Forex FOREX PRO WEEKLY, October 18 - 22, 2021

Sive Morten

Special Consultant to the FPA
Messages
15,289
Fundamentals

This week we do not see big moves on FX market, except maybe JPY that come under pressure due political situation and hydrocarbons price rising. But, on EUR, in particular, action was muted. Still I would call this week as furious because of statistics that we've got and because of earnings reports on stock market. Earnings are important not only to shareholders but taking together they provide important information on economy conditions. For example, this week is a time for banks earnings reports. And all of them shows multiple increase in revenues and profit. This, in turn, has triggered risk aversion and demand for riskier assets. Expectations of rate hike was moved to back stage, at least temporary. But despite recent euphoria I'm not share the view that this is supportive to dollar rivals. And gold performance shows it clearly. Despite of short-term enthusiasm, overall situation shows that inflation is not temporal, rate could be increased earlier and more aggressively, which is more supportive to the dollar in longer-term. So, it seems that relief that we see now is short-term, and soon investors start took into things.

Market overview

The dollar held near a one-year high versus major peers on Wednesday, amid rising expectations the Federal Reserve will announce a tapering of stimulus next month, potentially following with interest rate hikes by mid-2022. Three Fed policymakers said overnight that the U.S. economy has healed enough to begin to scale back the central bank's asset-purchase programme, including Vice Chair Richard Clarida.

Money markets now price about a 50-50 chance of a rate increase by July. A surge in energy prices has fuelled inflation concerns and stoked bets that the Fed may need to move faster to normalise policy than officials had projected, sending two-year Treasury yields to their highest in more than 18 months overnight.

The dollar fell from its one-year high later in the session, as longer-dated Treasury yields dipped after U.S. inflation data showed prices rose solidly last month, while the minutes from the Federal Reserve's September meeting confirm tapering will begin "soon."

The consumer price index rose 0.4% last month versus a 0.3% rise anticipated by economists polled by Reuters. Year-over-year, the CPI increased 5.4%, up from 5.3% in August. Excluding the volatile food and energy components, the so-called core CPI climbed 0.2% last month versus 0.1% in August.

Yields on shorter-term Treasuries, which typically move in tandem with interest rate expectations, increased after the report, while longer-dated yields dipped, indicating the market is still not pricing in a sustained period of inflation. The gap between the two- and 10-year Treasury notes closed to its narrowest in two weeks after having widened to a 3-1/2-month high on Friday.

"The market is now seeing a major pivot here as far as how inflation is showing more signs of being persistent than transitory, and that's likely to force the Fed's hand to deliver a rate hike well in advance of what people were anticipating," said Edward Moya, senior market analyst at Oanda. The market had been pricing in a rate hike for December 2022, but now it is eyeing September of that year. The dollar has had a significant move higher and it's been ripe for a pullback here, and I think this is going to likely trigger that," Moya said.

The minutes from the Fed's September policy meeting signaled that the central bankers could start tapering their crisis-era support for the economy in mid-November, though they remain divided over how much of a threat high inflation poses and how soon they may need to raise interest rates in response.

"Tapering is baked in the cake," said Kathy Bostjancic, chief U.S. financial economist at Oxford Economics. "The bigger question is will the inflation dynamics lead them to be more aggressive and quicker in raising interest rates? So interest liftoff now becomes the big focus for the markets, and that's where we're really seeing price action along the yield curve," she said.

The dollar was slightly lower on Thursday in choppy trading, having erased most of its early session losses, as investors bet the Federal Reserve would begin tapering its asset purchases next month and attention turned to the timing of interest rate hikes. The greenback had rallied since early September on expectations the U.S. central bank would tighten monetary policy more quickly than previously expected amid an improving economy and surging inflation.

But the dollar reversed course on Wednesday, even after the minutes of the Fed's Sept. 21-22 policy meeting confirmed the tapering of stimulus is likely to start this year and data showed that pricing pressures were still hitting U.S. consumers.

"I think what we've seen over the last day or two is a little bit of profit-taking," said Shaun Osborne, chief FX strategist at Scotia Capital. I don't think this is, at the moment, anything close to a significant reversal in the dollar trend, and in fact, I think what we've seen today might be a sign that the corrective rebound that we've seen over the past day or two has perhaps run its course," he said.

The market is expecting that the Fed will begin tapering its asset purchases as early as next month, and that the wind-down of the massive bond-buying program will happen fairly quickly, Osborne added. That seems to be advancing to some extent towards when and how quickly the Fed is going to raise interest rates, so that's another potential positive for the dollar," he said.

