Forex FOREX PRO WEEKLY, October 16 - 20, 2023

Sive Morten

Special Consultant to the FPA
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Fundamentals

It was really long week and we've got a lot of events and many of them are still needed to be analyzed and unclear what consequences they will trigger, but most of them are political ones. On economical front, it almost nothing to discuss - just the US inflation data and recent Fed comments.

Market overview

The euro strengthened as the dollar slid on Tuesday in response to a sharp drop in Treasury yields on the back of further dovish comments by Federal Reserve officials, as well as the prospect of stimulus from China.The benchmark 10-year Treasury note tumbled to a day low of 4.618% from Monday's high of 4.887% after Atlanta Fed President Raphael Bostic said the U.S. central bank does not need to increase interest rates any further.

Bostic, in the latest comments this week by Fed speakers, told the American Bankers Association that Fed policy is sufficiently restrictive and that he sees no recession ahead even as the Fed's rate hikes slow the economy and bring down inflation. U.S. Treasuries rallied, pushing two-year yields to their lowest in a month, as safe-haven demand was driven by the ongoing Mideast bloodshed and dovish Fed comments.

Bostic was partly responding to the outburst of violence in Israel and Gaza, said Joseph Trevisani, senior analyst at FXStreet in New York. You're looking at the typical and standard and historically repeated reaction of the Fed to a crisis that (would) lower rates if things get ugly in the Middle East," he said. You can pretty much count on the Fed taking that into its world view and that's only going to be lower rates."

"The focus on term yields and term premiums is going be a key issue for the U.S. dollar because it does suggest that maybe the Fed doesn't have to go any more," said Shaun Osborne, chief FX strategist at Scotiabank in Toronto. These are all things that are going to check the dollar's advance. Whether we see any sort of significant decline at this point, it's hard to say given where yields are," he said.

Bloomberg reported that China is weighing the issuance of at least 1 trillion yuan ($137.1 billion) of additional sovereign debt for spending to boost its struggling economy. Analysts said this helped currencies such as the euro, which are more exposed to global growth.

Analysts said the drop in U.S. yields was initially driven by comments from two Fed officials on Monday who said rising long-term yields might negate the need for further hikes. Core reading of U.S. producer prices showed underlying inflation moderated further in September, leading the market to reason the Federal Reserve is done hiking interest rates.

The market later barely reacted to minutes of the Fed's policy meeting last month that showed uncertainty around the path of the U.S. economy pushed Fed officials into a cautious stance as they debated whether more rate hikes were needed. Rising Treasury yields in recent months may be doing some of the U.S. central bank's work for it, Dallas Fed President Lorie Logan and Fed Governor Christopher Waller have argued, preventing any urgent need for another rate hike.

"The doves have broken out of their cages, but aren't yet in full flight," said Karl Schamotta, chief market strategist at Corpay in Toronto. On balance, the minutes show officials turning far more concerned about downside risks to the U.S. economy - but also expressing humility in the face of deeply confusing and often contradictory signals in the data," he said.

After stripping out food, energy and trade services, the producer price index (PPI) gained 0.2% last month, the same margin as in August. In the 12 months through September, core PPI increased 2.8%, or less than a 2.9% advance in August.
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"There's optimism that the disinflation process is still intact despite some of the hot numbers that we got today," said Edward Moya, senior market analyst at OANDA in New York, adding that building material margins had impacted the data. The market has really become confident that the Fed could be done raising rates" after a "steady dose of dovish Fed speak" this week, Moya said.

Waller on Wednesday said higher market rates may help the Fed slow inflation and let policymakers "watch and see" if the Fed's policy rate needs to rise again or not as price data seemed to be moving towards its 2% target. Minneapolis Fed President Neel Kashkari said it was "possible" that further hikes might not be needed. But, at the same time, he said that it is necessary to understand the factors that has pushed yields up.

Euro zone households see inflation staying slightly above the European Central Bank's (ECB) 2% target for another three years, an ECB survey on Wednesday showed, as rate-setters struggle to convince the public their plans to tame prices are on track. The ECB has made "important progress" in getting inflation back down to target but there is still a long road ahead and a further rate hike cannot be ruled out, Dutch central bank chief Klaas Knot said on Wednesday.

