Sive Morten
Special Consultant to the FPA
- Messages
- 18,659
Fundamentals
This week EUR was driven by economical and technical factors and it has made price behavior more predictable. Market has hit all our targets. In general, long-term picture has not changed and major factors for EUR price action was short-term. The major one was EU/UK Brexit negotiations and rising concern on Italy national debt, of course. Previously we've mentioned that so called "Irish" border issue is a cornerstone of all Brexit problems. Now we hear the same said by politicians.
As Reuters reports - The euro recovered from one-week lows against the U.S. dollar on Friday as investors took profits on bets against the currency, after it was burdened this week by concerns about Italy’s spending proposals and Britain’s plans to exit the European Union.
The single currency had dropped after the European Commission on Thursday sent Rome a letter calling a draft budget an “unprecedented” breach of EU fiscal rules, the first step of a procedure that could end with Brussels rejecting the budget and fining Italy.
The failure to reach a deal for Britain to exit the EU has also weighed on the euro and the British pound.
EU negotiator Michel Barnier said a Brexit deal was 90 percent done, but also warned that failure to resolve the Irish border question could derail any agreement.
It has been “quite a negative week for the euro, and I would say (it’s) drifting lower primarily because we’re no closer on Brexit than when we were at the start of the week,” said Greg Anderson, global head of foreign exchange strategy for BMO Capital Markets in New York.
Closing out profitable trades, however, provided some support for the euro on Friday.
“The market has added to shorts considerably during the week and so I’m not surprised that the down move ended today,” said Anderson, noting that traders are “taking profit on a short that’s worked for them.”
Next week we have three major events. Bank of Canada rate decision, ECB meeting and US GDP 3Q preliminary report. All this stuff takes 5 stars of importance and could shake markets rather well.
Speaking on Canada, chances that rate will be raised now looks better, mostly due Crude Oil price perspectives. You probably heard about Saudi Arabia turmoil with killed journalist and other stuff. Taking a wider picture, I see big political processes under cover of this event, which are promised to bring big problems to Saudi Arabia. Despite how situation will develop - either on hard way or soft one, any turmoil around oil kings will keep market in tension, which support demand on Crude oil. High price of major Canada export commodity, promised to support inflation, although now it stands at a bit lower levels that it was anticipated. That's why I think that rate has more chances to be increased, rather than kept intact.
Reuters suggests mostly the same - the data is seen as unlikely to stop the Bank of Canada from raising interest rates again next week, though the inflation miss may make the central bank less likely to take a more hawkish view when doing so.
“After the last meeting they discussed taking the word ‘gradual’ out of their communications and this cements ‘gradual’ will remain in communications,” Anderson said.
On ECB we do not expect any rate change, but what Draghi will say on EU economy perspective is interesting. Mostly all attention will twist around mid 2019 assessment, because now this is main term, pointed by ECB, when first rate change is possible. Any hints on adjustments of this term could trigger strong action on EUR. But, I suspect with Italy turmoil on the back - M. Draghi will keep everything intact. IMO this is most probable scenario.
US GDP is expected to be at 3,3% YoY basis, and based on the data that we've got in recent three months, this level looks achievable. Our regression GDP model shows that 70% of GDP value depends on Retail Sales data, which was good, on average. More eyes will be on PCE inflation, which expected to be at 2.1%.
COT Report
Despite strong rebound on Friday - overall sentiment doesn't look bullish on EUR. So, indeed it could be some profit taking. Net short position is risen. Although open interest has decreased, speculators have closed more longs than shorts. Closing of the shorts indeed confirms idea of profit taking, but, long closing gives warning hint that anticipation of EUR growth is phantom.
We rare take a look at hedgers, but this time it makes sense to do this. Take a look hedgers simultaneously have closed shorts and open longs - they prepare for EUR drop. Hedgers take position in opposite direction to anticipated movement of the currency.
Source: CFTC.gov
Charting by Investing.com
So, sentiment is not quite supportive for further EUR growth. Maybe due careful attitude to coming ECB meeting and anticipation of flat comments. We should be careful with taking any long position on EUR nowadays.
