Forex FOREX PRO WEEKLY, September 21 - 25, 2020

Sive Morten

Special Consultant to the FPA
Messages
14,060
Fundamentals

This week, no doubts, the central event was the Fed. Yes, we also have got some statistics across the board, that it still remains in the shadow of J. Powell. Speech.
News makers continue to chewing the same topics as slowdown in recovery, worry about delay in vaccine production, growing CV19 cases and so on, but market have become insensitive to this subjects. Besides, Fathom Consulting has released new outlook for economy and they still suggest that global economy will return to pre-pandemic levels by the end of the year. So they still support "V" shape recovery model.
Within few weeks we will have some important events as well. As usual, here we briefly take a look at them.

New Fed long-term strategy

The Federal Reserve on Wednesday vowed to keep interest rates near zero until inflation is on track to overshoot the U.S. central bank’s 2% target, a bold new promise aimed at bringing millions of out-of-work Americans back to the labor market. But the new guidance also marked the start of a vigorous monetary policy debate as the Fed shifts from a crisis-era focus on keeping markets afloat during the coronavirus pandemic to managing what it now sees as a steady, multi-year recovery.

Underscoring the depth of disagreement, and the economic uncertainty that underlies it, the decision drew two dissents, one from a policymaker who thought it went too far, and the other from one who thought it didn’t go far enough.

It was also the Fed’s last policy decision before the Nov. 3 U.S. presidential election, delivering the winner a runway of low borrowing costs for years to come. All but one Fed policymaker saw rates staying at their near-zero level through 2022. Just four saw them higher than that in 2023.

“Effectively what we are saying is that rates will remain highly accommodative until the economy is far along in its recovery,” Fed Chair Jerome Powell said in a news conference following the release of the policy statement and new economic projections. The new promise to “moderately exceed” 2% inflation, he added, “should be a very powerful statement in supporting economic activity.”

With about half of the U.S. jobs lost since the crisis now recouped, and consumer spending about three-quarters recovered, the economy has come farther and faster than most at the Fed had thought just a few months ago.

The new economic projections showed policymakers now see the economy shrinking 3.7% this year, far less than the 6.5% decline they forecast in June. They see unemployment, which registered 8.4% in August, dropping to 7.6% by the end of the year.

The recovery “is here, and it’s well along,” Powell said. And even as the virus continues to cause “tremendous human and economic hardship,” he said, “we are learning to live with COVID, which still spreads,” Powell said.

But with parts of the economy, like the travel and entertainment sectors, likely to take longer to revive, millions will still struggle to find work.

The recovery, Powell noted, is expected to slow, requiring continued support from further government spending and, he said, the Fed, which is continuing to debate further actions including a possibly faster pace of bond buying.

Or, as the central bank’s policy-setting Federal Open Market Committee said in the dry language of its statement after the end of its two-day meeting, “The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee’s goals.”

The Fed used its policy statement to begin to pivot from stabilizing financial markets to stimulating the economy, saying that it would keep its current government bond-buying at least at the current pace of $120 billion per month, in part to ensure “accommodative” financial conditions in the future.

The new economic projections show that the Fed does not expect inflation to breach the 2% target any time soon. Powell said the Fed “is both confident and committed and determined” to modestly overshooting 2% inflation, but added that it would take time. In pledging to keep rates low until inflation was moving above the target, to make up for years spent below it, the Fed reflected its new tilt towards stronger job growth, announced late last month after a nearly two-year review.

Both dissenters to the statement, Dallas Fed President Robert Kaplan and Minneapolis Fed President Neel Kashkari, took specific issue with the central bank’s guidance that it would keep interest rates where they are “until labor market conditions have reached levels consistent with ... maximum employment and inflation has risen to 2 percent and is on track to moderately exceed 2 percent for some time.”

Having ridden a short-covering rally sharply higher after the Federal Reserve left interest rates on hold, the U.S. dollar erased virtually all of those gains on Thursday as markets digested the U.S. central bank’s policy statement. With the new guidance from the Fed focused on keeping U.S. interest rates at current record lows until employment and inflation reach its targets, some strategists argue any dollar strength is likely to be temporary.