A return in risk appetite may also have dented demand for the safe-haven greenback, with U.S. equity markets notching solid gains on upbeat earnings, said Vassili Serebriakov, FX and macro strategist at UBS.

Data on Thursday showed the number of Americans filing new claims for unemployment benefits fell sharply last week to the lowest level since mid-March 2020.

In another report, the Labor Department said its producer price index for final demand rose, but the increase was less than economists polled by Reuters expected, both on a monthly and a year-on-year basis.

The dollar headed for its first weekly decline versus major peers since the start of last month, falling back from a one-year high as traders turned their attention to when the U.S. Federal Reserve will start raising interest rates. Improved market sentiment, which has lifted global stocks, commodity prices and bond yields, is also weighing on the safe-haven dollar.

"We end the week with risk flying," Chris Weston, head of research at brokerage Pepperstone in Melbourne, wrote in a client note. "Equities are going up hard, and the JPY has no place as a hedge," because it would just drag on overall portfolio performance, Weston said.

The dollar index is "looking a little shaky, but any slippage should prove modest" with Fed tapering now imminent, Westpac strategists wrote in a client note. Any dips in the index should be limited to 93.70, they said.

U.S. retail sales unexpectedly rose in September in part as more expensive motor vehicles boosted receipts at auto dealerships, but there are fears that supply constraints could disrupt the holiday shopping season amid continued shortages of goods.

Given the partial lift from inflation, the surprise increase in retail sales reported by the Commerce Department on Friday did little to change economists' expectations that consumer spending probably stalled in the third quarter. Inflation-adjusted sales, which rose moderately last month, are what is included in the calculation of gross domestic product.

"The solid retail sales report reflects both consumer resilience and escalating prices," said Sal Guatieri, a senior economist at BMO Capital Markets in Toronto. "The main concern now is that supply-chain disruptions and microchip shortages appear to be spreading, limiting selection and tamping down goods demand."

Retail sales rose 0.7% last month. Data for August was revised higher to show retail sales increasing 0.9% instead of 0.7% as previously reported. Economists polled by Reuters had forecast retail sales would slip 0.2%. Consumer prices increased 0.4% on a monthly basis in September suggesting the so-called real retail sales rose 0.3% last month.

A survey from the University of Michigan on Friday showed consumer sentiment slipped further in early October because of the endless pandemic and the political wrangling in Washington over raising the federal government debt limit as well as more spending for infrastructure and social programs.

"Strength this month and next could be a result of well-telegraphed supply shortages leading consumers to begin holiday-season shopping earlier than usual," said Veronica Clark, an economist at Citigroup in New York. "This effect, as well as potentially binding supply limitations, could subsequently result in a drop in retail sales in November and December."

"We have seen record imports this year and are confident that collectively we can work through these challenges to ensure a healthy and happy holiday season," said Matthew Shay, president of the National Retail Federation in Washington.

Economists believe consumer spending, which accounts for more than two-thirds of U.S. economic activity, was flat in the third quarter after a robust 12.0% annualized growth pace in the April-June period. Consumer spending growth estimates for the third quarter are mostly below a 2.0% rate.

That also suggests GDP growth braked sharply in the July-September quarter from the second-quarter's 6.7% pace. Growth estimates for the third quarter range from as low as a 1.3% rate to as high as a 4.0% pace. Some of the anticipated slowdown in growth reflects the fading stimulus from trillions of dollars in pandemic relief from the government.

"Inflation will take a major bite out of third-quarter real consumer spending growth," said Shannon Seery, an economist for Wells Fargo in Charlotte, North Carolina. "The main challenge for the fourth quarter will be finding everything on the shopping list as the supply chain crisis worsens."

U.S. stocks rose on Friday and the Dow scored its biggest weekly percentage gain since June, as Goldman Sachs rounded out a week of strong quarterly earnings for the big banks. Results from big financial institutions provided a strong start to third-quarter U.S. earnings, though investors will still watch in coming weeks for signs of impacts from supply chain disruptions and higher costs, especially for energy.

Forecasts now call for third-quarter S&P 500 earnings to show a 32% rise from a year ago. The latest forecast, based on results from 41 S&P 500 companies and estimates for the rest, is up from 29.4% at the start of October, according to IBES data from Refinitiv.

"We're starting to get into an earnings-driven rally here that I hope lasts. We'll really see the results in the next couple of weeks as a great bulk of companies in all sectors report," said Peter Tuz, president of Chase Investment Counsel in Charlottesville, Virginia.

