Forex FOREX PRO WEEKLY, September 04 - 08, 2023

Sive Morten

Special Consultant to the FPA
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Fundamentals

This week we've got a lot of statistics, although it mostly shows the same thing - situation is not becoming better. At the same time there were few loud geopolitical news that were not widely announced by media. Mostly it relates to China economy conditions, WHO statement on raising CV-19 cases and some others - all of them have direct relation and link with ongoing economical and political processes. Today we take a look at economical component and tomorrow in Gold report will take a look at other things.

Market Overview

The dollar extended its losses on Wednesday, as a slew of disappointing economic data raised the probability that the Federal Reserve will press the pause button in its efforts to rein in inflation. A barrage of economic indicators generally surprised to the downside, including private payrolls clocking a 52.3% monthly drop and second-quarter GDP revised significantly lower, to 1.7% on a quarterly annualized basis.

"It's pretty clear that the Fed's tightening is having its desired effect and that's being reflected in job creation and job opening numbers," said Oliver Pursche, senior vice president at Wealthspire Advisors, in New York. "For now, it's likely from a statistical perspective we won't see a recession this year."

Thomas Martin, senior portfolio manager at GLOBALT in Atlanta, agreed.

"(The data) fits with the idea that central banks have another data point that makes them more comfortable with holding steady rather than opting for further rate increases," Martin said.
Other data on Wednesday showed that the U.S. economy grew at a slightly less brisk pace than initially thought in the second quarter as businesses liquidated inventory. Inventory investment was sharply revised down to show it declining at a $1.8 billion pace instead of increasing at the previously reported $9.3 billion rate. Inventories were a small drag to GDP growth rather than adding 0.14 percentage point as estimated last month. There were also downward revisions to business spending on equipment and intellectual products.

The full impact of the U.S. Federal Reserve's interest rate hikes that began in March 2022 has still not been completely transmitted to the real economy, a former vice chairman of the central bank said on Friday. "I think there's a lot more to be seen," Alan Blinder, Fed vice chairman between 1994 and 1996.

"We're talking about historically average lags from monetary policy to inflation of two to three years. So against that, if it's three months or four months faster, that's not a big deal, and suggests there's still plenty to come," Blinder added.

The single currency was boosted by hotter-than-expected inflation in Germany, a day before highly anticipated consumer price data for the euro zone. German consumer prices increased by an annual 6.4% in August, down from a reading of 6.5% in July but above the 6.3% forecast in a poll of economists surveyed by Reuters.
Spain's consumer prices also rose to 2.6%, while core inflation fell to 6.1% from 6.2% in July.

The data "add to the uncertainty surrounding the near-term path of ECB policy. On balance, we think that the ECB will raise rates once more in this cycle," said Hubert de Barochez, markets economist at Capital Economics.

The dollar gained on Thursday and was on track for a monthly increase of 1.69% against a basket of currencies as U.S. data showed a mixed picture of the American economy, while the euro was weighed down by cautious comments by a leading European Central Bank hawk. U.S. consumer spending increased by the most in six months in July, with an 0.8% increase, but slowing inflation strengthened expectations that the Federal Reserve would keep interest rates unchanged next month.

Atlanta Fed President Raphael Bostic said on Thursday that monetary policy is already tight enough to bring inflation back down to 2% over a "reasonable" period.

The euro ebbed on Thursday after ECB rate-setter Isabel Schnabel - considered one of the most hawkish members at the ECB - said euro zone growth was weaker than predicted, but that does not necessarily void the need for more rate hikes.

“We've heard the most influential hawk on the Governing Council take on a much more cautious tone," said Michael Brown, analyst at Trader X. "I think the fact she is flagging downside risks to growth is putting some downside pressure on the euro."

European Central Bank policy maker Boris Vujcic said on Friday that weaker economic growth could bring euro zone inflation down faster, but a resilient labor market continues to produce quick wage growth, creating upside risk for prices.

ECB policy maker Francois Villeroy de Galhau also said that the ECB has a range of options at its next interest rate meeting, although interest rates are near their high point and there are signs underlying inflation has peaked.

Money markets are pricing in a 79% likelihood that the ECB will leave rates unchanged at its September meeting.

Data on Thursday showed that Euro zone inflation held steady this month, but underlying price growth fell as expected, a mixed picture that complicates life for the ECB as it weighs the merits of a pause in rate hikes in the face of a visible slowdown in growth. Meanwhile, German unemployment rose more than expected in August, showing the first cracks in what until now had been a very resilient labor market.