U.S. consumer prices rose more than expected in September, lifted by an elevated cost of rent that raised the prospect of the Federal Reserve keeping interest rates high for some time. The annual increase in consumer prices last month, excluding the volatile food and energy components, was the smallest in two years, but the surprise surge in rental costs rippled across markets. While many shrugged off the move higher in rental costs, others concluded the Fed's mission to lower inflation to it's 2% target isn't quite there.

"It just drives home the recent narrative that interest rates are likely to stay fairly high for a long period of time until the Fed can really break the back of inflation," said Douglas Porter, chief economist at BMO Capital Markets in Oakville, Canada. Getting inflation back to 2% is not going to be easy."

The consumer price index increased 0.4% last month, with a 0.6% jump in the cost of shelter accounting for more than half of the rise.
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While a close call, the Fed is on course to hike rates one more time, most likely in December, said Bipan Rai, North America head of FX strategy at CIBC Capital Markets in Toronto.

Owners' equivalent rent, a measure of the amount homeowners would pay to rent or would earn from renting their property, rose even though non-official sources show a decline in rental prices.

"Since the Fed makes its decisions based on the official numbers, not on what third party sources are showing, it's a little bit worrisome," said Thierry Wizman, Macquarie's global FX and interest rates strategist in New York. Even though September was a blip, I don't think that it negates the overall picture of the declining inflation. I don't think that this is going to cause (the Fed) to hike," Wizman said. "The only thing that the market is missing is that somehow it thinks that the Fed is going to drop high for long."

Thursday's CPI release came after Wednesday's mixed report on U.S. producer prices, and minutes from the Fed's September meeting. Fed officials pointed to uncertainties around the economy, oil prices and financial markets as supporting "the case for proceeding carefully in determining the extent of additional policy firming that may be appropriate," the minutes showed.

Yields are "going to be the primary driver on where markets go," for now, said Alan Lancz, president of Alan B. Lancz & Associates Inc, an investment advisory firm based in Toledo, Ohio. But, "it's going to be a challenging market environment," he said. "I know a lot of people think the fourth quarter is going to be a rally ... but it's gonna be difficult with all the uncertainty going on now as things unfold" in the Middle East and with earnings.

"Overall, there is probably not enough in the (CPI) report alone to suggest to the FOMC that it needs to be tightening policy again in November, but it will see it as justifying its message that policy needs to remain 'tighter for longer,' with the prospect of another rate rise still being kept on the table," said Stuart Cole, chief macro economist, at Equiti Capital.

Federal Reserve Bank of Philadelphia President Patrick Harker said Friday he believes the central bank is likely done with rate hikes amid an ongoing waning in price pressures, while flagging the uncertainty of how long rates will need to remain elevated.

Data on Friday showed U.S. consumer sentiment deteriorated in October, with households expecting higher inflation over the next year, but labor market strength was likely to continue supporting consumer spending. Futures pricing suggests traders now see about a 30% chance of another rate hike this year, down from about 45% a week ago. In general, current market expectations on future Fed rate look like this:

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U.S. Treasury Secretary Janet Yellen said on Wednesday she continued to expect the U.S. economy would have a soft landing, even though the conflict between Israel and Palestinian Islamist group Hamas brought additional risks.

"I still see as the base case for the United States a so-called soft landing," due to the resilience in the labour market and moderating wage pressure, Yellen told a briefing. Of course the situation in Israel causes additional concerns. I'm not saying soft landing is an absolutely sure thing. But I continue to think it's the most likely path."

Yellen said Washington was monitoring the potential economic impact of the escalating conflict, though it was unlikely a major driver of the global outlook.

"Thus far, I don't think we've seen anything suggesting it would be very significant," she said.

Yellen said she had nothing to announce yet on whether the United States would tighten sanctions on Iran if evidence emerged that the country was involved in the attack.

"This is something that we have been constantly looking at, and using information that become available to tighten sanctions," she said. "We will continue to do that."

European Central Bank policymakers expressed cautious optimism on Thursday that inflation was on its way back to 2% even without more rate hikes and raised pressure on governments to maintain the sort of fiscal discipline needed for a soft landing of the economy. The ECB's models also suggested, according to the accounts, that a deposit rate in the region of 3.75% to 4.00% could bring inflation back to 2%, provided the ECB held this level long enough.

