Sive Morten
Special Consultant to the FPA
- Messages
- 18,550
Fundamentals
(Reuters) - The dollar was little changed against a basket of currencies on Friday, shaking off early weakness, after data showed U.S. consumer prices rose less than expected in September, pointing to muted inflation that could worry Federal Reserve officials.
The Labor Department said on Friday its Consumer Price Index jumped 0.5 percent last month after advancing 0.4 percent in August. Economists polled by Reuters had forecast a 0.6 percent increase.
September’s increase was the biggest in eight months, but it stemmed mostly from soaring gasoline prices after hurricane-related production disruptions at Gulf Coast area oil refineries. Underlying inflation remained muted.
The dollar index, which tracks the greenback against six major currencies, was up 0.02 percent at 93.072 after falling to a more than two-week low of 92.749. The index was down about 0.75 percent for the week, its worst weekly performance in five.
“We did see a knee-jerk reaction that was perhaps overdone. On more sober reflection, traders are coming to bid up the dollar,” said Karl Schamotta, director of global product and market strategy at Cambridge Global Payments in Toronto.
The Fed has raised its benchmark rate twice this year and signalled a third hike later this year.
Financial markets are pricing a roughly 83 percent probability of a rate increase in December, according to CME Group’s FedWatch tool.
The dollar edged higher after U.S. President Donald Trump struck a blow against the 2015 Iran nuclear agreement, choosing not to certify that Tehran is complying with the deal and warning he might ultimately terminate it.
“Trump’s unwillingness to sign the nuclear deal is increasing global risk aversion, making markets more hesitant on the geopolitical outlook,” said Schamotta.
The dollar slipped 0.37 percent against the Japanese yen.
Japan is the world’s largest creditor nation and traders tend to assume Japanese investors would repatriate funds at times of crisis, thus pushing up the yen.
The euro was down 0.07 to $1.1821 after European Central Bank President Mario Draghi said the euro zone continues to need substantial monetary stimulus as the ECB has not yet managed to increase inflation sufficiently.
“Draghi did definitely pour some cold water on expectations around ECB’s Oct. 26 meeting,” said Schamotta.
Britain’s pound hit an 11-day high in a volatile day of trading and was heading for its best week in four, benefiting from signs that Britain is to be offered a two-year Brexit transition deal.
Chart of the Week: Brexit-Related Uncertainty Weighs on Economic Sentiment in Q3
by Fathom Consulting
By distilling information from numerous consumer and business surveys into one measure, Fathom’s UK Economic Sentiment Indicator (ESI) provides a monthly snapshot of underlying growth momentum.
Since the beginning of this year, survey-based measures of economic output, including Fathom’s ESI, have required a large pinch of salt — exceeding official output data by some way. More recently, however, that wedge has narrowed, with the UK ESI falling throughout the third quarter, to 0.5% in September.
While the vast majority of survey respondents were less confident than they were in the second quarter, the deterioration was most marked in the construction sector. Notably, the recent drop in the Construction Purchasing Managers’ Index to below the key threshold of 50 has brought it more in line with official data, which has pointed to a contraction in building activity for several months now. Respondents identified political and economic uncertainty weighing on investment decisions and extending lead times for budget approvals as the principal cause.
Looking ahead, we expect both our ESI and official GDP data to soften further from here.
COT Report
So, as you probably understand, today we will take a look at GBP again. Our last research was important as we've discovered some contradiction between investors' expectations on rate change in November and real situation in economy. Besides, BoE has a reputation of tricky promiser, who has cried wolf, repeatedly trying to persuade investors that they have failed to price in a sufficiently aggressive interest rate path, only to have a change of heart come the next meeting.
Right now could happen the same stuff. In our previous weekly research on GBP we posted Fathom consulting view on possible rate hike and its far from confidence that this definitely will happen. Right now again - economy sentiment indicator shows slow down.
CFTC data shows that investors were looking positively on perspectives of rate change, at least 2-3 weeks ago, when net bearish position has diminished significantly. Take a look - now it has turned bullish. But this shifting stands on a background of miserable drop in open interest. It means that investors just contract shorts, but not taking new longs right now.
Besides, last week net long position slightly decreased but open interest rises. Is it mean that market treats current level comfortable for selling?
