Forex FOREX PRO WEEKLY, September 07 - 11, 2020

Sive Morten

Special Consultant to the FPA
Messages
13,815
Fundamentals

This report will be a bit different as we intend to focus more on coming events that promise to have decisive impact on the markets in near-term. Of course we take a look at factors of this week as well, as they also have made impact on the market. But now guys, things that stand ahead could drastically change the shape of the markets. There are a lot of stuff here. Coming ECB meeting, Fed in perspective of two weeks, rising of inflationary expectations, changing of EU/UK Brexit agreement rhetoric, some political issues and more.

News surfing

In general, dollar was on a positive mood through the whole week, although price action was gradual. Initially the dollar bounced off two-year lows on Wednesday as U.S. data pointed to a firm manufacturing activity, while the euro retreated from its highest levels since 2018 on profit-taking. Economic data published on Tuesday showed U.S. manufacturing activity accelerated to a nearly two-year high in August amid a surge in new orders, with the reading from the Institute for Supply Management highest level since November 2018.

Fed Governor Lael Brainard said the central bank would need to roll out more stimulus to help the economy overcome the coronavirus and fulfil the Fed’s new pledge.

Also supporting a rebound in the greenback, U.S. Treasury Secretary Steven Mnuchin said on Tuesday he would telephone House Speaker Nancy Pelosi about stalled coronavirus aid negotiations later in the day. White House chief of staff Mark Meadows said Senate Republicans are likely to bring up a targeted COVID-19 relief bill next week.

On Thursday as investors trimmed bets against the greenback and sold the euro on concerns that the European Central Bank was worried about its rise. After the euro touched $1.20 earlier this week, worries brewed in the market that the rise had come too fast and strong for the ECB’s liking. Fears have intensified after a Financial Times report confirming those concerns.

ECB policymakers reportedly warned that if the euro keeps appreciating it will weigh on exports, drag down prices and intensify pressure for more monetary stimulus.
That followed remarks on Tuesday from ECB chief economist Philip Lane, who said the exchange rate “does matter” for monetary policy.

“Overall the comments suggest that an immediate policy response from the ECB to help weaken the euro appears unlikely, and they will rely more on jawboning to dampen euro strength for now,” said Lee Hardman, currency analyst at MUFG.

“We may be approaching a phase where the ECB could curb the pace of euro appreciation, but...I have a serious doubt that this could send the euro materially lower,” said Vasileios Gkionakis, global head of FX strategy at Lombard Odier. “The dollar correction has yet to run its course,” he said.


Euro zone retail sales defied expectations of a rise in July and fell against June despite the lifting of COVID-19-related restrictions on economies, data showed on Thursday.

In general employment statistics was mixed. From the one side, jobless claims and unemployment rate fell, but from another one - NFP has not shown something outstanding and was slightly below the consensus. U.S. job growth slowed further in August as financial assistance from the government ran out, threatening the economy’s recovery from the COVID-19 recession.

Nonfarm payrolls increased by 1.371 million jobs last month after advancing 1.734 million in July, the Labor Department’s closely watched employment report showed on Friday. The unemployment rate fell to 8.4% from 10.2% in July. Economists polled by Reuters had forecast 1.4 million jobs added in August and the unemployment rate sliding to 9.8%.

Employment slowed and permanent job losses increased as programs to help businesses pay wages have lapsed or are on the verge of ending. Economists credited government largesse for the sharp rebound in economic activity after it nearly ground to a halt following the shuttering of businesses in mid-March.

“Dollar rallies are going to be faded unless there is a major surprise on the risk front,” said Mazen Issa, senior foreign exchange strategist at TD Securities. “The focus is going to be on what happens at the ECB meeting next week,” said Issa, explaining that if the euro’s recent rally is mentioned in the central bank’s official statement, it is likely to have a major impact on foreign exchange markets. If it is relegated to the Q&A session, markets will shrug it off.

The dollar’s downtrend will continue for at least another three months due to the outlook for the Fed’s monetary policy, a Reuters poll of analysts showed on Friday.

Recent economy data is actively used in President's run piking between Trump and Biden. Atmosphere becomes hotter. I do not want to put all this stuff here, but if you're interested - you could read it here and here. In two words speaking, unemployment dropping and rising women employment stand in favor of Trump, while weak NFP data and widening racial gap supports Biden position. Weak economy is always bad for the President and Biden tries to use it as much as he can.

