Sive Morten
Special Consultant to the FPA
- Messages
- 18,527
Fundamentals
This week our attention mostly will be on short-term factors, as long-term ones stands without significant changes. So, we keep our long-term view on dollar appreciation in relation to EUR and GBP within a year or so.
Speaking on Brexit negotiations - we've missed just for one day, guys. Factors that I've explained in details in Thu video have been triggered on Friday and GBP collapsed. Daily setup has worked perfect as market has not passed through K-resistance, while intraday Thu setup has been erased by price action...
As Reuters reports - Sterling plunged on Friday, driving the U.S. dollar up, after fears rose that Britain would
leave the European Union without a trade deal. British Prime Minister Theresa May said on Friday the European Union must supply an alternative Brexit proposal, saying talks had reached an impasse after the bloc's leaders had rejected her plans without fully explaining why.
That's what we've talked about. It is useless to expect some steps from EU, because Brexit was initiated by GB, and all troubles concerning border as physical as economical will be GB burden. EU has better and stronger position in this dispute, since they actually don't care where border will be and whether GB will keep place in EU trading space or not. In fact, GB staying with EU trading space is another strong argument in hands of Brussels, and it could use it to force GB accept EU-favored position on Brexit, or to get big reparations.
"Sterling bears are out in full force. They've pushed the pound quite aggressively down this morning," said Dean Popplewell, chief currency strategist at Oanda in Toronto, "and it looks like they want to push things further."
"On the back of (the pound's fall), it's interesting the dollar got a bit of a bid as well. The trade woes in the last 48 hours took a bit of a back seat and it did allow some of the risk takers to set their sights on some of the other G7 currencies," said Popplewell.
With trade war concerns receding and emerging market central banks led by Turkey taking measures to stabilize their currencies, investors pushed the euro just past the $1.18 line for the first time in more than three months during the European session. The dollar's bounce, however, pulled the single currency back into the red, last at $1.174.
The safe-haven bid into the dollar has been bolstered by strong U.S. economic data, boosting the value of the currency as trade tension between Washington and Beijing escalates. As the tariff talk has faded out of focus, traders have made classic risk-on moves.
The market will be focused on the Federal Reserve's policymaking committee meeting next week, at which a hike in interest rates is expected by 93.8 percent of traders, according to CME Group's FedWatch tool.
With the likelihood of a Fed hike almost fully priced in by the market, analysts at TD Securities suggest that might yield an "asymmetric response in the FX markets where the dollar weakens more on a dovish take than rallies on a hawkish one."
Now, if we will take a look what's going on in US, recent Fathom consulting update on US economy sentiment tells that everything stands rather positive.
"We expect US GDP growth to remain between 3.5% and 4.0% in Q3 and Q4, after increasing by an annualised 4.2% in Q2. The latest reading of our US Economic Sentiment Indicator (ESI) supports that view after it climbed from 5.5% to 6.0% in August. Trade tensions between the US and China continue to escalate, but there has been some cooling of tensions between the US and other trading partners, such as Mexico. While consumer sentiment remains upbeat by past standards, the rise in the ESI was driven by businesses, with the readings on 10 out of 14 business surveys increasing in August."
Taking it all together, guys, about GBP - it seems that this is good moment to short GBP. Problems are not resolving, but time of divorce closer and closer. It means that domestic political pressure on T. May will rise, and negotiations will be harder. Now I do not want even to talk on border problems and what will happen inside GB, if they will decide, say, to split Ireland again or separate UK economy in two parts. Any of these solutions will be disaster. If we add here UK economy problems that were mentioned many times here and relatively positive perspective of US economy - from fundamental point of view, conclusion is obvious.
It might happen, that by recent drop GBP turns back to long-term bear trend.
And the last thing for today. If you remember within two previous reports we've talked about Fathom analysis of possible global crisis in 2020. Also I've put some technical charts of DAX, NASDAQ and DJIA indexes, where all of them stand at all-time targets.
Today, Fathom also has released analysis on small cap US stocks where it comes to conclusion of possible soon reversal there. I read this reports, since I mostly deal with equity options right now. When I saw H&S on DAX in January - this was first warning sign. Now, with Fathom view on small caps, this could be early bell on stock market era is over.