Joining an already long list of policymakers suggesting steady rates for now, French central bank chief Francois Villeroy de Galhau and his Greek counterpart, Yannis Stournaras both planed down the need for further tightening, arguing that policy was already in a setting that could lower inflation.

Hedge funds have entered the final quarter of the year doubling down on two of their biggest macro conviction trades - short U.S. Treasuries and long the dollar.
According to U.S. futures market data, speculators are holding a record short position in two-year Treasuries, and are the most bullish on the dollar in a year.

In currencies, meanwhile, funds ramped up their broad, net long dollar position by $5.4 billion in the week to $8.45 billion. Funds have been turning more bullish on the dollar for seven weeks in a row, the longest streak since April 2021. The net long euro position was cut to 79,000 contracts, the smallest in nearly a year. That equates to a roughly $10 billion bet that the euro will strengthen - still pretty big, but half what it was only a month ago.

A sustained rise in interest rates could not just slow the economy more than Federal Reserve officials feel is needed to lower inflation, but saddle the Biden administration with higher borrowing costs and larger deficits that put top priorities at risk, throw a new wrinkle into the 2024 presidential election, and force the U.S. central bank to recast some long-held plans.

"It's not mostly about inflation expectations," Powell said, citing the one thing that would cause immediate concern at the Fed. "It'll probably have something to do with stronger growth ... More supply of Treasuries," due to rising deficits.

The fact that deficits in the U.S. are near 8% of (gross domestic product) today, at a time when the economy is doing okay, and the unemployment rate is very low, that's very unusual," said Gene Tannuzzo, global head of fixed income at Columbia Threadneedle. "Typically, deficits only reached this level during deep recessions when ... government spending increases to sort of prop up the economy ... If government spending doesn't come down now, how large is it going to be if we do hit another recession?"

Events like a recent credit downgrade by Fitch Ratings, the repeated flirtations with debt defaults and government shutdowns, and the ouster last week of the Republican speaker of the U.S. House of Representatives are possible reasons investors are demanding more of a return for buying long-term U.S. debt.

"The bottom line is that the world only saves a limited amount of dollars every year, and the significant growth in the size of the Treasury market is at risk in 2024 of crowding out demand for other types of fixed income," Torsten Slok, chief economist at Apollo Global Management, wrote of the roughly 23% jump in issuance of Treasuries coming next year.

That transmits the pressure of rising rates into the world economy's weakest cracks, raising the risk that a key bank or pension fund could fail, or a currency crisis or debt default erupts in one corner of the globe and spills into others.

"When the central banks are buying government bonds, that can mask large government deficits because when governments are running large deficits and borrowing a lot of money ... the central bank is turning around and buying a lot of debt on the other side," Tannuzzo said. "Now we are in an environment ... where central banks are going the other way."

MARKET SENTIMENT ANALYSIS

In general, from comments above and prospect of the Fed fund rates, it becomes clear that market doesn't expect any rate change this year. Meantime, there are 2-3 special factors that we need to consider. First is, as more higher probability of further rate jump is as more talking will be about Fed pivot. The further prices for treasuries fall (yields raise), the more posts like this there will be: "a reversal is coming!"
But no, not even close, we haven’t even gone a third of the way yet. Although when you are in a position, any puny bump on the chart seems to be a reversal, this is understandable. However, the surest way to preserve the deposit in the current conditions is to cast aside false shame. And for now, do not buy any government debt, at least with a maturity of more than a year.