The August jobs report showed a still strong labor market, despite some signs of deterioration. Employers added 187,000 jobs in August, above expectations for a 170,000 gain. But data for July was revised lower to show 157,000 jobs added instead of the previously reported 187,000. The unemployment rate rose to 3.8%, above the expected 3.5%. Average hourly earnings rose by 4.3% for the year, below expectations for a 4.4% gain.

Fed funds futures traders are now pricing in a 93% likelihood that the Federal Reserve will leave rates unchanged at its September meeting and see only a 36% chance of a hike in November, according to the CME Group's FedWatch Tool.

The Labor Department's payrolls report showed the U.S. economy added more jobs than expected last month, but the rising unemployment and participation rates, along with a welcome cool-down in average hourly wage growth, solidified expectations that the Fed will let key interest rates stand this month.But what the Fed will do beyond September remains an open question.

Fed Bank of Cleveland President Loretta Mester said on Friday that the U.S. labor market remains strong despite signs of it coming into better balance, while noting future interest rate decisions will be made based on incoming data.

Other data on Friday showed that U.S. manufacturing contracted for a 10th straight month in August, but the pace of decline continued to slow, suggesting that the sector could be stabilizing at lower levels.

What to expect from the Fed and ECB in September

Based on information above it seems that markets do not expect any rate change as from ECB as from the Fed in September.

Indeed, in EU we have clear signs of acceleration of destructive processes in economy. Growth in lending to euro zone companies slowed again in July, adding to already mounting evidence that sharply higher interest rates are putting a brake on credit creation and economic growth.
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Economic data from PMI surveys in August showed the downturn in euro zone business activity deepened far more than thought this month in a broad-based fall across the region. Economic growth indicators are now pointing to a contraction in the third quarter, despite what could be a record-breaking tourism season. The weak data is intensifying debate over just how much more the ECB needs to do.
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The M3 measure of money supply, seen in the past as a good indicator of future economic expansion, shrank 0.4% in July. The latest monetary policy indicators are screaming about the imminent starfall: the eurozone M3 growth rate is in the red for the first time since 2010, the overall demand for loans is the lowest since the beginning of statistics (20 years).
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Bloomberg calculated that corporations will have to refinance about $ 400 billion of "cheap" debt until 2029:
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The number of bankruptcies in the EU is already growing. In some sectors, such as transportation, the impact of sanctions is even greater than the direct increase in ECB rates, but rates have played their role.

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To be fair, the level of uncertainty on what happens next - both within the major central banks and the investment world - is high and rising. Long-term visibility is unusually low. Specifically, I. Schnabel outlined puzzlement at why the inflation-adjusted risk-free rates priced by markets - real Overnight Index Swap yields from one to 10 years - had subsided again since the last ECB rate hike in July - back to where they were in February when ECB policy rates were just 2.5%.

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"This decline could counteract our efforts to bring inflation back to target in a timely manner," she concluded, insisting that just holding rates here higher for longer was not a substitute for even more restrictive policy if warranted. Also spotlighting a dispersion in private forecasters' inflation outlooks to show a 'fat right-hand tail' indicating a significant probability of inflation settling above 2.5%, she stressed the ECB could not commit to ending its campaign yet.

But although well off early August highs of around 2.7%, market inflation expectations contained in the euro 5-year, 5-year forward inflation swap remain stuck at 2.5% - up more than 10bp from the start of the year despite 125bp of ECB hikes. If it's deemed essential that these expectations - and by extension those of wage bargainers and companies pricing goods - are nailed back to 2%, then the verbal jousting is either going to have to go up a gear or the ECB will have to turn the screw again.

"For the hawks, the risk might be too high that a pause could actually transform into an actual full stop," wrote ING economist Carsten Brzeski. This is why we think the hawks will have their final say and push the ECB for a final dovish hike at the September meeting. A last one for the road, even if it remains a very close call."

Now to the Fed...

Although job statistics in the US is most politicized and manipulated, the Fed has more chances to keep rate flat in September, although we suggest that they will raise it later, in November and December, and this decision has non-economical reasons. We explain it tomorrow. Meantime, the US yields has grown to the crisis values of 2007-08, keeping the yield curve inversion at ultimate levels. In other words, there is another, additional factor that shows that the US economy is in an extremely unstable position:
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Recent data in the table below shows that the structural crisis continues, but it seems that its scale is growing. This should not happen in accordance with the theory, but only in a situation where the state does not interfere in the economy. And it actively intervenes, and on a fairly large scale. As a result, structural changes begin.

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A few more charts on employment, retail sales and personal consumption - pay attention to average weekly hours in the US. Nobody looks at this indicator, that's why it is less adjusted and shows the real picture. Take a look it is dropping since 2021 and indicates the deteriorating events in the US economy.

