Forex FOREX PRO WEEKLY, September 14 - 18, 2020

Sive Morten

Special Consultant to the FPA
Messages
13,829
Fundamentals

Markets just have entered in a way of big financial events that supposedly should bring some fresh air to fundamental background and either enforce investors on current direction or make to change it. Thus, this week mostly was twisting around EU/UK Brexit negotiations and ECB statement. Market mostly has confirmed our suggestions on these two events - Brexit talks are stumble, while ECB has kept blur position of doing nothing new and let situation to flow down the river.

European Central Bank President Christine Lagarde said on Thursday that data suggested a “strong rebound” in the euro area, with the economy contracting less than expected this year. The bank now expects GDP to shrink by 8.0 percent this year, better than the 8.7% contraction it expected in June. Inflation projections were little changed at 0.3% for this year and 1.0% in 2021. On the euro’s recent rise to two-year highs, Lagarde said the bank would “monitor closely” the currency’s strength, but it is not a monetary policy tool.

“The truth of the matter is they realise there is not a lot they can do (about euro strength), aside from increasing the size or pace of the PEPP programme. “The euro zone has been able to sustain euro-dollar exchange rate at $1.60, so a move to $1.30 is manageable for the economy. The real issue is that they want to avoid an aggressive pace of currency appreciation, said Peter Kinsella, head of FX strategy at UBP.

“We still expect an expansion of the PEPP (Pandemic Emergency Purchase Programme) by the end of the year but there does appear to be a division on the Governing Council, chief ING economist told.


Her comment suggested the ECB was unlikely to undertake measures to weaken the euro despite its recent gains, giving traders motivation to take the single euro zone currency higher. As expected, the ECB held interest rates steady on Thursday. But a strong euro tends to hurt an export-dependent economy like the euro zone, raising concerns from some ECB officials such as chief economist Philip Lane, who said the exchange rate mattered to monetary policy.

Just as Lagarde was starting her press conference, Bloomberg news came out with a report, citing ECB sources, saying there was no need to overreact to the euro’s gains. Traders said the Bloomberg report caused a spike in the euro.

“Markets know there is very little that the ECB can actually do to weaken the currency. Rates are almost as low as they can possibly go and the various asset purchase and lending program are already sizable,” said Seema Shah, chief strategist at Principal Global Investors. “What’s more, the euro is strengthening for all the right reasons: improving growth, relatively contained COVID infection rates, and positive developments in the fiscal stimulus region,” she added.

The dollar slipped after data showed U.S. initial jobless claims totaled a seasonally adjusted 884,000 for the week ended Sept. 5, matching the number of applications received the prior week. Economists polled by Reuters had forecast 846,000 jobless claims applications.

U.S. producer prices were better than expected though, with gains of 0.3% for the headline and 0.4% for the core figure.

The euro rose for a third straight session against the dollar on Friday, with investors encouraged to push it higher after the European Central Bank showed no sign of stemming the single currency’s appreciation. On Friday, however, ECB policymakers, including chief economist Philip Lane, warned against complacency over low inflation and highlighted risks from a strong euro, nuancing the bank’s benign message from a day earlier.

“There is a feeling here that it’s okay for the euro to be around $1.1750-$1.1850. If it hits $1.1950, it probably starts swinging down,” said Juan Perez, currency trader at Tempus Inc in Washington. “Overall, ECB policymakers seem to be saying that let’s not overreact about the euro exchange rate,” he added.

Overall, some analysts believe the dollar has scope for further gains as a safe haven amid still heightened uncertainty related to the COVID vaccine and the global recovery from the virus-induced downturn.

“We are concerned that the consensus may be too optimistic on the global economy; too optimistic on a vaccine; too pessimistic on the COVID-19 situation in the U.S. compared with that in Europe; and complacent on the U.S. elections,” said BofA Securities in a research note.

Brexit Talks

Hardly you recall this, but couple of years ago we've prepared detailed research on pitfalls of Brexit. In two words speaking, Brexit has just two ways to happen:

Border could be either between Republic of Ireland and Northern Ireland, or in the Ireland Sea between Ireland island and Great Britain island.