Second, the US investors carefully start asking the same question - you have too much debt. Wall Street Isn’t Sure It Can Handle All of Washington’s Bonds. Investors long shrugged off U.S. deficits, but a torrent of Treasuries is testing the bond market. Indeed, debt right now is raising for $1 Trln per month. Who could absorb this when everybody is selling - the Fed, US Treasury, China, S. Arabia, Japan? Now the demand mostly is based on the households. Poor US people now under huge brain wash from media, who day by day tell them that this is great interest rate for investing in long-term bonds. But for how long their purchasing power will stay?
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Finally, all J. Biden initiatives on Middle East has failed. They dumped Iran with unlocking of $6 Bln, S. Arabia has stopped foreign relations normalization process with Israel. Some tensions starts appearing with Turkey - their NATO ally and 2nd largest NATO army. It is a big question now on Lebanon shelf oil extraction that Turkey and Israel were intended to develop together. Now if we take a look at the structure of CPI data, we see that in recent 2-3 months the energy component was decreasing. Something tells me that next month this trend will change:
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Meantime, inflationary expectations are raising. Here is United States Michigan 1-Year Inflation Expectations:
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Major UK banks have begun preparing for the possible introduction of Western sanctions against China and have provided the British and American governments with a draft action plan for such an eventuality. This was reported by Reuters with reference to Neil Willey, director of sanctions at the banking and financial association UK Finance. UK Finance organized fortnightly meetings of major British and foreign banks for several months to draw up the project, Willey said. He says the document includes sharing lessons learned from the imposition of Western sanctions, including on Russia, and discussing the consequences that any restrictions on China could entail. The “fun” is yet to come. And by the way, it is difficult to fully imagine the scale and consequences of the initiated disengagement, because it is not very comprehended by the mind. At least I find it difficult.

Israel-Palestine conflict is out of the economical scope and our primary object. The only thing that it is necessary to say - keep an eye on major players in region. Depending on what Iran, Turkey and S. Arabia will do they impact on the shape of the conflict. As the reasons of this confrontation as its consequences, of course, have a pronounced economic meaning.

Returning back to our primary topic of EUR/USD rate, it is difficult to find even single factor that could suggest reversal on the market. Political struggle in Europe is intensifying with far right parties come to power - Hungary, Slovakia, AfD in Germany, just to name some. Best countries in EU show big problems in economy. Now, with Israel war, the US will try to hang Ukraine financing on EU. Tough geopolitical situation should support demand for the US assets. As we hear talks about interest rates ceil from both, the US Dollar should keep status quo of more attractive currency. Besides, US rate still could be raised more, if we will see (I would say when we will see) another jump in inflation. From that standpoint we do not see any reasons to change our long-term view of weaker EUR and downside 0.9 target.

The turning point that we have to carefully watch for is - downside reversal of US Dollar with simultaneous growth of the interest rates. This combination will mean the break of the system.
 
Technicals
Monthly

October performance looks small by far. Market briefly stands under YPP, but it is early to speak on final breakout. Most intriguing moment here is a clash with MACDP line that comes close to current price level. It will be important as potential breakout as potential grabber, although fundamental background doesn't suggest it.
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Weekly

Weekly chart keeps bearish context. Technical bounce from 1.0430 area was very small, that suggests existing of bearish pressure. The bounce from weekly support is still possible, but in a light of recent events and unstoppable gold rally we should be ready for downside breakout on EUR as well:
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Daily

Here from technical point of view it is early to acknowledge of bearish continuation. Formally, trend remains bullish by MACD and market has not broken the lows. For example, it is possible Double Bottom pattern, and stronger upside bounce.

But few signs tells that it might not be the case. First is, downside action is strong and we have reversal session:
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Intraday

Second is, and more important - EUR has was not able to complete upside targets, leaved them behind and collapsed. This is the sign of intruding strong driving factor. On a way down price has dropped all support levels, although it still keeps harmony of H&S pattern. Finally - it is a clear difference in the pace of upside and downside action. The former looks heavy while the latter is too fast for bullish reversal patterns. All these moments together suggest that H&S failure here is very probable.
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To keep pattern valid, EUR has to turn up immediately, right from the area where it stands now. Thus, it has to form something bullish on 1H chart. Potentially - reverse H&S pattern around 4H 5/8 support area. If nothing "bullish" will happen around - we should be ready for the challenge of the lows. Taking in consideration that weekly K-support area is almost broken as well, chances on appearing of some bullish pattern are not too high. We will see, but IMO Double Bottom appearing hardly happens.
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Morning guys,

So, today we take parallel view on EUR and GBP, so, that I even call the video as EUR&GBP analysis. Because they have absolutely the same patterns. Even the shape of MACD is the same...

