Forex FOREX PRO WEEKLY, October 12 - 16, 2020

Sive Morten

Special Consultant to the FPA
Messages
13,930
Fundamentals

This week activity has come only on Friday and through the whole week investors were watching for D. Trump recovery first. Later they have turned to possible stimulus providing. Despite that stimulus was not agreed, dollar has dropped on expectations that negotiations will continue. Gradually focus is turning on coming elections and result of Q3 in global economy. The situation around stimulus stands very tricky as D. Trump, a day after leaving the hospital for COVID-19 treatment, said he instructed his representatives to stop negotiating on a new fiscal stimulus bill until after the Nov. 3 U.S. election.

Stocks dropped and Treasuries rallied on Trump’s statement, which came via Twitter.

“This is just not good for the economy and that’s why we’re seeing a strong risk off move here,” said Edward Moya, senior market analyst at OANDA in New York.

The U.S. economic recovery is far from complete and could still slip into a downward spiral if the coronavirus is not effectively controlled and growth sustained, Federal Reserve Chair Jerome Powell said on Tuesday at a virtual meeting of the National Association for Business Economics. Зowell said households, businesses and local governments need more fiscal support.

A growing lead in the polls by Democratic presidential nominee Joe Biden was seen as weighing on the U.S. currency.

The increasing possibility of a “blue wave (Democratic control of the White House and Congress) that would open the door for much-needed fiscal stimulus would be a welcome development for risk assets and could undermine the U.S. dollar,” said Lee Hardman, currency analyst at MUFG.

On the data front, the U.S. trade deficit surged 5.9% in August to $67.1 billion, the largest in 14 years as imports climbed again, suggesting that trade could be a drag on economic growth in the third quarter.

FX markets are starting to, at the margin, price in not only a Biden presidency but also a blue sweep as well,” said Mazen Issa, senior FX strategist at TD Securities in New York. Investors have been building short bets on the U.S. dollar index on the growing likelihood of a Democrat victory, Issa said. "The market is looking at it as being reflationary.”
A Democratic sweep would make larger fiscal stimulus more likely, which would weaken the U.S. currency. Biden opened his widest lead in a month in the U.S. presidential vote, according to a Reuters/Ipsos poll released on Sunday.

U.S. House Speaker Nancy Pelosi and Treasury Secretary Steven Mnuchin failed on Friday to reach agreement on a COVID-19 stimulus package, while the top Senate Republican voiced doubt that Congress would act before the Nov. 3 election.

Mnuchin floated a new $1.8 trillion proposal in a 30-minute Friday afternoon phone conversation, according to the White House. But Pelosi aide Drew Hamill said the offer lacked a broad plan to contain the pandemic. Talks will continue, he said.

The new White House package was higher than an earlier $1.6 trillion Mnuchin offer and closer to the $2.2 trillion that the Democratic-controlled House of Representatives passed last week.

White House spokeswoman Alyssa Farah said the administration wanted to keep spending below $2 trillion but was eager to enact a fresh round of direct payments to American individuals as well as aid to small businesses and airlines.

“The proximity to the election and the differences of opinion over what is needed at this particular juncture are pretty vast,” McConnell told a news conference in his home state of Kentucky. Senate Republicans have warned that they might not support a package near the $2 trillion mark.

So, the result of two factors - promising to continue stimulus negotiations and J. Biden leadership has made significant impact on dollar this week.

President's Run

It is interesting report from Fathom consulting, dedicated to President's run in US.

The economic indicators have been dire in this US election year. US GDP was down by almost 10% year-on-year in the second quarter, while there were 10.7 million fewer people in employment in September than there were in February. The link between economic conditions and voting intentions in previous years would suggest an incumbent’s chances of re-election in such circumstances would be extremely low. Despite this, it would be dangerous to assume that Donald Trump’s chances can be ruled out.