GBP net position stands around 19K contracts. Historical highs stand around 40-50K. It means that position is very close to saturation. It points that upside potential of cable right now is limited. This sentiment is difficult to call "bullish" as we do not see any new purchases of UK currency. It seems that investors mostly stand aside and try to catch good entry point to re-establish shorts...
Technicals
Monthly
So, long-term view for GBP is not really positive. Fundamental picture points on structural problems in economy, while very long-term technical analysis suggests 1.12 target. But right now, as market stands in upside action - we're mostly interested with its perspectives.
Trend is bullish here and there are some moments that we should take care on. First is uncompleted AB-CD target around 1.1650 area. Market has turned up just 350 pips above it, which is small distance for monthly scale. When such turning happens, this creates friable background of upside action. In fact, you never know where precisely market could stepped out and start dropping again, tending to uncompleted target. The same situation we have here. The nature of price action definitely shows that this is not a trend - too many overlapping candles, long shadows and no thrusting action.
If we will take a look at reasons for this action, from technical point of view we will find nothing but 0.618 target of all time AB-CD pattern. No Fib supports, Pivots, OB/OS levels, nothing more. Taking it all together, it seems that upside action should not be too extended. Usually market shows either small reaction on minor target or sometimes no reaction at all. This leads us to second issue.
As market is not at OB right now, it seems that nearest upside target stands around 1.3860-1.3975 K-resistance here. Obviously, this is rather strong resistance cluster as we have YPR1 and OB levels slightly higher, around 1.42 area.
Also this is previous very important monthly lows. By they point on rather wide range of 1.36-1.42 area.
That's being said, combined all tools that we have here right now, we could say that cable could turn down at any point of 1.36-1.42 area. But as we have K-resistance, we suggest that retracement market should not break it and this lets us to narrow range a bit to 1.36-1.40 probably.
Weekly
So, our suggestion that market should pull back was correct. Indeed, as price has reached Fib level and OB level, which, in fact, has given us DiNapoli bearish "Stretch" pattern and it has worked nice.
Now there are two important issues here. First is completion of retracement harmonic swing, second - bullish grabber that suggests action at least above previous top.
It means that until grabber is valid - it is dangerous to go short against it.
Daily
Now guys, we're coming to most sophisticated moment on the market. What do you think - what we will get either upside continuation on weekly grabber or downside AB-CD pattern?
In fact, recent upside action was a reaction on daily OS and K-support area. But overall price action doesn't look strong enough to treat it as upside reversal and trend. Besides, on other assets, such as EUR, DXY we mostly watch for downside action, and even bearish reversal patterns were formed on intraday charts. Our DRPO's on EUR and DXY...
Finally, bullish grabber on weekly chart looks a bit irrational. Because, GBP has formed bullish reversal swing and was at weekly! OB. This combination suggests deeper retracement, by normal technical response. Only some external driving factors, such as political news, BoE decision etc. could overcome technical factors.
Intraday
Based on intraday picture, it is difficult to say that we have clear bullish setup. Recent drop and re-testing of trend line was a perfect daily B&B "Sell" actually.
Here we could watch for upside AB=CD pattern. CD leg looks fast, and in general, this action is based on Brexit procedure approvement by GB parlament. Market has passed through K-resistance, but currently it makes sense to watch for 1.3370-1.3415 area - completion of AB-CD, WPR1 and Fib resistance. Now picture doesn't look cloudless at all here and after minor upside continuation upward action could stop.
Situation is a bit tricky with this retracement guys. Mostly, because weekly grabber looks not quite logical in current environment and mostly has appeared due political action in Parliament last week.
Overall price action looks so, that as bullish setup as bearish will lead to some action in the direction of setup. For example, on 4-hour chart, if price will complete AB=CD we will get "222" Sell pattern. Thus, bears could watch this area for position taking. The major thing is to not forget to move stops at breakeven as soon as possible.
Bulls, in turn, need to wait for some deeper retracement.
Conclusion:
Short-term picture slightly stands in favor of bears. Existence of weekly grabber should not become a barrier for taking short position on intraday charts around 1.34 area, based on "222" Sell pattern. Major thing is to not forget move stop at break even as soon as possible.
Bulls need to wait for retracement and control validity of weekly grabber. If market will drop below its lows - do not be long.
All other stuff that we've talked previously about longer-term view on GBP is still valid. This is another reason, by the way, why we're not too fascinating with upside potential of cable right now...