Alcoa Corp shares surged 15.2% after the aluminum producer reported stronger-than-expected results, announced a $500 million buyback program and initiated a quarterly cash dividend.

Data published last month showed that UK CPI inflation had reached 3.2% in the twelve months to August, triggering an open letter from the Governor of the Bank of England to the Chancellor, explaining why inflation had moved more than a percentage point away from the target, and setting out the actions that the MPC would take in response. As Fathom Consulting chart shows, since the introduction of the CPI-based target in 2003, there had until then been just four separate occasions where inflation had overshot the target to this degree. The proximate cause had been either a spike in energy prices (in 2007 and in 2008-09), a sharp fall in sterling (2008-09 and 2017) or increases in the rate of VAT (2010-12). All three of these economic shocks tend to make UK households worse off, and can reasonably be expected to be self-limiting, requiring little or no monetary policy response.

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The current situation feels somewhat different, with a period of exceptionally loose monetary and fiscal policy meaning that UK households are sitting on pandemic savings worth some 10% of GDP. It is not obvious to us that the current UK inflation overshoot will prove to be temporary. The Bank of England’s new Chief Economist, Huw Pill, last week said that, in his view “the current strength of inflation looks set to prove more long lasting than originally anticipated”. Fathom saw a broadly evens chance that the pickup in UK inflation would prove to be sustained, by which they meant that it would not fall back to the 2.0% target of its own accord. If it does continue, Fathom believes it is far more likely that policymakers in the UK and elsewhere will ‘roll with it’, and accept a prolonged period of higher inflation, perhaps by raising inflation targets.

COT Report

Recent CFTC data shows nothing special for EUR. Open interest has dropped slightly as hedgers have closed positions in both directions. Speculators add more in both ways but changes also are minimal. As a result, net short position has slightly decreased:

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Source: cftc.gov, Charting by Investing.com


Next week to watch

#1 China GDP

From an Evergrande-induced property market crisis to power shortages halting production lines supplying Apple and Tesla, the world's no. 2 economy has plenty to worry about. A good gauge of the fallout comes with Monday's Q3 GDP figures and other keenly-watched data points, from factory production to retail sales.

Economists forecast China's economy grew 5.2% year-on-year, the weakest reading in a year, amid power rationing, persistent supply bottlenecks and soaring commodity prices, all as consumption languished amid sporadic COVID-19 flare-ups.

The real estate sector, a key growth driver, is reeling from rising defaults, with sales tumbling and construction slowing. Still, few expect the central bank to ride to the rescue, for fear of fomenting bubbles in debt and property prices. According to polls -China's growth seen slowing to 5.5% in 2022, modest policy easing expected, while the fall in China's $1.3 trln land sales to test local finances, economy.

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#2 Global PMI's releases

A year after coronavirus lockdowns dampened festive spirits, world leaders will be hoping supply disruption won't be the Grinch that stole Christmas. It may be more than two months away, yet panic buying of turkeys and festive goodies has begun amid supply chain chaos.

White House officials warn Americans may face higher prices and empty shelves this Christmas. The busy ports of Los Angeles and Long Beach are expanding operations to unload an estimated 500,000 containers waiting on cargo ships offshore.
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Britain has urged consumers to buy normally after containers carrying toys and electrical goods were diverted from its biggest port because it was full.

Friday's October flash purchasing managers indices (PMI) from Australia, Europe and elsewhere might illustrate supply chain pain. Germany business sentiment is already suffering.

So, as you could see from the text above - investors mostly ask for the same question as we do and make the same assumption on dollar performance. Just using of a common sense it is simple to understand that if national assets are rising in price explosively and Central Bank stands at the eve of rate rising it makes direct boosting impact on national currency. So, here I'm not share the view of UBS strategists above that rising bank earnings and other positive statistics decrease demand for the US dollar, just because it is a safe haven asset. Our opinion agrees with Scotia Capital position as they said:
"I think what we've seen over the last day or two is a little bit of profit-taking," said Shaun Osborne, chief FX strategist at Scotia Capital. I don't think this is, at the moment, anything close to a significant reversal in the dollar trend, and in fact, I think what we've seen today might be a sign that the corrective rebound that we've seen over the past day or two has perhaps run its course," he said.

The market is expecting that the Fed will begin tapering its asset purchases as early as next month, and that the wind-down of the massive bond-buying program will happen fairly quickly, Osborne added. That seems to be advancing to some extent towards when and how quickly the Fed is going to raise interest rates, so that's another potential positive for the dollar," he said.