With these conditions last met between March and October 2018, and before that in 2000, Commerzbank strategists said the Fed was imposing conditions for rate hikes that were met only very rarely in the past.

“The headlines focus mainly on the fact that the Fed does not expect any rate hikes until year-end 2023 based on its revised projections, but if one takes the forward guidance literally it might take much longer until rate hikes will be considered,” they said.

Diplomatic Tug of war

The dollar was on track for its fifth straight day of declines against the yen, which was at a seven-week high against the greenback on Friday as investors sought Japan's safe-haven currency due to monetary policy, U.S. election uncertainty and the latest U.S.-China political tensions.

Boris Schlossberg, managing director of FX strategy at BK Asset Management said dollar weakness may signal more volatility to come ahead of the Nov. 3 U.S. elections where President Donald Trump with face-off with Democrat challenger Joe Biden. "Markets always hate uncertainty. At this point everybody is convinced that an unambiguous win is not the most likely scenario," he said.

Schlossberg also pointed to a Trump administration plan to ban WeChat and video-sharing app TikTok from U.S. app stores starting Sunday night, blocking Americans from the Chinese-owned platforms over national security concerns. "It's showing the diplomatic tug of war is not being resolved. The tensions are heightening rather than easing," he said. "That's not something the market likes to see."

China’s Commerce Ministry said on Saturday it was “resolutely opposed” to the U.S. decision to ban WeChat and video-sharing app TikTok from U.S. app stores starting Sunday night. If the United States does not correct its mistakes, then China will take necessary measures to safeguard the legitimate interests of Chinese companies, the ministry added without giving details.

The Trump administration will ban video-sharing app TikTok from U.S. app stores starting Sunday night, a move that will block Americans from downloading or updating the Chinese-owned platform over concerns it poses a national security threat. On Nov. 12, the app could become slower or harder to use because American companies will be barred from providing back-end hosting services that help the app function smoothly. TikTok said in a statement Friday those changes would amount to a “ban.”

TikTok will not see major changes until after the election, so the issue’s influence on the presidential race is unlikely to grow significantly. President Donald Trump could still be seen by some as defending U.S. interests by threatening to ban a Chinese app, and some may see him as avoiding a decision or arranging a deal for a political ally, in Oracle Chair Larry Ellison.

Global economy overview

Fathom consulting keeps their central scenario where the global economic recovery continues uninterrupted. We use high-frequency smartphone data to conclude that, on a cautious assessment, around one-half of the fall in global economic activity through the first half of this year was recovered during the third quarter. Very few major economies publish monthly estimates of GDP, but where these data are available, they point to a V-shaped recovery. Canada had made up around one-half of its lost output by June, while both Norway and the UK had done so by July. In our judgement, the global economy is likely to return almost to pre-COVID levels of by the end of this year, but in the absence of an effective treatment or vaccine, the sectoral composition of what is produced will be very different, particularly in the major economies.

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CFTC Data

The high saturation of long positions on EUR and exhausting of major driving factors have led to acceleration of the process that we've talked about previously - off load of this long positions. Recent CFTC report shows big drop in EUR open interest as well as massive close of long positions by speculators. This put under questions possibility of upside continuation in near term. Hedgers also have closed big amount of shorts positions and it also decrease chances on immediate upward rally. Hedgers take position in opposite direction to supposed price action to hedge against it. If they close short it means that they do not expect upside action any time soon. As a result EUR has lost 32K contracts which equals $4 Bln. par amount of positions closed or ~4.5% of total open interest just in one week. The only thing that we could suggest to reduce the negative background is maybe this close was due preparation to Fed statement, just to contract existed positions. Next week we should get the answer on this question, if positions will be re-established. At the same time for the truth sake hedgers are not as sensitive to Central bank statements as speculators, as they have different driving factors but they have closed shorts still.

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Looking Ahead

Strong British consumer spending helped sterling earlier in the day as investors bet on a solid recovery from COVID-19 induced lockdowns but it failed to hold its gains and was last down 0.25% against at $1.2940.