The recession associated with COVID-19 is exceptional in many respects. For one, it was driven by a large external shock that has negatively affected the entire world. It is not clear that US voters will blame the president for it. Indeed, in polls a majority of Americans give President Trump a better rating on the economy than Joe Biden, his Democrat opponent. For many voters, meanwhile, it might not feel like a large recession, thanks to substantial fiscal support which pushed US household income above its February level in August. Without transfers, it would be 3.7% down. Finally, voters may be swayed by the upward direction of travel. The US economy has been in expansion mode since May and the unemployment rate has dropped by 6.8 percentage points from its recent peak, to stand currently at 7.9%.

Rather than economic data, we should therefore look to the polls — derided in recent years, but nonetheless the best variable to examine when assessing electoral outcomes. They suggest that Joe Biden should be considered the favourite to win in November. In national polls, he enjoys an almost ten percentage point lead — a gap that has increased in recent weeks. While national polls provide some insight into the mood of the nation, and likely future control of the House, it is the voters in key swing states who will decide the presidential election. Joe Biden maintains a lead with them, albeit a smaller one than at national level. His lead in the six most important swing states is now a little under five percentage points. It is possible that the polls are wrong, but they could be wrong in either direction. It seems equally likely that the pollsters are understating Joe Biden’s lead as that they are overstating it.

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Donald Trump’s recent hospitalisation for COVID-19 has added an additional layer of uncertainty to the race. The evidence so far suggests that his approval ratings may actually decline. In a Reuters survey taken after his illness was confirmed, two-thirds of respondents answered yes to the statement: “If President Trump had taken coronavirus more seriously, he probably would not have been infected”.

Based on the polling more so than the economics, Joe Biden should be considered the frontrunner by a decent margin. However, the current situation is without precedent in US electoral history.


COVID19 and Global economy overview

The number of new cases is undoubtedly picking up across many countries now, especially in Europe, though so far the fatality rate in the second wave remains encouragingly low. Even in Spain, where the fatality rate is accelerating, the path of the second wave is not — yet — close to what we saw in the first wave. In the UK, the line is starting to pick up again, but so far it barely registers compared to the first wave. In Sweden, there is no discernible increase at all, so far, in the number of deaths per million, while New Zealand remains exceptionally low. There has in the past been a lag of several weeks before increased infections started to show in data on rising fatalities, and it is likely that the fatality rate will increase in most countries. But, in our central case, it will not repeat the rate of increase we saw in the first wave.

Chancellor Angela Merkel said she and mayors from Germany’s 11 largest cities agreed on Friday to adopt stricter anti-coronavirus measures if infections exceed a threshold of 50 cases per 100,000 population in a week.

Early in September, Fathom consulting was strongly persuaded that our central, V-shaped recovery scenario was correct — supported by very low pressure on corporate earnings at that time according to our proprietary measure, and by the fact that electricity consumption had come back almost to normal levels for the time of year across many European economies. Since then, however, the news about rapidly rising new cases has sown a seed of doubt. A ‘V’ remains our central case, but the risk of a ‘W’ is increasing — particularly in Sweden, they said.

The signals into Q3 so far are not encouraging: US trade flows in both directions are still down substantially on a year earlier (to August, the latest data available). The growth rate will eventually turn positive, but it is likely that the pre-crisis trajectory for trade as a share of GDP will never fully be restored.

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CFTC Data

Speculators reduced their net short dollar positions in the latest week to the lowest level since late July, according to calculations by Reuters and U.S. Commodity Futures Trading Commission data released on Friday. The value of the net short dollar position fell to $28.35 billion in the week ended Oct. 6, compared with a net short of $30.47 billion the previous week. U.S. net shorts hit a more than nine-year high of $33.68 billion in late August.

Particular in EUR, open interest has dropped again for ~6K contracts, while as speculators as hedgers have closed positions against the dollar, which actually doesn't correspond to the direction of this week. Maybe this difference stands due time lag between CFTC report and Friday, when major upside action has happened:

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Next week to watch

Q3 results will be the last bulk of statistics before the elections. Not only GDP Q3 at the end of October but companies' earnings reports that starts next week.
After U.S. Q2 results beat expectations, Q3 will show whether dire forecasts for companies’ bottom lines were justified. Most sectors will again show steep drops in earnings but it should be less dramatic than the previous quarter; expectations are for an average 21% decline, versus the 31% contraction of Q2, when coronavirus-linked lockdowns decimated economic activity.

