Forex FOREX PRO WEEKLY, September 12 - 16, 2022

Sive Morten

Special Consultant to the FPA
Messages
16,700
Fundamentals

No doubts, ECB decision and following comments have made the week. Also we've got some stats and Powell's comments but he mostly just confirmed Fed's commitment to fight inflation whatever cost. Great Britain events around Royal Family have mostly political meaning, so we discuss it tomorrow in Gold research.

Market overview

The ECB lifted its deposit rate to 0.75% from zero and raised the main refinancing rate to 1.25%, their highest level since 2011, as inflation is becoming increasingly broad and was at risk of getting entrenched.

WILLEM SELS, GLOBAL CIO, PRIVATE BANKING AND WEALTH, HSBC, LONDON
“It is no surprise that the euro rose a bit on the announcement. But we think that the upside is not sustainable, given that the euro remains a low yielding currency compared to others, as the market also prices in a more than 50/50 chance that the Fed and the Bank of England will hike rates by 0.75 (percentage points). In addition, the rising cost of debt, the recession, Italian election and geopolitical risks are headwinds for the euro. Bond markets and equity markets have reacted with some concern: the rate hikes will further raise borrowing costs of peripheral countries and tighten financial conditions, which may deepen the recession.

Goldman Sachs recommends investors short the euro against the Swiss franc following the European Central Bank's record rate increase as they think it likely the Swiss National Bank will want to take action to arrest the franc's depreciation. In a note published on Thursday, Goldman Sachs said they recommend a short EUR/CHF trade, targeting 0.955 on a tactical horizon, with a stop at 0.985.

Following are highlights of ECB President Christine Lagarde's few most important comments at a news conference after the policy meeting.

"We have more steps to that rate at which we believe we will return inflation to 2% in the medium term. If it means that we have to go further than whatever rate you refer to we will do so. We have a goal, we have a mission. We have incredibly high inflation numbers, we are not on target in our forecast and we have to take action. We don't want to see second round effects. We want economic actors to understand that the ECB is serious about returning inflation back to 2% in whatever decisions they make."

“I am not scratching my head around the neutral rate versus the terminal rate versus the … so on and so forth. What we know is that we want to get that 2% medium-term target and we will take the necessary steps along the way in order to get there. We think that it will take several meetings to get there. Some people will ask how many is several? Well, it is probably more than two including this one but it is probably also going to be less than five. Now, I will leave it to you to decide whether it is going to be two, three or four. You have at least a ballpark idea of how long it will take, that is the length of the journey.”

"We have noted the depreciation of the euro against a basket of currencies but in particular against the dollar. We know it has a lagging impact on inflation. But we do not target the exchange rate. We have not done so and we will not do so".

"Looking ahead, the slowing economy is likely to lead to some increase in the unemployment rate. We expect the economy to slow down substantially over the remainder of this year. We took today's decision and expect to raise interest rates further because inflation remains far too high and is likely to stay above our target for an extended period. According to Eurostat's flash estimate, inflation reached 9.5% in August. Over the next several meetings, we expect to raise interest rates further to dampen demand and guard against the risk of a persistent upward shift in inflation expectations"

The European Central Bank must keep raising interest rates, prioritising its fight over painfully high inflation, even if that comes at a cost to growth, European Central Bank policymakers said on Friday.

Canada and Australia also lifted rates this week. Japan, which is yet to lift rates in this cycle, is the holdout dove among the 10 big developed economies. In total, the following central banks have so far raised rates in this cycle by a combined 1,615 basis points. And it is more to come. U.S. rate futures have priced in an 87% chance the Fed will hike by another 75 bps at its next meeting on Sept. 20-21, which would increase the Fed funds rate to 3.0% to 3.25%.

Federal Reserve Chair Jerome Powell reiterated that the U.S. central bank will continue to raise interest rates in order to tame surging inflation and warned against prematurely loosening monetary policy. In remarks at a Cato Institute conference, Powell said the Fed needs to keep going until it gets the job done and is "strongly committed" to bringing inflation down

"I am not convinced that the dollar's highs are in place yet," said Marc Chandler, chief market strategist, at Bannockburn Global Forex in New York. Powell did not add anything new to what he said in Jackson Hole or to what (Fed Vice Chair Lael) Brainard said yesterday but I expect the dollar to consolidate ahead of CPI (consumer price index) next week," he added.

We think we can avoid the kind of very high social costs that Paul Volcker and the Fed had to bring into play" in the 1980s, Fed Chair Jerome Powell said on Thursday
The Fed "could very well do" a 75-bps increase at its September meeting, said Chicago Fed President Charles Evans on Thursday, who has tended to be on the dovish side of monetary policy debates. While Fed Governor Christopher Waller said on Friday that the U.S. central bank should be aggressive with rate hikes while the economy "can take a punch."