"The market would be a lot more excited about this news if it felt the UK was well on its way toward recovery. But now with a huge resurgence in infections, there's a serious threat of a secondary lockdown which could bring this recovery to a grinding halt," said BK's Schlossberg.

The currency fell sharply on Thursday when the Bank of England said monetary policymakers had been briefed on how to implement negative rates, but recovered later in the session. The negative-rates debate is heating up, with the Bank of England admitting to studying them. All eyes, therefore, on the Thursday policy meeting of the Reserve Bank of New Zealand, whose governor Adrian Orr has signalled willingness to take that step.

So far, Orr is sticking to his line that rates will stay at 0.25% until March. But the meeting takes place just as the country’s largest city Auckland lifts coronavirus restrictions, New Zealand endures its worst recession in a decade and campaigning heats up for October elections.

Other countries’ experience implies the RBNZ may end up with asset price inflation rather than a weaker currency, should it embrace sub-zero rates. While the debate is mostly moot for now, the RBNZ’s latest views on the subject will be watched.

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Many central banks are battling to lift inflation and growth but the Swiss National Bank has it tougher than most. Despite the world’s lowest interest rates, its currency, a popular safe-haven, is near five-year highs and Switzerland has endured a seventh month of annual price deflation.

Policymakers will likely hold off on new announcements on Thursday and wait instead for the European Central Bank’s next move. They have spent 2020 intervening to tamp down the franc; the result is a swelling portfolio of valuable U.S. tech stocks. But interventions risk the wrath of the United States, which has Switzerland on a currency manipulation watchlist. And despite all efforts, the franc is not far off five-year highs versus the euro and 5-1/2 year peaks to the dollar.

Upcoming meetings of Sweden’s Riksbank and Norway’s Norges Bank won’t spark fireworks either. Like the SNB, they will probably pledge to keep rates low as they monitor the ECB’s stimulus splurge.

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So, how we could comment market reaction on Fed statement. Based on analysts and investors' feedbacks, it seems that markets see zero interest rates on the first stage and that they stay there for the long-term. There is no big weight appointed to positive review of US economy conditions and only short-term reaction has followed. We think that Fed shows transformation from emergency measures to keep economy afloat to long-term recovery strategy that has the main aim to boost employment whatever it will cost. Inflation level becomes the secondary factor. With global strong deflationary processes Fed in fact has unlimited sources to stimulate the job market and could create very attractive conditions to the people and small business and return them to work. This process is just starting right now.
The big difference between Fed and ECB now that Fed is ready to do this, while ECB is not. Although ECB also has enough aces in the sleeve. Currently real interest rates are dropping:

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And investors see only rising of liquidity injections on horizon with relatively worse economy statistics, compares to EU, for example. But situation definitely will change if Fed's efforts will start bringing positive results and statistics improves. Now market are future-thinking and driven by expectations mostly, as facts become a history even before they become the reality. Thus, it could lead to change the balance of EUR/USD even no 2% inflation will be on horizon and rates will be still around zero.

J. Powell said "recovery is here", which means that it is underway and Fed sees it. As they haven't increased Bond purchasing programme and not adopted new liquidity measures, they probably see acceptable pace that supposedly should appear in economy statistics soon. For instance, next week the US earnings report cycle begins. As we said in daily update, we think that market underestimate the importance of Fed review of US GDP and employment this year, but probably it will have later effect than we've suggested. US Dollar probably will stay under pressure until elections or even till the end of the year as President's run passions and drama hardly calm down fast.
Currently EUR stands in better position as EU has better recovery pace, better situation with CV19, less debt, more active M&A market, less necessity to supportive measures to stimulate economy. But the question is what degree of these advantages is already priced-in. Closer to the end of the year situation could start changing, especially if Fed efforts will bring positive results. And probably they will based on J. Powell's comments and Fed steps on recent meeting.