Biden, who held a seven-percentage-point lead over Trump nationally in the Reuters/Ipsos poll this week, called on the president to bring congressional leaders together to restart stalled negotiations for another coronavirus economic relief package.

“Bottom line: Mr. President, do your job. Get off your golf course and out of your sand bunker. Call your leaders together and sit in the Oval Office. Make a deal,” the Democrat said.


Pound Sterling affairs

As we keep an eye on the cable, guys, I thought it might be interesting to take a look at this new inputs. Bank of England policymakers warned that Britain’s economy could suffer more damage than anticipated by the central bank last month.

The BoE said in August it expected Britain’s economy to recover to its pre-COVID-19 size by the end of next year, but Bank of England Deputy Governor Dave Ramsden told lawmakers economic output would permanently be about 1.5 percentage points lower than it would have been without the pandemic and another interest-rate setter, Gertjan Vlieghe, warned of “a material risk” it could take several years for Britain’s economy to return to full capacity.

BoE governor Andrew Bailey told the lawmakers in Wednesday’s closely watched online session that inflation might not be as weak as estimated by the BoE last month, citing evidence that many businesses had not passed on a value-added tax cut to customers. The BoE said last month negative rates are part of their monetary tool box but that it saw no immediate case to cut interests rates below zero.

The speeches “are likely to keep the debate on negative policy rates alive in the UK”, said Adam Cole, chief currency analyst at RBC.

Trade-weighted sterling meanwhile remained range-bound, and well below its pre-Brexit referendum level. The fact that the real effective exchange rate in sterling is much lower than that in sterling/dollar indicates the recent sterling strength came solely on external factors.

Sterling remains very weak in real effective terms which means it can only go down with the help of big short positions,” Juckes said.

It is not certain that Britain and the European Union will be able to seal a deal on their new relationship after Brexit, European Council President Charles Michel said on Friday, urging London to come clean on its state aid plans to unlock progress.

Speaking to Reuters and five other European news agencies, Michel said: “Sooner or later, the UK should clarify what they want. It’s not possible to leave the European club and at the same time keep all the benefits.” “The UK should clarify its position. For us, the level-playing field is key and essential,” he added. “It’s impossible that they diverge and there are no consequences, for example on tariffs.”

Michel spoke ahead of another negotiating round between the EU and Britain in London next week aimed at sealing a new partnership agreement from 2021 on everything from trade and security to cooperation on nuclear, transport and aviation.

After the summer brought no breakthroughs on the key outstanding issues - the level-playing field guarantees of fair competition, fisheries and dispute settling - the EU has grown increasingly wary that an agreement may not come together in time for the bloc to be able to ratify it by year-end.

The bloc’s Brexit negotiator, Michel Barnier, went to London last Sunday to tell his UK counterpart, David Frost, that Britain must move on state aid, or there will not be an agreement, according to EU diplomatic sources.

Michel said Barnier came back empty-handed ahead of what the bloc now says is a “strict deadline” of the end of October to seal a deal between the two sides.

A senior EU diplomat estimated chances for a deal against a rough split without an agreement to continue some of the current, close-knit cooperation, at 50-50. Michel refused to comment on that but said:“We have no certainty that we’ll reach a deal. I hope it will be possible - but not at all cost ... We defend European interests.”

Calling on Britain to clarify its future state aid plans - which the bloc worries London might use to support UK firms that would then gain an unfair advantage in offering their products on the EU’s cherished single market of 450 million people, Michel said: “It takes two to tango.”

COT Report
Once EUR has hit our major 1.20 monthly target and reached new all time highs of net long speculative position, the sentiment starts chilling. This week open interest has dropped and traders have closed some long positions. Hedgers did the same and increased possession in favor of more balanced price behavior, reducing the hedge against further upside action. At first glance changes are minimal but recall what have been said above by ECB representatives and do not forget that ECB meeting ahead... So, these changes could get more scale and EUR could show deeper retracement, which actually is suggested by technical picture.
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Source cftc.gov
Charting by Investing.com

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So guys, taking it all together we approximately understand the major drivers that should be in focus on coming few weeks and should become important topic in discussion by Central Banks. First of all - this is inflation. Last year, Tony Yates — senior advisor to Fathom — argued there are strong theoretical arguments for central banks raising inflation targets above 2%. In his words:

“the benefits of such a decisive move would far outweigh those of tinkering around the edges — for example by targeting a rate of 2% on average over time.”