Barclays, in its latest research note, said it is also forecasting a 75-bps hike this month, noting it sees an outside chance that a softer-than-expected August CPI number will swing the pendulum back toward 50 bps. July's CPI report showed a surprising moderation in prices that helped spur a rebound in stocks. That rally has since faded with Fed chair Jerome Powell warning that the Fed's single-minded fight to tame inflation could lead to economic pain.

On an annual basis, CPI increased by a weaker-than-expected 8.5% in July, with the inflation gauge coming in flat, month-over-month. Early estimates for August call for a 0.1% decline on a monthly basis, but wildcards such as volatile energy prices are keeping investors on edge.

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By our (FPA) view, indeed, August CPI numbers could be softer because the US was able to decrease gasoline prices by burning record amount of its oil piggy bank. By October, the US Strategic Petroleum Reserve will shrink to a 40-year low as the White House taps it to put a lid on global oil prices:


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As a result the US gasoline prices have turned down a bit. Partially because of demand drop due cosmic prices and ending of high vacation season. Partially is because of supply increasing:
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Although it has happened in September but we get numbers for August, nevertheless, the price growth slowdown could be visible in August as well. In general as we've said in recent videos - it is nothing wrong with CPI stabilizing and decreasing. The energy component is too high, showing temporal outbreak, up to 30-40% inflation. But as any radical outbreak it can't stay for too long and sooner or later but has to converge to average structural inflation which now stands around 7-9%. The drop of the energy prices is natural and driven by few factors - providing of more supply from the US government, decreasing of the demand by companies and households because of too high price, which reduce inflationary pressure. At the same time, the structural component of inflation is becoming stronger, spreading over all spheres of economy and life. CPI could decrease to 7% in mid term but as Fed as US Government have no tools right now to push it back below 2%. We explained many times already the structure of current crisis. Until they cut M2 supply for 20% and crush public consumption, matching it to production capacity of its own economy - inflation remains stable.

"We think falling inflation in the U.S. is consistent with our view that the backdrop remains favorable for the dollar, as it stands to benefit from higher real rates while the global economy slows," wrote Jonathan Petersen, Capital Economics senior markets economist wrote in its latest research note.

Gas prices are much lower in the US than in the EU, although they start rising as all "free" extracted gas sending to EU, that leads to price rising in the US as well. The US now takes 1st place among LNG exporters, ahead of Katar, Russia and other countries.
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The dollar fell to a more than one-week low on Friday as investors consolidated gains after a sharp rise against most currencies, ahead of a U.S. inflation report that could determine the size of the Federal Reserve's rate hike at this month's policy meeting.

"Markets are getting a little nervous about levels, really historic levels, so the market decided not to push the dollar's strength at this juncture and lightened up positions," said Greg Anderson, global head of FX strategy, at BMO Capital Markets in New York. Probably position-taking will be light until the FOMC (Federal Open Market Committee) meeting. The market looked at everything overnight and decided that this is a good juncture to square up and that process has brought the dollar lower. But this is not a reversal of the trend on dollar strength," he added.

But not only the energy prices bring problems in EU. We should not forget about derivative market. Now the hazard of margin calls for $1.5 Trln stands on horizon:
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Thus, if EU will not provide necessary support, EU energy market could collapse. Just for comparison - the total amount of Covid stimulus was about 2.06 Trln and all of them were covered by just printing them:

European energy companies need at least 1.5 trillion euros ($1.5 trillion) to cover the cost of their exposure to soaring gas prices, Norwegian energy group Equinor has estimated, and that does not include firms in Britain.

Several European countries are providing billions of euros in support to power suppliers caught out by extra collateral payments on their trades - known as margin calls - but Equinor's estimate suggests such support is a fraction of the overall bill.

Second problem is big disbalances in EU financial system. As the EU financial space has high fragmentation, and due to the rising of interest rates, the new type of problems come on surface. Here is Bundesbank "Target 2" claims to other members of EU financial system of central banks. Obviously if Germany has the claim - some other banks, supposedly Italy, Spain Portugal and other high-indebted countries have liabilities. Now they already stand around EUR 1.2 Trln and will rise more as riskless rate is coming up.
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Germany 2-year swap spread stands for ~ 140 basis points and keep going higher, suggesting 1.25% (current rate) +1.4% (Swap) = 2.65% yield in two years for now:

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Conclusion:

As usual, to get a view on EUR/USD perspective we make a comparison of major fundamental issues. Energy prices we've shown above. The expectations on inflation rate is also drastically differ among them. An unprecedented divergence has emerged between the rate of inflation expected in one year’s time between the EU and US. While this can largely be explained by the difference in natural gas prices, the policy divergence between the US and EU may offer an explanation too: investors may believe that the Fed is more willing to move rates and deal with inflation than its counterpart in the EU. The natural gas shock is idiosyncratic to Europe, and has led to an unprecedented divergence in expected inflation between Germany and the US. A divergence in economic activity appears likely too, with the US outperforming.
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Second issue, as we've mentioned - is the ability of the ECB to raise interest rates without prompting a rise in the yield spreads between the bonds of European peripherals and German Bunds. The last time the ECB’s deposit facility rate was above zero, the euro area was in the throes of a debt crisis. Things may have changed since then, but a significant increase in the policy rate could raise the question of debt sustainability once again.
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Because of this, the ECB is likely to err on the side of caution when raising interest rates in the coming months. And this could also help to explain the current interest rate differential between the US and EU. Moreover, the high price of natural gas in Europe has more to do with supply disruption than with demand – meaning that even sharp increases in the policy rate may not do much either to lower the price of European natural gas or to reduce the first-round impact of that on inflation. The fear is that the rise in gas prices could have second-round effects, and push up the prices of other goods and services, as well as wages.

Equally, the ECB must also contend with a negative economic outlook for the single currency bloc, in part due to the hit to consumers’ disposable incomes that the rise in energy prices will have. Indeed, Fathom Consulting thinks that a recession in Europe is almost inevitable, and may already have begun – the question is how deep it will be, not whether it will happen. On this basis there would be little point in the ECB hiking rates aggressively and exacerbating the downturn, especially if this policy lever is unable to do much to reduce the first-round impacts of gas prices on inflation — and if the economic downturn dampens second-round price pressures without the need for central bank intervention.

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The ECB will face a series of difficult questions when setting interest rates in the coming months. These factors, coupled with possible gas shortages and the related economic damage they would cause, lead us to conclude that the economic prospects in the US for the year ahead, while not too great themselves, are rosier than those in the EU.

This leads us to suggestion that any upside action on EUR/USD now is temporal and should be treated as pullback and make us to keep 0.90 target intact.

Technical analysis on the post below...
 
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Sive Morten

Special Consultant to the FPA
Messages
16,700
Technicals
Monthly

Although EUR shows visible bounce on daily/intraday chart, it still has no impact on higher time frames. Since we have sharp drop, no strong support area and weak reaction on passed OP - this is a direct road to the next downside targets.

Long-term picture on EUR remains bearish, MACD stands bearish as well. No oversold.

With the drop below OP, it is the only direction to XOP, as market enters new extension mode. Our major target that we could calculate is 0.9, nearest local target is 0.9750-0.98, which is 1.27 butterfly extension.

Downside action shows good thrust and appearing of B&B "Sell" here is definitely welcome, but now it is unclear where the pullback is possible, maybe from butterfly target.
eur_m_12_09_22.png


Weekly

On a weekly chart, I would like to show you CME Futures instead by simple reason. On FX Choice chart we do not have a grabber for this week (but we have it for the previous one, which is mostly erased), but on CME Euro Futures we do -
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Grabber exists as on continues futures as on September/December contracts. Market stands in channel and we could make few remarks here. It is true that on previous retracement downside action has started not from the grabber but after touching of the channel line. But, now price has not completed yet the downside action, as pullback stands not from the lower border of the channel but on the way to it. Anyway, this grabber is important pattern for any short position that we could consider on lower time frames.

Daily

Here price was not able to stay outside of the consolidation, and, in general, this is comfortable picture for bearish positions - we have K-area right above the rectangle and failed attempt of breakout. This combination keep advantage on the bearish side. Failed breakout suggests that price could return back to the bottom, at least:
eur_d_12_09_22.png


Intraday

Sharp reversal on 4H chart happens precisely at the potential neckline that we've discussed on Friday. H&S pattern still could be formed but existence of weekly grabber increases the risk of pattern's failure and downside breakout:
eur_4h_12_09_22.png


On 1H chart market has completed local H&S and its OP target:
eur_1h_12_09_22.png


As you could see - now EUR provides a lot of chances for trading. Bulls could wait for H&S right arm and consider long entry, if drop will not too fast. While bears, which is our major direction have a lot of options to take a position. First is - do nothing and wait for 4H H&S failure with drop below 0.99-0.9950 area.

Alternatively, it is possible to stick with weekly grabber, as on 1H/4H chart we have downside bounce out from the resistance (neckline). Market now re-testing support, so it is possible to use one of the minor Fib resistance levels for position taking and stops above daily K-resistance area. The compromise decision is to combine both scenarios 50/50. Major risk here - Tuesday's weak CPI numbers, but we never know. Strong numbers instead just triggers this scenario.
 