First case, when "hard" border will split Ireland in two parts is unacceptable, because everybody keeps memories of conflicts in 70-80's and carry on Belfast agreement (Good Friday agreement of 1998) which reduce tensions. Besides, here is tricky moment exists, that Theresa May's Conservative cub gets in dependency from N. Ireland unionists. They have just 10 seats, but they in particular provide necessary majority in parlament.

Second scenario, when border will be in Ireland Sea - this is a nightmare for all Brits and for Democratic unionists in particular. Because in this case single economic space of Great Britain will be split in two parts.


The first scenario has phantom chances to happen. It is too many negative sides. Beyond the bloody history that could become the reality again, there is another issue:

U.S. House of Representatives Speaker Nancy Pelosi said on Wednesday any potential U.S.-UK trade deal would not pass the U.S. Congress if Britain undermines the Good Friday Agreement as it exits the European Union.

If the U.K. violates that international treaty and Brexit undermines the Good Friday accord, there will be absolutely no chance of a U.S.-U.K. trade agreement passing the Congress,” Pelosi said in a statement. “The Good Friday Agreement is treasured by the American people and will be proudly defended in the United States Congress,” she said.

Pelosi speaks on UK-US free trade Agreements the same that exists among US, Canada (NAFTA). UK definitely will not pay so high price and will not follow the first scenario. It means that only second way is possible - split the GB economic space. This will lead to political tensions again that promises nothing good to domestic economy and makes even more complex negotiations on sea borders as it directly touches the business interests, such as fishery and other. Political tension already have started, actually:

Johnson’s bill also faces opposition from senior figures in his Conservative Party and some of his own lawmakers who are unhappy at the prospect of infringing international law. In a video conference call with his lawmakers on Friday he appealed for support for his bill and for them to avoid repeating the “squabbling” over the Brexit divorce deal which saw some quit the party and others thrown out.

Michael Gove, one of Johnson’s most senior ministers, said the government had the support of its own lawmakers and those in other parties. But some were clearly unconvinced.

“Unamended I cannot support this Bill ... (it) is damaging brand UK, diminishing our role-model status as defender of global standards,” Conservative lawmaker Tobias Ellwood and chairman of parliament’s defence committee wrote on Twitter.

Pushed on whether Britain would be breaking international law, Gove said the bill was consistent with “the rule of law” and denied it was a negotiating tactic to put pressure on the EU to make concessions for a trade deal.

With the EU stepping up planning for talks on trade to end without a deal, Johnson has accused its negotiators of threatening to impose a food blockade between mainland Britain and Northern Ireland.

“Let’s make the EU take their threats off the table”, Johnson said on Twitter. “And let’s get this Bill through, back up our negotiators, and protect our country.”

British lawmakers will on Monday begin debating the Internal Markets Bill, which one minister has said would breach international law “in a very specific and limited way”.

The government says it is needed to clarify the Northern Ireland protocol element of the Brexit deal it signed in January to protect free trade between the four constituent nations of the United Kingdom. But European lawmakers said on Friday they would not approve any new trade deal unless the withdrawal agreement was fully implemented, while there is also talk of possible legal action.



Both sides have set a deadline of the end of October for a deal, raising the prospect that nearly $1 trillion in trade between the EU and Britain could be thrown into confusion at the start of 2021 when a transition period ends.

Writing in the Daily Telegraph, Johnson said a “great deal” could still be done but it appeared the EU were now taking an “extreme interpretation” of the Northern Irish protocol.

“We never seriously believed that the EU would be willing to use a treaty, negotiated in good faith, to blockade one part of the UK, to cut it off, or that they would actually threaten to destroy the economic and territorial integrity of the UK.”

If it’s autumn with a year-end deadline and a sterling sell-off, it must be Brexit. Britain’s internal market bill, a bombshell which the government readily admits contravenes international law, may wreck its EU divorce treaty, scupper chances of a post-Brexit trade agreement and trigger EU legal action.

Britain’s lower house of parliament starts debating the bill on Monday. While Prime Minister Boris Johnson has an 80-seat majority, internal party rumblings over the bill could well test his authority.

Meanwhile, sterling has lost 4% this month and at $1.28, it may not even be pricing the full risk. Clearer signals come from options markets, where positioning has turned markedly bearish.