Last week, at the Jackson Hole Symposium, the Fed announced a 2% average inflation targeting regime. In theory, the benefit of this approach comes from the commitment to keep rates low and policy loose for a long time following a crisis. Under such a regime, expected inflation is higher and, other things equal, real rates are lower, thus stimulating the economy. However, in reality, the benefits of such a policy are quickly eroded if individuals are not rational and do not see lower rates as a harbinger of higher inflation. Likewise, in a world in which a boom yields a persistent inflation overshoot, policymakers would be committing to driving inflation back below the long-term target (presumably through inducing a recession) where before the central bank needed only to have driven inflation back to 2%. Do policymakers really have an appetite to pursue such a policy?
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In the near term, US inflation appears to have turned a corner with April, the trough in the twelve-month growth rate, now firmly behind us. Lower rates in the second quarter were primarily driven by falling oil prices (due to short-term excess supply). Since then, the WTI price has recovered to around $40 per barrel suggesting that oil’s peak deflationary impact has now passed. Indeed, even in the event of a widespread second wave of the virus, it seems unlikely that we will see a repeat of the collapse in oil prices earlier this year. As a result, the odds that base effects cause a brief inflationary spike in the second quarter of next year are high.

Either way, investors seem to be increasingly gearing up for higher inflation with the yield curve steepening and inflation swaps levels not seen since the start of the year. Fathom’s view had always been that the fall in market-based inflation expectations was overly dramatic. Indeed, the combination of loose monetary policy, fiscal stimulus and a rapid expansion in the money supply mean that the upside risks to the inflation outlook are increasing.
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The Fed’s inflation target was not the only topic discussed at the symposium — the infamous ‘r-g’ gap was also on the agenda. Though simple in formulation, this accounting identity is the key to understanding government debt dynamics; the higher the real growth rate is relative to the real effective interest rate, the looser a government can be with its finances. This gap has, broadly speaking, been negative since the Global Financial Crisis, allowing many governments to sustainably run budget deficits.

As Fathom highlighted back in 2017, the gap tends to close over time, if not completely then at least partly. And, the gap can close from either side — on the g side, medium-term growth prospects appear grim due to weak productivity growth and a declining working-age population while on the r side, rising inflation could lead to higher rates. Speaking at last week’s symposium, the OECD’s chief economist expressed her concern that current fiscal policies are only sustainable provided r remains low and that this could lead to pressure on policymakers to keep it that way.

What tomorrow brings


There’s plenty for the ECB to chew over at its meeting on Thursday. The euro hit $1.20 for the first time since 2018 - not a big deal if that reflects optimism about the future, something that may be reinforced when EU finance ministers meet in coming days to discuss implementing their 750 bln euro recovery fund.

But on a trade-weighted basis, the euro is near six-year highs, weighing on prices. Inflation turned negative in August for the first time since 2016 - a red flag for an ECB charged with keeping it near 2%.

Aggressive stimulus due to the COVID-19 shock buys time and no major action is expected. Yet the deflation alarm and a firm euro suggest it won’t be long before the ECB acts again. Markets will looking for clues on just when that might be.
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Less focus on inflation, more on labour markets: That was Fed boss Jerome Powell’s message at last month’s virtual Jackson Hole summit. Essentially that means the Fed, now aiming for an average, won’t worry about inflation exceeding the 2% target, which is seen as giving it room to keep interest rates low as long as it wants.

That’s good news for stock markets, property and other sectors that benefit from cheap money. Inflation seems to have little chance of getting to 2% anytime soon, even though inflation expectations have nudged higher of late.

Friday’s August inflation readings are expected to show core CPI up 0.2% month-on-month after July’s 0.6% gain. For 12 months through August, it is expected at 1.2% versus 1% last month. The Fed’s preferred gauge - core personal consumption expenditure (PCE) index excluding food and energy - was up 1.3% in July. At this rate, asset price inflation might pose a bigger headache for the Fed.

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Britain’s government apparently sees just a 30%-40% chance of a post-Brexit trade deal with the European Union. Little optimism, then, before talks resume on Sept 8. Previous rounds ended in impasse, with each side accusing the other of unwillingness to compromise before the transition period expires at the end of 2020.