Now there are more and more signs appear that inflation is not transitory. And it is no prize for guessing that if 20% Global GDP was printed in 1-2 years it should have some echo. The first market that gets the impact is commodities. Usually it shows the first reaction a long ahead of any CPI, PPI and PCE numbers which are lagging for 8-15 months behind it. Here is Commodity Research Bureau Index and take a look at its performance. Recent breaking news about gasoline in UK, natural gas in EU and crude oil prices are still sounding in media space. Alcoa reports multiple profit expansion for a long period. Inflation data hits the records month by month. Recall what we've said about UK above.


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Next subject is a cargo shipping. Take a look at Baltic Dry index that indicates intensity of of the shipping vessels. It hits unprecedented levels in this year, haven't seen since 2008 crisis and oil price jump in 2005-2009. It means that economy is boosting.



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All these things lead us to conclusion that Dollar stand at the edge of long term bullish reversal, as we call it "the smile". It might happen that it is already started. We do not share opinion that retail sales will drop it Nov-Dec. Mostly because of Black Friday, Thanksgiving and Christmas holidays. As a result, IVQ GDP should be closer to 3-4% instead of 1.5-1.8% as it is suggested by some analysts.
In short-term perspective we expect DXY downside reaction to strong weekly resistance level but with the data and information that we have now it might be smaller than it was suggested initially. Overall environment stands in favor of the US Dollar. So we should be careful to any bearish signs on the EUR as well.



Technicals
Monthly


Long term picture remains bearish. Market stands at important sentiment point - YPP and it is rather close to the breakout. It is difficult to call September as positive month to EUR. Trend remains bearish and market shows two bearish signs right in single month - confirms downside pennant breakout. Second - forms bearish reversal month in September. Despite that we could get some bounce in October as we've discussed, it seems that bearish saga on EUR is not over yet and could get continuation in Nov-Dec as we come closer to the first hawkish Fed step.

eur_m_18_10_21.png


Weekly

Picture has not changed since last week. We've got just inside week this time. Market still stands in an area of important and strong support. Some reaction should happen but it seems that background for it is melting and pullback could be shyer than it was suggested initially. As we've said supposedly, based on harmony here we could suggest a H&S - looking price action. It means that market could show 50% bounce to form potential right arm. Based on the EUR chart it should be somewhere to 1.20-1.21 area, but now it is more doubts appear on the upside potential.

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Daily

On daily chart it makes more sense to take a look at Dollar Index instead, as on EUR we have nothing special. If you remember we've discussed possible appearing of DRPO pattern. While on EUR we do not have it, but on DXY we do, at least Look-alike pattern as the thrust action on DXY is not as good as on EUR... DRPO minimal target here stands around 93-93.50 area, which is 50% support of the thrust. Right about this level Westpac analysts talked above. In EUR terms it means that action could be to 1.17-1.1750 area:
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Intraday

Since we do not have the same clear pattern on daily chart as on DXY, here we could try use the only shape that we have now - potential H&S pattern. It would be nice if we get harmonic shape and price forms right arm before upward action. But as we have DRPO on DXY, it could happen direct acceleration as well. Still lets hope that H&S will be formed...

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On 1H chart EUR hits our predefined resistance and stuck there but now is showing bullish signs, starting to form pennant and local bullish MACD divergence.
Most probable next step is jump to at least 1.1640 level that is potential neckline of H&S pattern. For example, minor butterfly here could be formed.
eur_1h_18_10_21.png


On higher time frames weekly and daily we intend to watch for bearish patterns due to analysis that we've made above. On intraday time frames, it is possible to follow this scenario differently. If you trade on 1H chart and lower - then it is possible to consider action just inside the triangle and make a bet on immediate upward action in a shape of butterfly. For this way it is enough to hide stop just under 1.1580 lows.
For position on H&S pattern the stop should be placed either below the head which seems to far now, or, at least below the lows of left arm, suggesting that pattern will be more or less harmonized. Alternatively - just wait when it will be formed and then make a decision on whether to trade it or not...
 

Sive Morten

Special Consultant to the FPA
Messages
15,289
Morning everybody,

Finally we see some action on EUR and could speak again about the potential patterns here. Technically everything looks perfect but a single tricky moment still exists around current situation. The point is DXY is forming DRPO while on EUR we prepare for B&B. We hope that both patterns will be completed somehow as EUR is just slightly greater than 50% of DXY. They are tightly related but still minor divergences are possible which gives the chance that B&B will be completed prior DRPO starts actively.
This is the specific of particular setup that now we have to control DXY performance and be aware of strong drops there. (For more details watch today's video).