The yield Curve

Will the Fed do something about the Treasury yield curve?

Bets on a spending boost from any incoming administration -- Democrat or Republican -- has seen record shorts build up in long-dated Treasury futures and a jump in long yields has pushed the gap between five-year and 30-year borrowing costs to the widest since 2016.

Curve steepening isn’t bad news if it signals higher growth and inflation, yet for an economy recovering from recession, too quick a move is a threat and a headache for the Fed. It hasn’t committed to capping yields or buying bonds of any particular maturity. But further steepening might test its patience. Fed research suggests bond holdings may need to rise another $3.5 trillion to boost the economy. Policymakers speaking in coming days will certainly be quizzed on that.

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Brexit talks

Britain and the European Union have agreed to pursue 'mini-deals' in areas of mutual interest, such as aviation and road transport, even if trade negotiations for a wider deal break down next week, The Times here reported on Saturday. In such an event, the two sides would spend November attempting to put together mini-deals to offset the likely disruption when the transition period ends on Dec. 31, the newspaper said, without citing sources.

British Prime Minister Boris Johnson has set a deadline of the Oct. 15 EU summit for a deal, but the two sides are still haggling over a trade deal that would kick in when informal membership ends on Dec. 31.

Negotiators warn of a huge amount of textual work even if a deal is struck. Another report suggests the EU is preparing for negotiations to last until mid-November. Several sticking points still remain.



The EU’s Oct. 15-16 summit will evaluate the progress. Sterling is on the rise meanwhile, but even if a deal is struck, the ebb and flow of Britain’s new relationship with the EU may continue to hold markets hostage.

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IMF and World Bank meeting

Finance officials from the 189 member countries of the IMF and World Bank will meet virtually next week to review the global response to the pandemic and economic recovery prospects. They will also try to negotiate further steps to strengthen debt relief to stave off default crises in poor and highly indebted countries.

IMF Managing Director Kristalina Georgieva said $12 trillion in fiscal stimulus, along with massive monetary easing, has made the outlook “less dire” than in June, but the global economy still faces a tough climb out of a pandemic-induced recession.

The U.S. Treasury will press countries to keep up coronavirus stimulus during International Monetary Fund and World Bank annual meetings next week and urge China to fully participate in debt relief for poor countries, a senior Treasury official said.

Finally, on Monday British Prime Minister Boris Johnson will make a statement to parliament about potential new lockdown restrictions, as the government seeks to tackle a rapidly accelerating second wave of the coronavirus outbreak.


So, guys, the result of this week shows that market's drivers take a new shape. Investors will closely look for any news on stimulus providing, J. Biden rating - both factors support risky assets and work against US Dollar. Correspondingly - no stimulus and dropping of Biden's rating will support the dollar. Additionally, Q3 statistics, especially GDP by the end of October and right before the elections could bring short-term volatility on the market. Particular for the EUR and GBP, the new round Brexit results also will be important
Concerning stimulus, it seems that now it is the cornerstone topic. Investors so exciting about it, that even negative result they interpret as positive one. No progress in discussion but the fact that "talks will continue" as Pelosi said was enough to push markets higher. It is obvious that sooner rather than later some stimulus pack will be provided, but as markets too euphoric and single-side oriented, it makes difficult to apply the common sense to this subject.


Technicals
Monthly


With the new vector of events, price action on monthly chart also could be different. Once COP has been reached, we've expected some downside reaction that is commonly happens. Appearing of engulfing pattern last week has confirmed this view and let us to suggest some downside AB-CD pattern on lower time frames. But, as markets become irrational, the shape of reaction could change. Now we have to take in consideration alternative scenario when price will return back to top first. Although it doesn't cancel idea of downside reaction, but it significantly could change the price shape on lower time frames.

