oct 26-27 meeting showed on Thursday.

Policymakers also put the reduction of the bank's 9 trillion euro balance sheet on the agenda - inching closer to unwinding a decade worth of government debt purchases aimed at rekindling inflation that had been undershooting the ECB's objective.

"It was also clear that rates would need to be raised further to reach a level that would deliver on the ECB’s 2% medium-term target," the accounts of the meeting showed.

The ECB added that some policymakers even expressed the view that "monetary tightening would probably need to continue after the monetary policy stance had been normalised and moved into broadly neutral territory". While the ECB firmly committed to further rate hikes, markets are now expecting a more modest, 50 basis point move on December 15 as a string of policymakers suggested that a slowdown after back-to-back 75 basis point increases was appropriate.

A possible compromise may be that a smaller rate hike is coupled with an early start in the reduction in the portfolio of bonds bought under the ECB's 3.3-trillion-euro Asset Purchase Programme, in a process known as quantitative tightening. Even if the ECB slows down, markets see the deposit rate doubling to 3% next year as inflation, now at 10.6%, will take years, possibly until 2025, to fall back to the ECB's 2% target.

"It's extremely exciting but predicting the ECB for a market participant has become impossible," Carsten Brzeski, global head of macro at ING, said. Madame Lagarde was so keen to get the team spirit together and now even her own ECB colleagues are keen to get this fight out in the open," ING's Brzeski said.

Dirk Schumacher, an economist at Natixis, found a public debate healthy but thought ECB policymakers were "bluffing" when they hinted at a peak rate of around 3%.
He estimated the ECB would need to be discussing a 5% rate if it single-handedly wanted to bring down inflation to 2%, but that this would cause too deep an economic recession.

"There's an element of bluffing there because they know they also need to be lucky," Schumacher said. Inflation is being driven by factors they can't control," he added, citing energy prices, geopolitical tensions and supply-chain disruptions as some of them.

The European Central Bank will keep raising interest rates until it brings inflation down to around its 2% mid-term goal even though the euro zone economy is heading towards recession, ECB Vice-President Luis de Guindos said on Wednesday. De Guindos did not elaborate on the magnitude of the potential next interest rate rise in December but said it would depend on upcoming ECB projections and inflation readings in November.

So ECB will lift its deposit rate by another 50 bps on Dec. 15, taking it to 2.00%, and do the same to the refinancing rate, putting it at 2.50%, according to the median forecasts in the Nov. 15-21 Reuters poll. That deposit rate view was held by a majority of 45 of 62 respondents, while 14 said it would add another 75 bps as it has done at its previous two meetings. Only three said it would opt for a modest 25-bp increase.

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December's move will be followed by another 50-bp increase next quarter, giving peaks in the current cycle of 2.50% and 3.00% for the deposit and refinancing rates, unchanged from an October poll. When asked about the risks to their deposit rate forecasts, 18 of 22 economists said it would end higher, either earlier of later than they expect. The other four said it would be lower.

"More resilient economic conditions, stickiness of inflation, potential spillovers on to inflation expectations and longer-lasting wage pressures could force the ECB to keep tightening for longer into 2023 than we currently predict," said Ken Wattret, vice president, economics at S&P Global Market Intelligence.

However, collectively economists gave a 70% probability their deposit rate peak forecasts were accurate.

It will take time for tighter policy to meaningfully tame inflation and while 13 of 23 respondents to an additional question said inflation had already peaked, it was not seen at the bank's target until at least 2025. Inflation was expected to ease to 8.9% next quarter from 10.5% this one and then steadily decline. It will average 8.5% this year, 6.0% next year and 2.3% in 2024.

Conclusion:

So, a bit deeper look totally dispells the myth of so-called positive shifts on the markets, such as "inflation is defeated", Fed is peaking", "employment is strong", "Consumption is strong". The Fed desire to slowdown the pace is based not on improvements of overall situation, but with coming to threshold level. Since the rate change doesn't bring any feasible results, it makes no sense to rise it anymore. The PPI decrease mostly suggests the starting of deflationary processes due to real economy sector slowdown. Which is better see on example of Germany. Fed constantly tells about tension on jobs market despite that numbers are positive. Based on Initial+Continues claims analysis, the breakeven point in NFP data should come sooner rather than later. And many traders could treat it as more dovish factor for the Fed that makes USD even weaker. It could be so, if we would have low inflation, but we don't. With high inflation hardly it lets the Fed to relax. After few months, these things should become obvious which should hurt stock market. In general, the situation when inflation remains high but Fed can't rise rate anymore is very bad combination for the USD. But since the situation in other countries stands even worse, we do not expect big changes of USD value to other currencies.