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Now few words on relationship among production, consumption, inflation and money supply. The drop in money supply is not unique to EU, we see the same huge M2 drop in the US as well. And the Fed is keep tightening it. The expanded money supply (M2 and M3) should correspond to the structure of the economy and, if its structure is more or less fixed, change along with it (if it is artificially inflated or underestimated, either inflation or deflation begins). Since there are no fundamental changes in prices, they were growing a year ago, but now the situation is more or less balanced (see below), with prices rising in the consumer sector and falling in the industrial sector, this picture of the money supply suggests that the EU economy is in the worst state of crisis in the last half century …

Apparently, consumer prices went up again. Taking into account the decrease in the money supply, this means, most likely, that producer costs are significantly increasing, on the scale of 10-15% per year. This is natural against the backdrop of falling demand, but there is deflation in the manufacturing sector. That is, the profitability of the business falls significantly (and how else to compensate for the increase in costs). The next stage is an increase in the number of bankruptcies and a further drop in aggregate demand, that is already under way.

Sometimes it is interesting to take a look at some specific indicators, that could much better present current economy conditions. For example, cars theft rate in the US:
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As we have shown in recent surveys, the surplus of household incomes created during the Covid-19 period (at the expense of the budget) has been practically consumed. This means that if you do not start a new campaign to give households budget money, then a serious drop in aggregate demand will begin. And this is extremely dangerous in an election year. Treat it as a transition topic to our tomorrow's Gold report....

Within the next two weeks we still will get the US inflation data that could change the market view. But for now ECB stands closer to the chance of rate change in September than the Fed, although in a long run, until the end 2023 the Fed will overcome ECB. For ECB September hike will become the last one (if it will happen at all), while Fed will raise rate one more time at least in November, although we think that in December as well, because we expect rising inflation in Sep-Oct.

Signs of destruction of EU economy are becoming evident - inflation is not slowing down, production sector is destroying, Sentiment at the lowest levels, unemployment is raising, consumption is falling - all these stuff we've shown above. Crisis is coming in real estate sector, especially in Germany, banking loans are slowing down, showing drop in economical activity. At the same time - inflationary expectations remain high and even rising. So, for the ECB this is last chance to raise the rate. Because now they still have interest policy momentum on the back, it will not become a big shock for markets as well. But in October and later - the destruction of economy will become too evident and much more pressure will be on ECB to hold rate.

The Fed, in turn, doesn't have so tight situation, at least based on statistics. Majority are sure that we're going to "Soft landing" and economy will grow, and we're getting out of the woods. They will despear very soon. Anyway, the Fed could let itself to not hurry up with the decision making and probably that is what they intend to do.

The schedule for September is as follows. Markets hope that the 13th September inflation reading would likely have to support the narrative of cooling consumer prices and resilient growth that has boosted stocks for most of the year. Investors will also scrutinise the message from Fed Chairman Jerome Powell after the central bank's Sept. 20 meeting to determine the likelihood of another hike this year.

Meanwhile, there's a risk of a fourth federal government shutdown in a decade if squabbling lawmakers cannot reach a deal by Sept. 30, when funding runs out with the end of the current fiscal year. On the data front, U.S. services sector activity is due Wednesday on coming week.

Take it all together, in nearest two weeks, EUR could keep some positive mood and even to show a bit higher pullback, but this will be the swan song. Because raising problems in economy and its evidence will start pressing on ECB to start cutting rates in the end of the year. This is the reason why we do not see an alternative to raising of USD in nearest 6-8 months. We also suggest that Fed will be tough on the interest rate due to political reasons that we will consider tomorrow. US Dollar could break the tendency even earlier, if we get strong US inflation data. In this case markets will be shocked, but we're waiting for this - as it is our primary scenario, although we are not sure that prices will be "in time" to get right into September report. More probable that we will see it only in October.
 
Technicals
Monthly

Long term charts show no big difference, price stands inside the August range by far. Monthly context, despite that trend is bullish, suggests downside reaction on strong resistance area and W&R. If ECB will scare to raise the rate once time more - downside action accelerates.