Technicals
Monthly


Despite the Fed, technical picture has not changed too much, as markets mostly saw only zero rates and decreasing inflation in Fed statement. Hardly we could expect big changes soon, as we've said above. The only thing that makes difficult suggestion of immediate rally is COT report. Too many longs have been closed this week in conditions when market was holding in the tight trading range and didn't show any deep drop. Only if speculators will start re-establish closed positions - that could push EUR higher... will see.

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. At the same time the strength of upside action hits on continuation of the rally in the future.

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 and it is already start making impact on sentiment. Second - market still stands around monthly Agreement resistance that in most cases triggers stronger downside reaction that we have right now.
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Weekly

Here we have too many doji candles on the top that indicates indecision condition on the market. This, in turn, suggests that real action could happen only after breakout in one or another direction. While market keep standing in this range, hardly something valuable will happen. We've hoped to get bullish grabber this week but unfortunately market was not able to reach MACDP for few pips and again we are with empty hands here.

It is really tight balance here as despite reaching of important targets, completed reversal patterns, hit overbought level - EUR has not shown any moderate pullback to complete at least 3/8 retracement, that in current conditions absolutely wouldn't hurt bullish scenario. At the same time, it can't proceed higher as bullish power has exhausted and can't support the same pace. Tight range standing suggests fast out. The common approach in such circumstances is either buy OTM options that are relatively cheap or use stop entry orders slightly outside the range to make them trigger at the moment of breakout. While market stands in this tight range it is nothing to discuss on weekly chart as everything is focused on daily and intraday ones.
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Daily

Volatility has dropped so significantly that oversold level stands right under minor 3/8 Fib support that market holds more than the month. Long-term standing above nearest support level is good and looks more bullish rather than bearish, but here we need to pay attention to symmetry. Sometimes price indeed stands above nearest support, but only until it forms symmetrical reversal pattern, but then it fast drops through it. Here, guys, maybe this is simple sideways consolidation, but as price gradually is rounding down, we should keep an eye on possible round top, or cup if you want. Until we will get clarity with it, we could trade something only on intraday charts.

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Intraday

Here we keep up with our trading plan that we already discussed. As upside rebound was fast after Fed statement, it takes the shape of 8H bullish engulfing pattern. In turn, it suggests AB-CD upside shape that could lead EUR back to 1.1950 area. The daily symmetry also doesn't exclude appearing of harmonic top to the right from the major peak.
Thus, recent action shows that the pullback that we were waiting for is started. Now price already shows harmonic lows but price action hints on possible deeper retracement. Thus, we still think that 1.1815 K-support could be reached. Now it even seems that we could reach major 5/8 level as well because of small Double Top pattern that we have here. So if you're searching context and setup to buy EUR, you could consider this one. Others, who trade on higher time frames have nothing to do as we do not have yet clear hint on direction.

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Sive Morten

Special Consultant to the FPA
Messages
14,060
Morning everybody,

So, yesterday panic on a background of rising CV19 cases across the Globe and worries that Powell will not be able to get new supportive measures from Senate, where it will talk three sessions, starting today - has led to collapse on all markets due rising of US Dollar. In general, this is not big surprise for us, as we were a bit surprised previously that markets do not show adequate reaction on rather strong targets and levels. Besides, recent EUR COT data has warned that this could happen.

Anyway, intraday EUR setup totally has been cancelled by price action and there was no chance to enter as market just dropped through all levels in an hour. Thus, on EUR it makes sense to wait a bit and see, whether price will reach stronger 1.1650 level where potentially something could be formed.

Meantime, we see that GBP situation looks more attractive for trading, as price finally is coming to our 1.27 K-support area and daily Oversold level. Still, we do not treat possible upside action here as major reversal. Taking in consideration our fundamental view, we mostly suggest technical bounce and then downside continuation to 1.20 area. Anyway, bounce on daily chart could be nice:
gbp_d_22_09_20.png


On 4H chart we do not have some specific AB-CD's targets as downside action is straight forward. But we have extension target and butterfly pattern that point approximately at the same 1.27 area. Once targets will be hit, we need to keep an eye on reaction and potential bullish patterns that should start forming there. Actually the one we already have - this is butterfly...
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Sive Morten

Special Consultant to the FPA
Messages
14,060
Morning everybody,

So, yesterday we've discussed situation on GBP and still keep watching over it, while today we finally can take a look at EUR. To be honest, price shape here mostly the same except longer term expectation. But in the short-term situation is very similar - in a few sessions chances on upside bounce look nice.