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 was little changed against a basket of currencies on Friday, shaking off early weakness, after data showed U.S. consumer prices rose less than expected in September, pointing to muted inflation that could worry Federal Reserve officials.
The Labor Department said on Friday its Consumer Price Index jumped 0.5 percent last month after advancing 0.4 percent in August. Economists polled by Reuters had forecast a 0.6 percent increase.
September’s increase was the biggest in eight months, but it stemmed mostly from soaring gasoline prices after hurricane-related production disruptions at Gulf Coast area oil refineries. Underlying inflation remained muted.
The dollar index, which tracks the greenback against six major currencies, was up 0.02 percent at 93.072 after falling to a more than two-week low of 92.749. The index was down about 0.75 percent for the week, its worst weekly performance in five.
“We did see a knee-jerk reaction that was perhaps overdone. On more sober reflection, traders are coming to bid up the dollar,” said Karl Schamotta, director of global product and market strategy at Cambridge Global Payments in Toronto.
The Fed has raised its benchmark rate twice this year and signalled a third hike later this year.
Financial markets are pricing a roughly 83 percent probability of a rate increase in December, according to CME Group’s FedWatch tool.
The dollar edged higher after U.S. President Donald Trump struck a blow against the 2015 Iran nuclear agreement, choosing not to certify that Tehran is complying with the deal and warning he might ultimately terminate it.
“Trump’s unwillingness to sign the nuclear deal is increasing global risk aversion, making markets more hesitant on the geopolitical outlook,” said Schamotta.
The dollar slipped 0.37 percent against the Japanese yen.
Japan is the world’s largest creditor nation and traders tend to assume Japanese investors would repatriate funds at times of crisis, thus pushing up the yen.
The euro was down 0.07 to $1.1821 after European Central Bank President Mario Draghi said the euro zone continues to need substantial monetary stimulus as the ECB has not yet managed to increase inflation sufficiently.
“Draghi did definitely pour some cold water on expectations around ECB’s Oct. 26 meeting,” said Schamotta.
Britain’s pound hit an 11-day high in a volatile day of trading and was heading for its best week in four, benefiting from signs that Britain is to be offered a two-year Brexit transition deal.
Chart of the Week: Brexit-Related Uncertainty Weighs on Economic Sentiment in Q3
by Fathom Consulting
By distilling information from numerous consumer and business surveys into one measure, Fathom’s UK Economic Sentiment Indicator (ESI) provides a monthly snapshot of underlying growth momentum.
Since the beginning of this year, survey-based measures of economic output, including Fathom’s ESI, have required a large pinch of salt — exceeding official output data by some way. More recently, however, that wedge has narrowed, with the UK ESI falling throughout the third quarter, to 0.5% in September.
While the vast majority of survey respondents were less confident than they were in the second quarter, the deterioration was most marked in the construction sector. Notably, the recent drop in the Construction Purchasing Managers’ Index to below the key threshold of 50 has brought it more in line with official data, which has pointed to a contraction in building activity for several months now. Respondents identified political and economic uncertainty weighing on investment decisions and extending lead times for budget approvals as the principal cause.
Looking ahead, we expect both our ESI and official GDP data to soften further from here.
COT Report
So, as you probably understand, today we will take a look at GBP again. Our last research was important as we've discovered some contradiction between investors' expectations on rate change in November and real situation in economy. Besides, BoE has a reputation of tricky promiser, who has cried wolf, repeatedly trying to persuade investors that they have failed to price in a sufficiently aggressive interest rate path, only to have a change of heart come the next meeting.
Right now could happen the same stuff. In our previous weekly research on GBP we posted Fathom consulting view on possible rate hike and its far from confidence that this definitely will happen. Right now again - economy sentiment indicator shows slow down.
CFTC data shows that investors were looking positively on perspectives of rate change, at least 2-3 weeks ago, when net bearish position has diminished significantly. Take a look - now it has turned bullish. But this shifting stands on a background of miserable drop in open interest. It means that investors just contract shorts, but not taking new longs right now.
Besides, last week net long position slightly decreased but open interest rises. Is it mean that market treats current level comfortable for selling?