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The European Union is stepping up preparations for a no-deal Brexit at the end of this year, the bloc’s chief negotiator said on Thursday after the latest round of UK trade talks in which he said London disappointed on many fronts.Speaking after an eighth full round of negotiations on a new partnership with the UK in London, Michel Barnier said the EU has shown flexibility on British demands on fisheries, the bloc’s top court and other areas.

“However, on its side, the UK has not engaged in a reciprocal way on fundamental EU principles and interests,” he said in a statement. “Significant differences remain in areas of essential interest for the EU.” “Nobody should underestimate the practical, economic and social consequences of a ‘no deal’ scenario,” Barnier said.

A “no-deal” Brexit would hurt the British economy a lot more than the European Union, German Finance Minister Olaf Scholz said on Saturday.

The European Parliament will not grant its necessary approval to any new EU-UK trade deal unless Britain fully implements its earlier divorce deal with the bloc, an official familiar with a looming statement by European lawmakers told Reuters.

COT Report

It seems that EUR positions start to chill out a bit. This week we see that open interest has dropped more and speculators have closed ~3K of longs. Hedgers close both positions but still the close more "shorts" than "longs". This stuff points that EUR intends to stay around current levels for some time:
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Looking forward

The short-term economic outlook will depend heavily on governments’ policy responses. Not just in terms of influencing people’s behaviour but also the level of stimulus they chose to provide going forward. A swift withdrawal, prompting a large pickup in unemployment is, of course, a risk. But while the UK government has spoken about ending its furlough scheme in October, the opposition are calling for an extension and it would not be surprising if some Tory MPs start to follow suit as that deadline approaches. Germany has extended its furlough scheme until the end of 2021. The US meanwhile, has enacted large stimulus programmes in the wake of the pandemic, which saw personal income spike. Congress is working on a fresh large stimulus package. These are some of the reasons that Fathom remains in the camp of a V-shaped recovery.

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Meantime, a lot of concerns still exist. Some worry, however, that the moves may herald the start of a volatile period, as a much-awaited fiscal aid package stalls in the Senate and the U.S. presidential election looms. That’s left investors looking to the Fed for its view of the nascent U.S. economic recovery and what the central bank may do if markets continue to slide.

“The market, especially in absence of that fiscal policy package, is looking for the Fed to do even more,” said Michael Arone, chief investment strategist at State Street Global Advisors. “And it’s not clear that they can do more or how much they’re willing to do, at least at this point.”

The number of Americans filing new claims for unemployment benefits hovered at high levels last week, suggesting the labor market recovery from the COVID-19 pandemic was stalling as government financial aid to businesses and the unemployed dries up.

Analysts at BofA Global Research noted that September tends to be the weakest month of the year, with stocks notching gains less than half the time and the S&P 500’s average return at minus 1%. The bank’s data also shows that markets tend to dip in the weeks ahead of an election, then rallying after. In this case, among investors’ concerns is that the Nov 3 vote will be unclear or disputed.

Investors are also hoping to learn more about the Fed’s strategic decision to allow periods of higher inflation as it puts more emphasis on bolstering the labor market.
Modestly higher real yields after the Fed’s shift on inflation have contributed to the recent wobble in tech-related stocks, analysts at Oxford Economics said in a report.

“It’ll just give us a bit more clarity in terms of how they are going to be looking at their mandate going forward,” said Eric Theoret, global macro strategist with Manulife Investment Management.

Investors will also be looking to the Fed’s summary of economic projections, known as the “dot plot,” for clues on how quickly the central bank expects labor markets to recover and how soon it may lift rates from record lows.

“I think the 2023 dots will be the ones everybody’s staring at,” said Jon Hill, an interest rate strategist at BMO Capital Markets.

The Federal Reserve meets on Wednesday for the first time since unveiling its landmark shift to a more tolerant stance on inflation. That move steepened the Treasury curve, lifting longer-dated borrowing costs and expectations the Fed may have to increase purchases of long-dated bonds to tamp down yields.

The gap between 5- and 30-year yields has contracted since hitting three-month highs after Fed chief Jerome Powell flagged the shift on Aug. 27. But 30-year yields, sensitive to inflation expectations, remain elevated - not great news for the battered economy. Fed purchases of more than $1.5 trillion of shorter-dated bonds during the pandemic have pinned down front-end borrowing costs. Investors will watch for a shift towards the long end.