Just to remind you - in weekend we've discussed EUR chances to proceed higher, and come to conclusion that it has to form something bullish around 1.05-1.0520 area to confirm, at least intention to go higher. Daily picture is also similar, so I use GBP charts this time, but you could watch for EUR as well. If market will not fail today - within nearest 1-2 sessions we also could keep an eye on possible bullish grabbers around.
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We've talked a lot about 4H chart reverse H&S pattern, and its weak moments - too slow upward action on head, too fast drop on the right arm. And decided to watch what will happen around its bottom. We've suggested that it could be the reverse H&S - and here it is:
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Now it is already in a final stage, price is moving to the bottom of the shoulder:
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So, here is few tips and tricks how we gonna use it. First is - keep an eye on both. Failure of the pattern on GBP, for example, means that EUR chances on success are phantom. Second - bulls now have to make a decision for position taking. Because this is best area from risk/reward point of view.

Finally, bears also could watch for it - its failure will trigger downside cascade and lead to the failure of big pattern as well. Personally I'm a bit skeptic on a big pattern, because it is too fast bearish action where it should not be. Fundamentals also are not supportive for sharp EUR reversal. If only some Middle East relief could trigger tactical pullback...
 
Morning everybody,

So, in general EUR confirms both our suggestions - first is, minor H&S is done, second - EUR has no more power for the big one. Now the price shape shows EUR weakness and chances on downside reversal are growing. On daily chart it seems that we're getting first signs of bearish dynamic pressure as MACD goes up, while price action is not and stuck in the range of the reversal bar. Thus, in current situation I wouldn't be surprised if we get something like this soon:
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On 4H chart minor H&S has done pretty well. Those who keep long positions here now have to decide what to do next - either to out or to risk and try to keep it until 1.0640 XOP, hoping on some external supportive factor:
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On 1H chart market mostly has completed OP of the minor pattern. But take a look that price action is too choppy and it is too long way to XOP:
eur_1h_18_10_23.png


If you take a look at GBP - there situation is even worse, minor H&S has not started the action and turned to triangle, which is a bearish sign:
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Taking both pics together, I wouldn't consider right now any long positions as on EUR as on GBP, at least by technical reasons.
 
Morning everybody,

So, EUR indeed has shown weakness yesterday, as we've suggested. But this doesn't look surprising when long-term US yields are already above 5% level, mortgages are above 8%. Thus, we suggest that downside action now looks more probable than any upside performance. On daily chart major XOP target stands around 1.012, but there are few other ones, such as butterfly extensions, intraday downside AB-CD's that we could use as closer objective points:
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On 4H chart it might seem that EUR is quite ready for upside AB-CD action, to complete big H&S pattern. But here is important nuance. Yesterday, EUR has formed bearish reversal swing and cancelled minor 1H H&S pattern, including its AB-CD pattern. This is "wrong" performance for any bullish scenario. That's why we suggest that downside action now is more probable. Here you could use different downside targets - AB-CD, minor butterfly, based on "BC" leg etc.
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On 1H chart, inability of the market to move higher and very choppy action that absolutely doesn't correspond to idea of bullish reversal and upside action makes us think that it is possible to consider short entry from ~1.0550-1.0566 area, any level that we have here as they are too close to each other. Hopefully there will be no external factor that once again breaks the technical picture...
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Morning everybody,

So, just we've planned everything on the morning - later angry J. Powell has come and messed. Now the entry process on the markets become very difficult, due to big amount of different events and investors scare and worrying on US debt, war conflicts etc. Markets volatility is raising across the board.

So, despite recent JPow spike - overall context remains the same. With 10-year yields hit 5%, now JP Morgan's 7% promise doesn't look funny any more. EUR performance has no signs of bullish reversal and we still suggest that this is retracement. So, downside continuation looks more probable. So, we keep as idea of bearish dynamic pressure here, that should show itself soon as potential butterfly pattern:
eur_d_20_10_23.png


On 4H chart the scenario that we thought not very probable, actually has happened thanks to J. Powell. Market has completed upside AB-CD pattern and formed "222" Sell. On GBP by the way, reaction is much smaller and it looks more bearish. So, if you like GBP more - you could trade it.
eur_4h_20_10_23.png


Now EUR stands in some flag consolidation. So decision for entry is not simple today. In fact, you could wait for more bearish signs and make decision on entry on next week. Besides, today's Friday. Or, if you would like to try - it is possible to take another attempt of short entry, based on most recent downside swing.
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