On monthly chart nearest support stands around YPP of 1.05 area.
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Weekly

Trend remains bearish. Upside bounce was very short lived. Long upper shadow points on short-term bearish sentiment. Investors are not sure with the next ECB hawkish step while recent NFP data is not obvious for the Fed pause as well. Meantime price is coming to support area of 1.0750 level and trendline. Existence of divergence suggests that EUR even could try to challenge 1.07 lows.
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Daily

Through the whole previous week we were considering all tricks around current situation on EUR and recent downside acceleration is not a surprise - we've warned about OP target and despite solid intraday rally, it holds significant downside risk. Now we see that reaching of OP is unavoidable. It stands precisely around 1.07 area, matching weekly support:
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Intraday

The same is about untouched XOP on 4H chart. We've warned about failure of H&S pattern and that has happened. At the same time, we have to say that long entry around 1.0840 support was not a trading mistake. Besides, we've got moderate bounce out from there that was quite enough to place breakeven stops:
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Now previous 1.0840 support becomes a resistance. Downside action is rather fast, so, if any pullback happens, hardly it will be higher than nearest two levels. Despite that we have multiple targets in 1.07-1.0735 area - all of them probably will be passed, because market is gravitating to the major one on the daily chart.
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Morning everybody,

So, the drop was not making us to wait for too long. On a background of raising US interest rates, it was just a question of time. Besides, situation with US Bonds liquidity is deteriorating. Existence of untouched major daily downside target is always a good assistance for bears. Market in most cases gravitates to complete it. Bulls now have nothing to do, at least until 1.07 OP will be reached:
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On 4H chart our XOP is almost done. Take a look that market shows no return back and stands stubbornly under the lows, suggesting that we get real downside breakout:
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As we've said in weekend, we have major target cluster around 1.07 area. Monday's pullback was small indeed, just to 1.0813 level. Here we see almost no reaction on local OP as well, suggesting solid bearish activity. XOP stands in 10 pips from daily major 1.07 target. Those who have shorts - could keep it. In general, until market has not reached daily OP, it is relatively safe to consider intraday short positions taking. For the bulls - it seems nothing to do by far.

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Morning everybody,

So, short-term journey is mostly done - market is at 1.07 target, which is actually a daily oversold as well. Now we need few sessions just to understand in what manner market's response will be. At the same time, mid term bearish context remains in tact and we do not expect any major reversal around this level, just temporal pause.
Recall that on weekly chart we have bearish divergence suggesting drop under 1.0622 area, and major support area is 1.0611. Thus, continuation could start within a week or so.
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On intraday charts, it seems that EUR should try to touch 1.0691 XOP target as well. Current flag consolidation is mostly a continuation pattern rather than reversal starting point. So, EUR will be flirting around 1.07 and we need to catch the pattern once it will be formed. In a scenario with XOP - minor reverse H&S might be formed, just as example.
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Thus, nothing to do by far either for bulls or for bears.
 
Morning everybody,

EUR shows light activity, so we need to make just two comments. First is, related to our short-term setup. Yesterday we've suggested that market could try to touch 1H XOP before any upside reaction starts. Now we have even most signs for that. First is - our flag is broken down. Second - we're getting clear signs of bearish dynamic pressure. MACD stands bullish while price action is not.
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Second moment concerns longer term perspective. The problem with 1.06-1.0620 lows that are, in fact the target of weekly divergence and first support level of wide K-area. EUR shows too weak reaction on OP. Maybe it comes later, but if everything remains the same - it will be the sign in favor of downside continuation. Thus, major upside reaction might happen not from OP but from 1.06 area. We will see. Some clarity should come after 1H XOP will be completed.

Another reason why I suspect this - EUR already stands under 1.0750 weekly Fib level, the next one is around 1.06. Daily OP by far triggers no reaction. So, "2+2" suggests raising chances on downside continuation... This is no surprise, it totally fits to our long-term view, but for us the technical side is also important.
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Morning everybody,

So, EUR has started lazy attempt of bounce out from our 1.0690-1.07 target area. Currently overall performance looks heavy and bearish. In fact, we have nothing but daily OP and oversold area. Price stands in between of weekly Fib levels - 1.0750 is passed already while 1.0611 is yet to come. This explains why the pullback so weak:
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Theoretically we could consider the bet on downside breakout, but not today. And the reason is - cross market analysis. First is, we've got daily bullish grabber on Gold. Second there are more to come as on DAX index as on S&P, potentially today. With such a background it makes sense to wait with decision making until the next week.

Here, on 4H chart we have two grabbers on the bottom. It means that 1.0750 area still could be touched.

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As we've suggested, we're getting the H&S indeed, or better to say two H&S, nested. Since we do not have yet either H&S in place or its failure - it is nothing to do by far. Once it will be formed, bulls could think about scalp long positions, while bears as usual will be watching for either its failure or completion.
For now it is nothing to do. Despite that have weaker type, 1.27 H&S, it would be better to not anticipate its failure, because of stocks and gold patterns.

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