Jump in 30-year Treasury yield raises expectations of Fed purchases - In landmark shift, Fed rewrites approach to inflation, labor market
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The Fed move towards greater inflation tolerance, essentially a pledge to keep policy loose, puts other central banks in a bind. Unless they follow, the dollar’s weakening against their currencies could threaten economic recovery and their inflation targets. The ECB says euro strength is not yet a concern. But it, along with British and Japanese peers which meet in coming days, may eventually be forced down the Fed’s looser-for-longer route.



No policy changes are expected in Japan and Britain. Still, the Bank of England may flag extending its bond-buying to help an economy reeling from COVID-19 and Brexit.

The Bank of Japan (BOJ) meanwhile must contend with a new premier, likely Yoshihide Suga, who may not hesitate to pressure the central bank over yen strength. Calling for the BOJ to work with the government, Suga said recently he didn’t buy arguments such as negative rates hitting bank profits.

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That's being said, guys, GBP situation becomes worse day by day. As you know our central scenario suggests drop to 1.20 area and then something should happen that could trigger upside reversal. Now, by taking a look at overall progress of situation, we worry that GBP could just drop through 1.20. A lot of new information appears and all of them with "minus" sign.

ECB statement clearly shows that major concern for the Bank is low inflation in EU that turns in August negative again. C. Lagarde comments hint that ECB could be patient a bit more on the exchange rate and let EUR to rise. I suspect that 1.25 level ECB could easily accept, using, for example, some verbal interventions from time to time. Simultaneously, they should increase stimulating programme to trigger inflation. Combination of these two moments makes us keep positive outlook for the EUR at least till the end of the year.

We do not consider sharp reversal on USD at least until elections result. Nobody puts the bet on the horse with unknown rider.


Technicals
Monthly


As fundamental situation dynamic is as technical picture static. Monthly chart brings nothing new to us within recent few weeks. Still, on a background of new comments on ECB and strong upside action to COP on the monthly chart - EUR could move out from dead point this week, supposedly to the upside. But again - a lot of things will depend from Fed, what will happen with the USD value.

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 1.25-1.26 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. And recent data shows that EUR rush calms down a bit. 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_14_09_20.png


Weekly

On weekly chart is nothing new to comment. 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. Also we have to be careful to patterns on daily and intraday charts as they could provide clarity on new EUR direction.

eur_w_14_09_20.png


Daily

Hardly we will get any activity until Tue-Wed when Fed sessions takes place. As investors hold EUR in tight range for the month and even relatively positive ECB statements was not able to push it out - investors definitely will not hurry before Fed.

Only few moments are interesting here. First is obvious signs of bullish dynamic pressure. Trend stands bearish, while price is forming upside action and higher lows sequences. Besides, the grabber that we've got last week was able to reach only minimum target, barely brushed the previous lows. Finally, action around ECB now looks like failed attempt of downside breakout, as price has returned back inside the flag. Could it be "bearish trap" that suggests strong upside rally? It is too many indirect bullish signs on daily chart now.

eur_d_14_09_20.png


Intraday

So, first conclusion that we could make is about daily lows - they are important because this is the low of failure downside breakout. And in short-term everything will depend on it. At the same time, as this is failure bearish attempt it makes overall situation to look bullish. Thus, these lows is the vital area and while price is above it - overall context remains bullish. Conversely second downside breakout will be final and EUR will drop more. So - pay attention to this area.

Following this logic, second factor is possible scenarios of upside continuation. On 4H chart we could consider bullish grabber. Once it will be formed, it could be used for long entry:
eur_4h_14_09_20.png


Alternatively, market could show a bit deeper action but within the same bullish context and form butterfly "Buy" on 1H chart. Both patterns are acceptable as EUR fits our major condition - price stands above daily lows. Thus with all other things stand equal we mostly look North this week and keep bullish scenario until price is above 1.1750 area
eur_1h_14_09_20.png
 

Sive Morten

Special Consultant to the FPA
Messages
13,829
Morning guys,

EUR is moving higher gradually, and setups with grabbers that we've mentioned in weekly report has worked nice. At the same time, overall action is very slow, Fed is ahead and this should hold us from taking any new positions by far. Besides, no good setup exists right now.