Sive Morten

Special Consultant to the FPA
Messages
16,700
Morning everybody,

Sorry guys, it seems that yesterday I haven't placed the text version of video... We've discussed GBP B&B trade - it finally has been formed, although the idea of this trade we've discussed on previous week. Now it has completed minimum target. It is reasonable to partially book result and keep some position fraction with the anticipation of downside continuation - recall that we have failing weekly H&S pattern with target below 1.12 area.

On EUR currency background was not as clear as on GBP, but general setup that we've discussed in our weekly report has done well - daily resistance indeed has stopped the market and pushed price back in consolidation.
Now we have two important moments. First is, market is turning from 0.5-0.75% change scenario to 0.75-1.0% one. Fed Fund Futures shows that probability of 1% change has jumped recently from 0 to 38%.

Second one is by-product. Speculators now start take position, betting on 1% rate change. It is not priced in yet and perfect idea from bargain hunting point of view.

Finally, on gold market our bearish grabber is not completed yet. This indirectly points that dollar should rise more in near term, which is also pressing on EUR and other currencies.

Besides, technically daily picture doesn't look positive. Despite that MACD has bullish trend by far, price has dropped back inside the consolidation, which significantly increases chances of challenging the lower border and former lows:
eur_d_14_09_22.png


On 4H chart our initial AB-CD is still valid and XOP around 0.98-0.9810 as well. Market now is coiling around 5/8 support area.
eur_4h_14_09_22.png


In a case if pullback starts, say, DRPO "Buy" will be formed, or something, we could keep an eye on 1.043 and 1.0065-1.0070 (which is 50% Fib level, not shown here) as most probable upside retracement targets. And then see, whether it is comfortable to take short position there.

eur_1h_14_09_22.png
 

Sive Morten

Special Consultant to the FPA
Messages
16,700
Morning guys,

As currencies mostly are coiling around the same levels - today we take a look at Dollar Index (DXY). In recent time we were watching not quite often for it, but sometimes, it could tell us a lot of useful things. And now is particular this case.

At first glance, as on EUR as on GBP you could suggest perspective of upside bounce. Say, on EUR 4H chart price is coiling around 5/8 support, and appearing of the butterfly here could confuse you a bit, thinking that it might be interesting bullish idea.

Things that we see now on Dollar Index tell us to stay aside from any long positions, at least on daily and above time frames. The most important is a monthly chart of DXY:
dxy_m_15_09_22.png


Price is not at overbought here, major K-resistance is broken already and price in few points from XOP target, where it gravitates to. CD leg shows excellent thrust, so we could get few sweety DiNapoli patterns around, once XOP will be completed.

Second moment here - is 1.618 butterfly that has the same destination point. But this is not all yet. On weekly chart we have valuable add-on. By this week's close, we could get bullish grabber. Although market is near overbought level, but still it is above the recent top, which lets DXY to challenge the top next week. By occasion - we have Fed meeting next week as well. Existing of XOP tells that upward action hardly stops at previous top. But, for EUR, and GBP this is important sign - it means that both currencies should challenge previous lows and any long position there looks doubtful, despite what potential patterns we could get on intraday charts. Thus, as you could see - DXY sometimes could tell us a lot of useful and interesting stuff:
dxy_w_15_09_22.png
 

Sive Morten

Special Consultant to the FPA
Messages
16,700
Morning guys,

Yesterday we've put technical foundation of bearish sentiment, based on DXY analysis. Today EUR and GBP behave differently. EUR stands flat around the same intraday support, while GBP is going down. In fact, if you take a look at weekly cross chart, you will see that this difference should last a bit more, until 0.8875 level, at least:

EURGBPWeekly.png


It means that EUR should outperforms GBP in near term. Since GBP stands in a stage of weekly H&S failing we do not exclude possible drop up to 1.12 area, based on 4H butterfly that we have. Hardly weekly major 1.14 lows remains intact. Nearest butterfly target is 1.13-1.1310
GBPUSDH4.png


On EUR picture is very similar to recent BTC analysis that we've made yesterday. Market is at 5/8 support and forming something like H&S pattern around. Here we have to repeat the same thing as on BTC - "we do not recommend to deal with this setup". Still, the risk of this trade is very small (around 30 pips). So, if you're stubborn enough or sure with upside action - you could try. Anyway this trade has only tactical meaning with the minor upside bounce, 1.0050 area at best.
eur_4h_16_09_22.png


Bears in turn, have three options - either wait for upside bounce to 1.0050, completion of 1H H&S pattern and appearing of "222" Sell, or drop below the lows and failure of this setup. Third option is to combine both scenarios. In 1st case we have to wait for the bounce, for 2nd case - it is possible to consider Stop "Sell" order around 0.9960-0.9965.
But whatever intraday setups we consider - with the general bearish background, based on DXY performance and overall fundamental situation, we're focused on downside continuation to our major targets 0.9750 and 0.9
 
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