In longer-term perspective we do not deny overall positive picture here. Indeed, we have good acceleration to COP and overall context still remains bullish, keeping chances on action to 1.25-1.26 area. But first market should finish somehow the engulfing pattern.

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Weekly

Here we're still watching for major support area, which is K-level around 1.1485-1.15. As overall thrusting action looks not bad, and in the middle of the thrust there was no close below 3x3 DMA, it is suitable for DiNapoli directional pattern. For a few weeks, B&B was our favorite pattern due to overall fundamental situation. Actually, it should remain to be favorite, but, markets are too positive now and we again have to consider DRPO "Sell" instead.

In this case EUR should return back to the top to monthly resistance area, forming second top of DRPO "Sell" pattern. If we're correct and price will show second collapse, it will be chance to go short and it will bring more confidence that EUR will reach 1.15 area, at least. Conversely, depending on other fundamental factors, EUR will just continue long-term trend. Chances for this scenario smaller, but they are exist, still.

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Daily

Daily trend has turned bullish. Another reason why we start to think about price return back to the top is breakout of important 1.1750 resistance area. Suggesting that EUR stands in retracement mode, the strength of this level is enough to to stop it. Market was challenging this level for the week showing no meaningful pullbacks out from it. Harmonic swing is also exceeded. All these moments point that EUR stand in more serious upside action. Maybe this is not the continuation of long-term trend yet, but not typical retracement either, as it is supported by investors too optimistic sentiment.

Finally, EUR has entered in the range of former H&S pattern and now this range is open for the price fluctuation which makes it easier to suggest upside continuation. The last bearish outpost is 1.1850-1.1860 Fib level. But, if even strong K-area was not able to stop it, hardly single stand level will do it. Price also has broken through Monthly Pivot on Friday. This also suggests that next destination might be MPR1 right around the previous top that agrees with idea of DRPO "Sell" pattern on weekly chart.

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Intraday

Here is we follow the setup that we've discussed on Friday. Although chances on upside breakout look significant, still, around 1.1850 will be solid resistance cluster, including AB=CD target and butterfly extension. Thus, at first touch of this level meaningful pullback is possible. Now price stands at minor, 1.27 butterfly extension.
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Let's suppose that market will climb to 1.1850 level. Here I plot Fib levels in advance of current price to make suggestion what the pullback could follow. In this case we will get two potential levels. First one is 1.18, second - K-area around 1.1750-1.1765. Second one is very important as it is former neckline, and K-resistance level that recently has been broken. If even price will not reach it during pullback, it will be level for stop placement behind it.

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So, our entire trading plan suggests following steps. At the first touch of 1.1860 resistance scalp bears could consider taking the short position with stops above the level. When bounce will start, we intend to watch for 1.18 and 1.1750-1.1765 levels for long entry, applying either scale-in approach, or focusing directly on K-support. Once position will be taken, we will watch over market reaction on support area. If we're correct about DRPO on weekly chart, this support should hold and price should continue upside action. Our task is to move stops to breakeven after the first touch of the level. If, somehow market will break 1.1750 down, trading plan will be erased and we will have to change it. Until market will hold above K-support - DRPO "Sell" plan will be valid.
 

Sive Morten

Special Consultant to the FPA
Messages
13,930
Morning everybody,

While EUR flirts with our predefined levels, lets take a look at GBP. This week is very important for the cable, because, as you know, on Thu-Fri we will get next round of Brexit negotiations. It is especially interesting because technical picture suggests downside reversal around 1.32, which means that negotiations should not bring any breakout.