Technicals
Monthly
Well, just I've decided to take a rest a bit and - look at it, what an activity on the FX forum thread. Great researches and updates, thanks to Stag and Deltoid.
As on previous week, we do not have big changes on technical side of long-term charts by far. Trading range was narrow - August range holds action of September and October.
Here I just want to share with you a single observation that lightly disturbs me. EUR - hangs upon 1.14-1.15 support area. After strong drop and spike down - no meaningful upside action has followed. This is not good sign for bulls. It's already 5 months of laying upon this area. As longer EUR will stand here as greater chances on downside breakout will be.
This is indirect sign of weakness, when market can't jump out from strong support area. It means that strong level could support price from collapse but its effort is not sufficient to start bullish action. Day by day buyers will be washed out around this level and EUR could break it, if nothing will change. So, let's keep this issue in mind. It is not vital by far, but still first warning signs already exist.
On monthly chart 1.14-1.15 area is strong and very important support, because it includes YPP. Since our fundamental background supports dollar strength within a year or so - downside breakout should happen sooner or later. The fact that EUR has turned down precisely from YPR1 area tells that recent 1.05-1.26 action was an upside retracement within long-term bear trend. And YPP break could become another vital confirmation of this scenario.
In general 1.14-1.15 is important not just because of YPP. Take a look - this is upper border of former 1.05-1.14 consolidation. If price will drop back inside it - it will open road to the bottom of 1.05 area. Also this is monthly 50% support area. Price has problems with breaking borders of any consolidation, but it has no barriers inside and could freely move from up to bottom.
Weekly
Weekly picture has not changed significantly. EUR keeps our major weekly support and has formed tweezers bottom this week. This is short-term bullish sign. Price also was able to hold above MPS1. This lets us keep
bullish scenario intact by far. It will be valid until market stands above 1.1450 lows.
Still, taking in consideration negative CFTC data, I would focus only on some short-term upside targets, just within a single week, without dreaming on 1.20 by far. So, I keep here the picture of our AB=CD pattern, but overall situation makes me have some doubts that this action indeed will happen.
Daily
Still, guys, even with doubts on large weekly AB-CD - we have good patterns to be busy the whole next week on daily chart. There are two of them. First one is perfect bullish engulfing, which suggests AB=CD action on intraday charts, and it will the first one that we will deal with.
Second is, as I said on Friday - Double Bottom. Although I would prefer to see W&R of previous lows, but I'm not upset too much with its absence. Potentially, this pattern suggests action to 1.18 K-resistance area. There will be big events on coming week, 400 pips is much for EUR, but, who knows...
Anyway, we start with engulfing pattern and then it will be clear what to do with Double Bottom.
Intraday
First of all, we've got B&B "Sell" setup that I've mentioned on Friday on 4H chart. Since our short-term context is bullish, we do not call you to trade it (although it is possible as well), but existence of B&B "Sell" hints on retracement down, that we need to catch for long entry:
Here is what we're gonna do on Monday. On upside action EUR has completed XOP. It means that market stands at 4H Agreement resistance, which, as we've said, good foundation for B&B "Sell". B&B suggests drop to 5/8 support of 1.1470. In general, this action agrees with idea of daily engulfing pattern.
Still, as you can see, here we have strong K-support and Agreement area around 1.1490. And retracement theoretically could finish there. That's why better way is to split your position in two parts. Take first half at OP around 1.1490 and, if market will drop more - second half at XOP and Agreement with 1.1470.
BTW, 4H B&B could be triggered by 1H DRPO "Sell"... but this is very short-term scale already... for those who thinks about B&B trading... Good luck.
Conclusion:
Despite the fact that EUR keeps bullish picture by far, we have to acknowledge appearing new risk factors that could turn equilibrium later to bears again. They are non supportive short-term sentiment, suspicious silence on monthly chart and fundamental EU problems.