The Fed and the US economists show higher level of competence than their EU colleges. Maybe they do not know how to resolve the problem but, at least, they more or less understand the depth of the problem. While the EU is just coming to this moment and with significantly worse economic statistics. In fact, EU shows the situation that we have seen in the US few months ago. And if the US is just started to show deflationary processes, in Germany they already have started, while inflation shows no signs of decreasing yet. This is bad combination, which mostly comes due too gentle ECB policy. They are not in time and not in value with the rate change. And within a few months they will come to the same threshold level. As it mentioned above, it also probably should be around 5%. And as now we speak about dollar weakness as Fed is pivoting - within few months we will talk about EUR weakness and ECB pivoting. That's why, despite on recent upward action we still think that 0.9 EUR/USD rate could be reached. It seems that Bundesbank correctly understand the real difficulty of situation, suggesting inflation rising through 2023 as well and standing at 2-digit level. It is off-topic a bit, but recent Fed minutes, and our analysis suggests that current situation stands more in favor of the gold market...
 
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Technicals
Monthly

Technical picture has not changed drastically. Volatility was relatively low due to the Holiday.

Here we keep watching for potential B&B "Sell" pattern that could start from 1.0580 area. We still hope that market will close above 3x3 DMA in November and touch this level. In fact, we have the same pattern on GBP and DXY as well. Besides, as we've discussed, on GBP it is closer to realization.

Theoretically B&B starting point is not limited by only 3/8 Fib level. It could be any Fib level if it has been reached within 1-3 closes above 3x3 DMA. So, if EUR hits 5/8 level of 1.12 within next two months - B&B could be still valid. But...

Right now we're mostly watching for nearest level because as EUR as GBP are overbought on weekly chart. Fed moves for 0.5 on December and 0.25 on February are mostly priced-in already. And only more hawkish ECB and BoE policy could push EUR and GBP higher. We will see...

Besides, here MACDP comes. Appearing of the bearish grabber and due to uncompleted 0.9 target, B&B hardly stops just at minimal target. It might become good setup for taking mid term bearish position. Now it is not ready yet and stands in progress, but we need to keep tracking it.

Appearing of DRPO here is hardly possible, just because we do not have fundamental background for major reversal just yet (or it is unknown). That's why, B&B "Sell" is more logical in current situation and let's focus first on it.

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Weekly

Here we do not have yet any patterns, but still there are few moments have to be mentioned. First is - we have hidden "gap" reaction point that gives us hidden 5/8 Fib level, which perfectly agrees with the monthly one. So we have K-area in potential starting point of B&B. Second is - market is overbought. Reaching of K-area also give us weekly bearish "Stretch" pattern. All together, especially if we get monthly bearish grabber - these patterns could create excellent context to justify short entry

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Daily

Mostly picture stands the same and we still expect the spike up here, above the recent top. Friday's pullback seems to put the shadow on grabber validity:
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But if we take a look at DXY we see that it is nothing to worry about by far, as grabber was formed just yesterday.
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Intraday

So, as we've suggested on Friday, it could be AB-CD retracement and it has happened. Now, price stands around K-support, former trendline and with "222" Buy pattern. Based on DiNapoli approach, as 1H trend after the K-area testing has turned bullish - this is precise point for position taking, called as "Minesweeper A". Initial stop has to be below K-area. And, in general, K-area is vital for this short-term setup.
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But if we take a look at DXY we see that it is nothing to worry about by far, as grabber was formed just yesterday.

How do I need to understand this observation correctly?
 
But if we take a look at DXY we see that it is nothing to worry about by far, as grabber was formed just yesterday.

How do I need to understand this observation correctly?
We have two grabbers - on Friday and on Wed. So, initial setup has been formed on Wed, and on Friday it was just confirmed. DXY chart is useful to check recent EUR performance that a bit more blur.
 
Hi everybody!
The technical context on #GBP (gbpusd and gbpcad) still remains the same as shown last week.

GBPCAD (1H)

View attachment 81202


GBPUSD (1H)

View attachment 81203


Our main driver...

DOLLAR INDEX (1H)

so we are definitely facing more GBP climb as an impulse wave seems to ge going up, inside the channel. From your EW analysis that picture suggests that we are nearly there... (v) of 5?
 
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