Besides, we do not take off the table our longer-term view with continuation to 1.20-1.22 area, which should be decisive for the GBP as well, but this is different story. In relation to our subject it means that we treat current action only as retracement by far.
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Mostly this retracement is based on reverse H&S pattern that we've discussed during last week. Now this pattern is coming to major target - AB=CD extension that creates an Agreement resistance with major 5/8 Fib level around 1.3170-1.32 area. This is primary object to keep an eye on. Reversal down here could become the starting point of large downside AB=CD pattern that should lead us right to 1.22 area...
Conversely upside breakout and action back to the top will change daily context... The end of the week is promising to be intriguing.
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Sive Morten

Special Consultant to the FPA
Messages
13,930
Welcome everybody,

So, the price action that would promise to be an ordinary pullback under impact of external factor turns to collapse and makes the harm to the whole context. This is the story that we've got yesterday. Until US session EUR was showing gradual retracement, as we've suggested in our weekly report. Once Pelosi has come with the statement that 1.8Trln stimulus pack was rejected - markets have collapsed. Besides, talking again on "no deal" Brexit has pushed GBP even lower. The same story on the gold market.

As a result, on daily chart EUR has dropped below MPP again, but trend holds bullish by far. Market now stands at solid support area, so we should get market some time for rehabilitation but overall situation now stands not as pleasant as on Monday's morning, of course:

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On 4H chart our AB=CD pattern is still valid, but we should forget about second target of the butterfly, as reaction on 1.27 target was too strong and price already is below the butterfly's bottom. Totally bullish context will be erased, if price will drop below the "C" point lows:
eur_4h_14_10_20.png


On 1H chart market now stands at strong support area. Another one is 5/8 Fib level that coincides with "C" point on 4H chart.
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What we could do in current situation? Definitely it is not the time yet for any new long positions. Bears could consider appearing of H&S pattern on 4H/1H chart, if market returns back to 1.18 and this return will be gradual. Conversely, the breakout of major 5/8 Fib support also will tell that daily context has turned.
In general, by technical picture, the sell-off was rather strong, which already tells that chances on upside continuation are anemic. But markets now show irrational reactions on events. And, as D. Trump's comments on "no stimulus" last week was ignored, as this week's talking also could be played back. Other factors could come in - market now is extremely sensitive to any rumors, talking, news on two subjects - Biden's leadership and stimulus providing.
 

Sive Morten

Special Consultant to the FPA
Messages
13,930
Morning everybody,

So, yesterday markets have made attempt of rehabilitation after collapse on day earlier. The most successful attempt is done on GBP. Now it has best chances to finally complete existed bullish setup on daily chart and this is the reason why we still keep it on the table.
On daily chart trend still stands bullish and market has played back almost totally the previous drop:
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On 4H chart our AB=CD pattern stands valid as drop has not touched the lows of "C" point. Recent sharp reversal puts price back to the top and it is a little bit till the OP target and Agreement resistance.

The risk factor that we've got is bearish grabber. But I have real doubts about it, because it stands right at the top of the rally and could be formed just occasionally.
gbp_4h_15_10_20.png


What I'm personally watching now - is a butterfly shape that could finalize our upside retracement. Thus, bears could watch for 1.3173 - actually this is our major scenario on GBP right now, or downside breakout of butterfly's lows. Conversely bulls could think about long entry at some support levels, for example 5/8 support with stops below the butterfly, but only if retracement down will be gradual, without acceleration.

gbp_1h_15_10_20.png
 

Sive Morten

Special Consultant to the FPA
Messages
13,930
Morning guys,

So, as we've told many times already, we have two major driving factors - Biden's leadership and stimulus pack rumors. Yesterday we've got the downside action as Biden's probe has come on surface that potentially could diminish the leadership. Maybe all this stuff costs nothing but speculators actively use this to shake the market.

As a result, we've got the grabber here. In fact, 1.17 is the last area where bullish context has theoretical chances. Dropping below this area will destroy it:
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On 4H chart we see that market also stands at Agreement support around major 5/8 Fib level. So, the grabber at Agreement support - this is all that we have. Overall bullish context is weak. And if you still will decide to buy EUR, there will be some part of gambling and hope that maybe later some news will be released. But the positive moment is we definitely know the invalidation point and potential loss of this trade will be minimal.
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