Keeping this issue aside, technically EUR setup looks perfect. Market is coming to 1.1670 FIb level that is accompanied by daily Overbought and natural resistance of previous lows:
eur_d_19_10_21.png


Based on recent performance, our H&S has got the slope of the neckline and now price is coming to complete its target:
eur_4h_19_10_21.png


Our 1H pennant has turned to flag but this has not changed its feature as continuation pattern and market indeed is moving higher as we've suggested in weekly report. Now - around 1. 1670 we get Agreement, K-resistance area, natural resistance and daily overbought. Definitely this should be enough to trigger at least minor bounce.
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So if you still decide to take B&B trade - keep in mind DXY DRPO that could start at any moment. That's why - do not marry short position, take the nearest B&B target. And move stops to breakeven ASAP, keeping an eye on DXY performance.
 

Sive Morten

Special Consultant to the FPA
Messages
15,289
Greetings everybody,

So, downside swing has been triggered perfectly right at OP level on 4H chart, but today more tricky moments appear. First is, DXY DRPO is started. Downside action is not as strong by far, but anyway it provides support to the EUR and directly impact on our setup. Currently our stops already should be at breakeven and we have a headache what to do with position. I see three possible ways - close it, do nothing and 50/50.
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But this is only the half of the problem. On 4H chart we've got two bullish grabbers that suggest action above the top and agrees with DXY DRPO:
eur_4h_20_10_21.png


Correspondingly we have two possible scenarios. If grabbers work - we should get a kind of butterfly that completes together with DXY DRPO Pattern. Alternatively, drop below 1.1630 lows keeps current bearish setup valid.
eur_1h_20_10_21.png


That's your task now - what to do with the short position that we have. Second - scalp traders could also consider this grabbers setup. Chances on success are moderate, but setup has very small risk, just around 20 pips, so, it also could be considered...
 

Sive Morten

Special Consultant to the FPA
Messages
15,289
Morning everybody,

So, yesterday we've suggested the tricky thing but price action was even more cunning that we've thought, as EUR has erased 4H grabbers first and then still has turned up. Well these things happen sometimes...

Now the major thought is to be aside of any shorts by far. DXY DRPO "Sell" pattern stands in progress and still has downside potential, as 93.25 seems as minimum DRPO target:
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It means that EUR could climb slightly higher as well. 4H chart has XOP around 1.1733 and with DXY deeper drop, EUR could reach it. Besides, 1.1730 is also 50% level on EUR. Don't pay too much attention to the grabber that we have here...
eur_4h_21_10_21.png


On 1H chart we have another reason to not hurry up with going short. This is the price shape. EUR stubbornly stands under K-area and usually it means bullish sentiment. But context is not ready yet. We need to see something more definite, say triangle shape or possibility for upside butterfly pattern, so we should wait a bit for long entry as well.
eur_1h_21_10_21.png


That's being said, the idea now is stay aside from shorts and watch for more bullish signs on 1H chart.
 

Sive Morten

Special Consultant to the FPA
Messages
15,289
Morning everybody,

So while EUR is coiling around resistance, today it makes sense to take a look at ausie. On EUR I just want to add that bullish context looks very weak and personally I have no desire to buy EUR right now. As everybody understands that DXY stands just in a retracement - EUR shows and bit different reaction on upward and downward swings of US Dollar Index. As DXY is passed the half way to the target already - EUR stands at the same area. So, it could happen that EUR could turn down right from current level once DXY DRPO is completed.

Now to AUD... Last week on Friday we already mentioned this setup but now it is ready for trading. Price hits OP target and completes "222" Sell pattern that suggests at least 3/8 downside action. Right on top we have bearish reversal bar and engulfing pattern. Upward thrust of CD leg also looks good, so, next setup, after the drop we could get B&B "Buy".
Final moment here, on daily is the CD leg speed. Its a bit slower than AB. As DXY could turn up again - here, on AUD, downside action potentially also could be stronger...

AUD Daily Chart

On 1H chart now price shows common upward bounce and it seems that 0.7505-0.7510 Agreement resistance could be interesting in terms of short entry. At least overall picture looks interesting and maybe it could help those of you who consider AUD and trade it regularly...

AUD 1H chart

Here is some problems on the server, so I can't upload charts. Hopefully it will be fixed soon...
 
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