On daily chart price stands now at wide support area, consisting of two Fib levels and daily oversold. It means that strong downside continuation hardly possible, if, of course, nothing outstanding happens. Thus, somewhere around we could consider intraday bullish setups:
eur_d_23_09_20.png


On 4H chart we have precise level to watch for - this is AB-CD OP target and BC leg 1.27 extension (you could treat it as butterfly, if you want). Thus, somewhere around 1.1650, when market hits it, something could start to change and we should keep an eye on possible bullish patterns that could trigger the upside bounce. That's our trading plan till the end of the week.
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Sive Morten

Special Consultant to the FPA
Messages
14,060
Greetings everybody,

While on gold market our situation has changed significantly, on FX market it stands mostly the same as currencies do not show strong downside continuation by far. Currently overall drop looks like retracement but shape of stock market and gold makes me think that within few weeks we should get the continuation down.

Now, within few session we're watching for short-term pullback as EUR and GBP stand on solid support areas. EUR mostly is at the same level, where it was yesterday. The only difference is our OP has been hit on 4H chart.
eur_d_24_09_20.png


If upside action will happen, it would be better to not set extended targets by far and do not hope that it will be major upside reversal. It would be more propriate to look at 1.1750 resistance first. Because, as we've said - there is solid odds that upside retracement will be temporal.
Next level to consider is 1.15 Agreement - there we have XOP on 4H chart and daily 5/8 Fib support. This is in case of downside continuation.
eur_4h_24_09_20.png


Now we could keep an eye on 1H time frame, whether any bullish reversal patterns will be formed there to trigger the pullback. At this moment we see nothing yet.
 

netbusinessman

Private, 1st Class
Messages
40
Dollar Index moves into some interesting zone:

-Falling trendline
-double Fib. equality.
-previous low/new resistance?

It's the market to decide what will happen next.

(copy paste)
 

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Sive Morten

Special Consultant to the FPA
Messages
14,060
Morning everybody,

Today I think we could take a look at something else, AUD for instance. Situation on EUR and GBP mostly stands the same. Besides, Roger also has prepared good update on EUR...

So, on AUD last time we were watching for reversal down on monthly chart and suggested that it should happen from K-resistance area. The reasons for retracement were simple - first upside reversal swing and existence of long-term bearish momentum. This combination should make price to show 50-60% pullback.

In reality market has climbed slightly higher, and reached major 3/8 level that is above our former K-area. As September is almost over, we could get bearish reversal month right on top:
aud_m_25_09_20.png


On weekly chart upside action has features of thrusting action and is suitable for DiNapoli patterns. We have to exclude B&B "Buy", because it is too far to 3/8 level and weekly oversold stands between current price and this level. Thus, it could either DRPO "Sell" or classic downward drift in some shape.
aud_w_25_09_20.png


On daily chart reversal also has started and now we have good K- support area and Agreement, accompanied by daily OS level. This is good chance for those who are watching for long entry. Maybe right from here the second part of weekly DRPO will start. Anyway 5/8 bounce here is highly probable.
But, take a look that XOP has not been reached yet. It means that price still could show another leg down before final reversal. Be aware of this moment:
aud_d_25_09_20.png


Finally, on 4H chart the whole way down looks like perfect thrust. Daily XOP marking stands below. It means that scalp short trade could be considered around K-resistance area and it will have the nature of B&B "Sell". Conversely, if market drops and hit XOP first - DRPO "Buy" or any other classic reversal pattern could be formed. In this case - this is chance for long entry:
aud_4h_25_09_20.png


So, what we have in a dry residual - two setups for intraday trading and potential signals on weekly chart as well. AUD provides good sequence of trading setups that we definitely should keep an eye on.
 
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