On daily chart market starts flirting with MACDP line and we should be careful to potential bearish grabber, whether it will be formed or not. As overall picture stands the same - we keep our moderate bullish view on situation, as we've said - at least until EUR stands above 1.1750 lows, that is fake downside breakout:
eur_d_15_09_20.png


Those who have taken longs based on grabbers on 4H chart yesterday could keep position, but actively manage stops and think about partial profit taking as we have the sequence on near standing targets now. Here in particular, market is coming to Agreement resistance with COP extension:
eur_4h_15_09_20.png


On 1H chart price already hits minor OP, XOP stands 30 pips above. So, in the range or 1.19-1.1970 we have the sequence of different intraday targets.
eur_1h_15_09_20.png


So, if you have long position you could play with them, tight stops and see whether market will be able to move higher. But for others, that do not have any positions we have nothing interesting and no setups to enter the market.
 

Sive Morten

Special Consultant to the FPA
Messages
13,829
Morning everybody,

Markets stand quiet, waiting for the Fed comments. As you can see, we indeed have got the grabber on EUR that we've discussed and situation has become even more confusing as price now is locked between opposite patterns. Fake breakout suggests upside continuation while grabber is opposite one, drop below the lows. Mostly this indicates indecision situation on the market:
eur_d_16_09_20.png


It is a bit curious that EUR was not able to reach COP target yesterday, turning down, although COP was in a range below "C" point:
eur_4h_16_09_20.png


At the same time now we see sharp upside reversal on 1H chart, bullish divergence. In general, it seems that we're in triangle...
eur_1h_16_09_20.png


In general, guys currently we have the situation when your own personality steps in. Now we have opposite patterns and both of them are valid. It means that you could trade in the direction that you like. But the problem is result depends not on patterns but from Fed statement that we can't control at all. Thus, any trade will care some degree of gambling. And your personality should answer whether you would like it or not.

If you want to buy - you could follow our setup and buy against the lows. Want to sell - stick with daily grabber with stops above the top. But any trade will be the bet not on the grabber or fake daily breakout but on the Fed result...
 

Sive Morten

Special Consultant to the FPA
Messages
13,829
Morning guys,

So, reaction on Fed was mild and EUR has dropped just to near standing Fib support level that already has been tested previously . Still our Thursday's grabber has reached the target anyway. So, what's next? First is about Fed... They said very important thing that economy recovers faster, 2 times faster. Somehow markets bring low validity to this words showing very small reaction. My suggestion - they will re-value it later with more importance and it makes me thing that deeper retracement are very probable as on EUR as on other markets.
Fed statement mostly was dollar supportive. This is the reason why I would avoid taking new long positions on EUR at least for few sessions till the next week:
eur_d_17_09_20.png


On 4H chart our upside AB-CD pattern totally has been erased, EUR is forming something that reminds H&S pattern and now price stands at COP target and daily Agreement support. This is also the neckline. If I'm correct with my suggestion - we should not get any deep upside pullback. Only some flirting with neckline is acceptable. Any strong upside action, especially above the "B" top and erasing H&S tells that I'm wrong.
Still, if I'm right, then next level that we could keep an eye on is 1.1650 OP target.
eur_4h_17_09_20.png
 

Sive Morten

Special Consultant to the FPA
Messages
13,829
Morning everybody,

Yesterday's action doesn't bring any clarity yet. It seems that investors absolutely do not know in what direction to push the market. Still, on intraday chart picture is a bit better than yesterday. At least here, we see that EUR shows sharp reversal that suggests minor intraday continuation based on existed impulse:
eur_d_18_09_20.png


Unfortunately MT4 doesn't let to plot 8H charts, but if you have this possibility - you probably will see here nice bullish engulfing pattern that W&Rinsed recent lows. Also we have here MACD divergence and this lets us to consider some scenario with upside continuation to ~ 1.1950 area. It is easy to imagine different reverse H&S patterns as well here, but first we start with the pattern that already in place.
eur_4h_18_09_20.png


IF we're correct with this suggestion, market now should show some pullback inside the pattern's body. It would be nice if this happens to 1.1815-1.1818 K-support area, that potentially interesting for long entry. As usual, we have to avoid position taking if downside action will be very fast, or market starts breaking all support levels tending to the bottom again. Our invalidation point is recent lows, as usual. Target is AB-CD pattern, based on the engulfing. Let's see how it will turn.
eur_1h_18_09_20.png
 
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