Next week we mostly will focus on trading short-term daily patterns that we have.
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.
This week EUR was driven by economical and technical factors and it has made price behavior more predictable. Market has hit all our targets. In general, long-term picture has not changed and major factors for EUR price action was short-term. The major one was EU/UK Brexit negotiations and rising concern on Italy national debt, of course. Previously we've mentioned that so called "Irish" border issue is a cornerstone of all Brexit problems. Now we hear the same said by politicians.
As Reuters reports - The euro recovered from one-week lows against the U.S. dollar on Friday as investors took profits on bets against the currency, after it was burdened this week by concerns about Italy’s spending proposals and Britain’s plans to exit the European Union.
The single currency had dropped after the European Commission on Thursday sent Rome a letter calling a draft budget an “unprecedented” breach of EU fiscal rules, the first step of a procedure that could end with Brussels rejecting the budget and fining Italy.
The failure to reach a deal for Britain to exit the EU has also weighed on the euro and the British pound.
EU negotiator Michel Barnier said a Brexit deal was 90 percent done, but also warned that failure to resolve the Irish border question could derail any agreement.
It has been “quite a negative week for the euro, and I would say (it’s) drifting lower primarily because we’re no closer on Brexit than when we were at the start of the week,” said Greg Anderson, global head of foreign exchange strategy for BMO Capital Markets in New York.
Closing out profitable trades, however, provided some support for the euro on Friday.
“The market has added to shorts considerably during the week and so I’m not surprised that the down move ended today,” said Anderson, noting that traders are “taking profit on a short that’s worked for them.”
Next week we have three major events. Bank of Canada rate decision, ECB meeting and US GDP 3Q preliminary report. All this stuff takes 5 stars of importance and could shake markets rather well.
Speaking on Canada, chances that rate will be raised now looks better, mostly due Crude Oil price perspectives. You probably heard about Saudi Arabia turmoil with killed journalist and other stuff. Taking a wider picture, I see big political processes under cover of this event, which are promised to bring big problems to Saudi Arabia. Despite how situation will develop - either on hard way or soft one, any turmoil around oil kings will keep market in tension, which support demand on Crude oil. High price of major Canada export commodity, promised to support inflation, although now it stands at a bit lower levels that it was anticipated. That's why I think that rate has more chances to be increased, rather than kept intact.
Reuters suggests mostly the same - the data is seen as unlikely to stop the Bank of Canada from raising interest rates again next week, though the inflation miss may make the central bank less likely to take a more hawkish view when doing so.
“After the last meeting they discussed taking the word ‘gradual’ out of their communications and this cements ‘gradual’ will remain in communications,” Anderson said.
On ECB we do not expect any rate change, but what Draghi will say on EU economy perspective is interesting. Mostly all attention will twist around mid 2019 assessment, because now this is main term, pointed by ECB, when first rate change is possible. Any hints on adjustments of this term could trigger strong action on EUR. But, I suspect with Italy turmoil on the back - M. Draghi will keep everything intact. IMO this is most probable scenario.
US GDP is expected to be at 3,3% YoY basis, and based on the data that we've got in recent three months, this level looks achievable. Our regression GDP model shows that 70% of GDP value depends on Retail Sales data, which was good, on average. More eyes will be on PCE inflation, which expected to be at 2.1%.
COT Report
Despite strong rebound on Friday - overall sentiment doesn't look bullish on EUR. So, indeed it could be some profit taking. Net short position is risen. Although open interest has decreased, speculators have closed more longs than shorts. Closing of the shorts indeed confirms idea of profit taking, but, long closing gives warning hint that anticipation of EUR growth is phantom.
We rare take a look at hedgers, but this time it makes sense to do this. Take a look hedgers simultaneously have closed shorts and open longs - they prepare for EUR drop. Hedgers take position in opposite direction to anticipated movement of the currency.
Source: CFTC.gov
Charting by Investing.com
So, sentiment is not quite supportive for further EUR growth. Maybe due careful attitude to coming ECB meeting and anticipation of flat comments. We should be careful with taking any long position on EUR nowadays.