GBP net position stands around 19K contracts. Historical highs stand around 40-50K. It means that position is very close to saturation. It points that upside potential of cable right now is limited. This sentiment is difficult to call "bullish" as we do not see any new purchases of UK currency. It seems that investors mostly stand aside and try to catch good entry point to re-establish shorts...
Technicals
Monthly
So, long-term view for GBP is not really positive. Fundamental picture points on structural problems in economy, while very long-term technical analysis suggests 1.12 target. But right now, as market stands in upside action - we're mostly interested with its perspectives.
Trend is bullish here and there are some moments that we should take care on. First is uncompleted AB-CD target around 1.1650 area. Market has turned up just 350 pips above it, which is small distance for monthly scale. When such turning happens, this creates friable background of upside action. In fact, you never know where precisely market could stepped out and start dropping again, tending to uncompleted target. The same situation we have here. The nature of price action definitely shows that this is not a trend - too many overlapping candles, long shadows and no thrusting action.
If we will take a look at reasons for this action, from technical point of view we will find nothing but 0.618 target of all time AB-CD pattern. No Fib supports, Pivots, OB/OS levels, nothing more. Taking it all together, it seems that upside action should not be too extended. Usually market shows either small reaction on minor target or sometimes no reaction at all. This leads us to second issue.
As market is not at OB right now, it seems that nearest upside target stands around 1.3860-1.3975 K-resistance here. Obviously, this is rather strong resistance cluster as we have YPR1 and OB levels slightly higher, around 1.42 area.
Also this is previous very important monthly lows. By they point on rather wide range of 1.36-1.42 area.
That's being said, combined all tools that we have here right now, we could say that cable could turn down at any point of 1.36-1.42 area. But as we have K-resistance, we suggest that retracement market should not break it and this lets us to narrow range a bit to 1.36-1.40 probably.
Weekly
So, our suggestion that market should pull back was correct. Indeed, as price has reached Fib level and OB level, which, in fact, has given us DiNapoli bearish "Stretch" pattern and it has worked nice.
Now there are two important issues here. First is completion of retracement harmonic swing, second - bullish grabber that suggests action at least above previous top.
It means that until grabber is valid - it is dangerous to go short against it.
Daily
Now guys, we're coming to most sophisticated moment on the market. What do you think - what we will get either upside continuation on weekly grabber or downside AB-CD pattern?
In fact, recent upside action was a reaction on daily OS and K-support area. But overall price action doesn't look strong enough to treat it as upside reversal and trend. Besides, on other assets, such as EUR, DXY we mostly watch for downside action, and even bearish reversal patterns were formed on intraday charts. Our DRPO's on EUR and DXY...
Finally, bullish grabber on weekly chart looks a bit irrational. Because, GBP has formed bullish reversal swing and was at weekly! OB. This combination suggests deeper retracement, by normal technical response. Only some external driving factors, such as political news, BoE decision etc. could overcome technical factors.
Intraday
Based on intraday picture, it is difficult to say that we have clear bullish setup. Recent drop and re-testing of trend line was a perfect daily B&B "Sell" actually.
Here we could watch for upside AB=CD pattern. CD leg looks fast, and in general, this action is based on Brexit procedure approvement by GB parlament. Market has passed through K-resistance, but currently it makes sense to watch for 1.3370-1.3415 area - completion of AB-CD, WPR1 and Fib resistance. Now picture doesn't look cloudless at all here and after minor upside continuation upward action could stop.
Situation is a bit tricky with this retracement guys. Mostly, because weekly grabber looks not quite logical in current environment and mostly has appeared due political action in Parliament last week.
Overall price action looks so, that as bullish setup as bearish will lead to some action in the direction of setup. For example, on 4-hour chart, if price will complete AB=CD we will get "222" Sell pattern. Thus, bears could watch this area for position taking. The major thing is to not forget to move stops at breakeven as soon as possible.
Bulls, in turn, need to wait for some deeper retracement.
Conclusion:
Short-term picture slightly stands in favor of bears. Existence of weekly grabber should not become a barrier for taking short position on intraday charts around 1.34 area, based on "222" Sell pattern. Major thing is to not forget move stop at break even as soon as possible.
Bulls need to wait for retracement and control validity of weekly grabber. If market will drop below its lows - do not be long.
All other stuff that we've talked previously about longer-term view on GBP is still valid. This is another reason, by the way, why we're not too fascinating with upside potential of cable right now...
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.