The squabbling is over several issues, from fishing quotas to Britain’s desire to use state aid to build up its tech sector. And less than a month remains before the Oct. 2 deadline for a deal that must then be ratified by a mid-month EU summit.

The prospect of no-deal is frightening, given the trillion dollars of annual trade at stake. Failure to progress will mean getting dangerously close to the wire. UK stocks are showing nerves, lagging European peers by 10% year-to-date and Britain’s economy may contract more than any other developed nation. Sterling has benefited from dollar weakness but its days in the sun might be numbered.

That's being said, for the EUR factors point on necessity to announce another stimulus pack. First is because they are "worry" about the rate that is too high and breaks the international trading and works against national economy as they said "exchange rate does matter". After massive USD printing, EUR share in international trading decreases even more, and here we see that EU is loosing the moment where it could bite more from international pie due better economy situation and US domestic problems. Second - inflation is nose diving again in EU and needs additional measures. Both these factors point that ECB probably sooner rather than later but will announce additional liquidity measures, i.e. - print more Euros.

Second hot topic is GBP. The optimism of recent data improvement gradually is melting under impact of difficult Brexit negotiations. Changing of the rhetoric recently promises nothing good to GBP as next round of negotiations stands right around the corner. Second moment - new statements from BoE representatives have dovish and bearish mood that will press on pound. We wounder, whether this factor could trigger the drop to 1.20 that we've discussed in our last report.

Finally, Fed has made serious statement concerning interest rates and its relation to inflation and employment. Rising inflationary expectations and fading effect of initial supportive efforts will be headache for the Fed in nearest year. Volatility of the markets definitely will increase. President's run will make overall situation even more unstable, especially if Biden wins. Inflation already shows first signs of increasing but US economy demands more, much more stimulus. If they will be provided, Fed could meet the situation when inflation will out of control and lead to another shock to economy when they will try to cut it.


Technicals
Monthly


EUR stands in technical reaction to COP target, which, theoretically should extend a bit more. Now it looks too small to the scale of the monthly chart. In general, our view is mostly the same. Besides, overloaded long positions need some relief. Existed driving factors should provide long lasting effect on EUR. Even rough approximation suggests that market could reach 1.20-1.23 area.

Technically we have large grabber as well that ultimately suggests action above 1.26 in long-term perspective, although now it is unclear what fundamental background we will get. I'm not an expert in EW, and lets professionals correct me, but it looks like 3rd wave up has started which should become the major swing in upside tendency. Theoretically it should be significantly in excess of "2" wave's top @ 1.25. Price stands above YPR1 as well that indicates new upside trend but not retracement to existing bearish tendency. Monthly overbought area stands far from here and provides room for more upside action.

But that is for long-term perspective. In short-term we have few technical limitations. First is and the major one - overextended net long position on EUR. Market sets the new record of ~211K contracts. Second - market meets monthly major 5/8 resistance level and something tells me that hardly it will be passed unsigned. It means that we should be prepared to the pullback, keeping long-term view intact.

August shows no big action and it seems that market indeed feels the barrier of the level. At the same time very fast action as of AB leg as current CD leg gives no doubts on upside continuation in medium-term perspective.
eur_m_07_09_20.png


Weekly

Here price has real difficulties on a way up as long spikes stand for few weeks in a row. Overbought level is not the barrier any more for EUR, but now it has limits of different kind. Recent week shows some signs of W&R, as price formed the new top, but following drop is not very fast that indicates still significant demand for EUR. If we take a look at this from butterfly point of view - EUR could show pullback to 1.15 K-support area, minimum 30% reaction on butterfly completion. Speak again about upside continuation we could only if price jumps above 1.20 and it will become clear that market is going to next long-term target. Currently it is not good point to take long-term bullish position.
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Daily

Here we have anemic progress and picture stands the same as on Friday. EUR shows consolidation without action neither above the top nor out from the flag pattern. Definitely market needs some new driver, maybe ECB will be able to push it from dead point. Currently, as our bearish grabber is still valid and longer-term charts point on deeper retracement, we still watch for breakout of the flag. NFP was not enough to move EUR out.
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Intraday

While market will wait for the next push, it could move slightly higher as reaction on NFP was weak. On Friday we've mentioned some bullish signs on 4H chart (divergence) but was not sure how it could work. Now it seems the time has come. On 4H chart we could get DRPO "Buy" pattern as market was not able to reach 3/8 Fib level. But we do not have 2nd close above 3x3 DMA yet.