Technicals
Monthly
Well, just I've decided to take a rest a bit and - look at it, what an activity on the FX forum thread. Great researches and updates, thanks to Stag and Deltoid.
As on previous week, we do not have big changes on technical side of long-term charts by far. Trading range was narrow - August range holds action of September and October.
Here I just want to share with you a single observation that lightly disturbs me. EUR - hangs upon 1.14-1.15 support area. After strong drop and spike down - no meaningful upside action has followed. This is not good sign for bulls. It's already 5 months of laying upon this area. As longer EUR will stand here as greater chances on downside breakout will be.
This is indirect sign of weakness, when market can't jump out from strong support area. It means that strong level could support price from collapse but its effort is not sufficient to start bullish action. Day by day buyers will be washed out around this level and EUR could break it, if nothing will change. So, let's keep this issue in mind. It is not vital by far, but still first warning signs already exist.
On monthly chart 1.14-1.15 area is strong and very important support, because it includes YPP. Since our fundamental background supports dollar strength within a year or so - downside breakout should happen sooner or later. The fact that EUR has turned down precisely from YPR1 area tells that recent 1.05-1.26 action was an upside retracement within long-term bear trend. And YPP break could become another vital confirmation of this scenario.
In general 1.14-1.15 is important not just because of YPP. Take a look - this is upper border of former 1.05-1.14 consolidation. If price will drop back inside it - it will open road to the bottom of 1.05 area. Also this is monthly 50% support area. Price has problems with breaking borders of any consolidation, but it has no barriers inside and could freely move from up to bottom.
Weekly
Weekly picture has not changed significantly. EUR keeps our major weekly support and has formed tweezers bottom this week. This is short-term bullish sign. Price also was able to hold above MPS1. This lets us keep
bullish scenario intact by far. It will be valid until market stands above 1.1450 lows.
Still, taking in consideration negative CFTC data, I would focus only on some short-term upside targets, just within a single week, without dreaming on 1.20 by far. So, I keep here the picture of our AB=CD pattern, but overall situation makes me have some doubts that this action indeed will happen.
Daily
Still, guys, even with doubts on large weekly AB-CD - we have good patterns to be busy the whole next week on daily chart. There are two of them. First one is perfect bullish engulfing, which suggests AB=CD action on intraday charts, and it will the first one that we will deal with.
Second is, as I said on Friday - Double Bottom. Although I would prefer to see W&R of previous lows, but I'm not upset too much with its absence. Potentially, this pattern suggests action to 1.18 K-resistance area. There will be big events on coming week, 400 pips is much for EUR, but, who knows...
Anyway, we start with engulfing pattern and then it will be clear what to do with Double Bottom.
Intraday
First of all, we've got B&B "Sell" setup that I've mentioned on Friday on 4H chart. Since our short-term context is bullish, we do not call you to trade it (although it is possible as well), but existence of B&B "Sell" hints on retracement down, that we need to catch for long entry:
Here is what we're gonna do on Monday. On upside action EUR has completed XOP. It means that market stands at 4H Agreement resistance, which, as we've said, good foundation for B&B "Sell". B&B suggests drop to 5/8 support of 1.1470. In general, this action agrees with idea of daily engulfing pattern.
Still, as you can see, here we have strong K-support and Agreement area around 1.1490. And retracement theoretically could finish there. That's why better way is to split your position in two parts. Take first half at OP around 1.1490 and, if market will drop more - second half at XOP and Agreement with 1.1470.
BTW, 4H B&B could be triggered by 1H DRPO "Sell"... but this is very short-term scale already... for those who thinks about B&B trading... Good luck.
Conclusion:
Despite the fact that EUR keeps bullish picture by far, we have to acknowledge appearing new risk factors that could turn equilibrium later to bears again. They are non supportive short-term sentiment, suspicious silence on monthly chart and fundamental EU problems.
Next week we mostly will focus on trading short-term daily patterns that we have.
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.
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