On 1H chart this price action takes the shape of Double Bottom pattern. Existence of bullish divergence and W&R stands in favor of upside pullback. Target supposedly should be around 1.1930 area and 5/8 Fib resistance.

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Sive Morten

Special Consultant to the FPA
Messages
13,815
That means it might not have another leg up according to this ? So going short might be more safer ?!
Yes, if you remember in our last GBP weekly report on weekly chart we approximately talked about 1.36 level, where major downside reversal could happen. (Recently GBP has hit 1.34+). But the factor was unknown that could trigger this action. So, maybe this is it?
 

Sive Morten

Special Consultant to the FPA
Messages
13,815
Morning guys,

Price action is slow by far as markets await for important events within two weeks. In weekend we've talked about possible minor pullback on EUR. Now chances for that have decreased. Despite that our major view was and is a deeper retracement on daily chart, we still thought that bounce is possible. But today you can take a look at GBP and see that it totally has destroyed the pattern that EUR is trying to hold on intraday charts.

On daily chart the grabber remains the major pattern that suggests drop below recent lows:
eur_d_08_09_20.png


Why we think that downside action is more probable? Take a look, on 4H chart we also discussed the background for possible DRPO Buy and on Saturday the picture looked promising. Take a look, what we have now - price pressing lower and bulls has lost control while theoretically they had have to push price higher. IT means that bearish pressure is growing. Yes, here we still have minor grabber, and some shape of reverse H&S or triple bottom, as you wish, but they do not encourage me to buy. Although risk is very small as price stands near the bottom and if you want it, you could try:
eur_4h_08_09_20.png


Next round of negotiations promises nothing good and probably will hit as EUR as GBP. On 1H chart, if even pullback will happen, hardly price jumps higher than K-resistance and Agreement area around 1.1870. GBP has erase similar pattern already.
eur_1h_08_09_20.png


Thus, decide by yourself. From one point of view - risk is very small of this trade, but from the another one - chances on success are small as well...
 

Sive Morten

Special Consultant to the FPA
Messages
13,815
Morning guys,

So, EUR has confirmed our suggestion with further dropping, but on GBP we see stronger action that is more interesting for trading. We've warned that bad times stand ahead and you do not need to be a prophet to suggest it, by using just common sense.
We suspect that this might be our 1.20 area action... Anyway, it is long journey to 1.20 and we hope that on a way to it we will get a lot of additional trading setups. First, on daily chart we have downside reversal swing and it tells two things. First - downside action will continue, second - before continuation we should get moderate pullback, usually 50% or higher. It means that we intend to consider this pullback for short entry:
gbp_d_09_09_20.png


On 4H chart price has completed XOP target. Overall thrust down is rather strong and definitely suitable for DiNapoli patterns. Thus, scalp traders could keep an eye on possible DRPO "Buy" while our major interest here is B&B "Sell", whether it starts from first level or climb higher to 1.3135 K-resistance. Because, in current situation, B&B could start major continuation pattern to daily 1.27 K-area. This is our plan. If we will get no DiNapoli patterns - just keep an eye on retracement. May be it will be "222" Sell.
gbp_4h_09_09_20.png
 

Sive Morten

Special Consultant to the FPA
Messages
13,815
Morning everybody,

The pullback on GBP is started, and now we need to just to understand what the shape it will have. Meantime, on EUR the downside action also slows. Formally, the daily grabber is done and now we do not have any other good setups for immediate trading. In general, the fact that price stands in tight range after reaching major target on monthly chart, and is not able to drop even to nearest 3/8 Fib level is bullish. It seems that EUR coiling because of technical reasons, such as rebalancing of positions. Investors have accumulated a lot of longs too fast.
eur_d_10_09_20.png


Currently market is not at some strong support. That's why we need more confidence before pulling the trigger. On 1H chart potentially we could H&S pattern, but now we're just on a way to it and need to get clear shape of the pattern. Hopefully it will happen today-tomorrow. Simultaneously - do not drop out of attention things that we've discussed yesterday about GBP - keep an eye on the patterns there as well.
eur_1h_10_09_20.png
 
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