But here, we're mostly interested in FX market, and another phrase is attracted my attention. Fathom writes:
"US dollar might not continue to support smaller companies as it has over the past few months. If the Fed delivers a rate hike per quarter until 2020, per our expectations, the extra financing costs from higher rates will probably offset any short-term relative gain even if the dollar does appreciate."
So, they expect rate increase by Fed every quarter till 2020. This is important. Speaking on small caps stock, conclusion stands as follows:
"We think that small-cap stocks may be approaching the end of their strong relative outperformance as this performance has become increasingly extreme."
COT Report
As you understand, today we will take a look at GBP, mostly because it could stay at decisive moment and, as we've said above - long term bear trend could continue right from here. Sentiment shows sad picture, it's bearish. Net short position has increased last week, while open interest has dropped for ~45 K contracts. It means that speculators were closing long positions on GBP:
Still, as you can see on the chart - net short position has not reached the bottom yet and has some potential to decrease even more.
Source: CFTC.gov
Charting by Investing.com
Technicals
Monthly
Although we've made no weekly reports on GBP within 2 months, monthly chart has not changed significantly. As you can see price is coiling around Yearly Pivot in August and September. Trend stands bearish here, no overbought. Fluctuations are too small to make impact on monthly chart, and we could say that bearish context here still stands intact.
Long term charts mostly stand in relation to fundamental processes rather some technical short-term issues. From this point of view GBP action on monthly chart absolutely corresponds to our view on UK economy and its perspectives. Once our previous target of YPP has been completed at 1.30 area, now we could talk about YPS1 at 1.2440.
At the same time we remind you our long tong all-time AB=CD OP target around 0.95. Recent bottom of 1.22 is, actually, COP target.
It is difficult to talk definitely guys, but in my opinion most undervalued factor for UK is flaw in its relation with EU as economical as political. Now, when US steps in in this conversation, situation has become even more difficult.
Speaking on long-term perspective, in July we've mentioned that EU is turning East right now to huge new markets and economical possibilities - Iran, Middle East, Asia and Russia, of course. This is alternative to UK market, especially when UK turns up its nose. At the same time, UK is an island, it strongly depends on its closest neighbor - EU. Not only in terms of mutual trading, but also in terms of goods logistic. If this flaw will start to wide - 0.95 of GBP/USD could become a reality.
Pivot framework looks very bright here. Cable has failed to break through Yearly Pivot resistance 1. This fact tells, that upside action to 1.40 was just a retracement within long-term bear trend, and this retracement is over. Following this logic, current downward action is another leg of bear trend. Thus, we should not be surprised by unexpected downside accelerations.
Weekly
Here we do not need many comments, guys. You probably understand everything - yes, here we have very good B&B "Sell" pattern, which still has potential down. As you know, minimal target of B&B is 5/8 Fib support of whole upside retracement action, and this level has not been reached yet.
At the same time, taking in consideration bearish sentiment around GBP, B&B could become the pattern that will trigger downside continuation. Major 5/8 Fib support here was deeply penetrated by downside thrust. Below this level market has no strong supports any more till 1.20 area.
Daily
Despite we've missed one day with expectation of impact of fundamental factors on GBP - daily setup has worked perfect. Market has failed to break K-resistance and collapsed. Now we have multiple bearish signs and patterns here. First is our "222" Sell, second - we have bearish "Stretch" pattern, as market overbought at K-resistance. Finally, GBP has failed to pass through MPR1 and WPR1. As we've explained, this is important issue for identification of retracement.
"222" already has reached minimal target - this is 3/8 Fib support. But, as we also have weekly B&B, we could watch for some continuation, at least to major 5/8 daily support.
Intraday
Indeed, market has reached K-support area around 1.3050. Here also you can see that B&B minimal target is ~1.29. Market has formed bearish reversal swing, so chances on upside bounce are not bad.
On 1H we have very good thrust down, that's suitable for DiNapoli B&B or even DRPO "Buy" patterns.
Here is as usual - watch for upside retracement and bearish continuation patterns, B&B "Sell", "222" etc.
1.3140 Fib resistance and WPP now seems like attractive level, where downside action could be re-established.
Conclusion:
As we've updated long-term inputs on UK and GBP, they bring nothing yet that could force us to change opinion on GBP perspective. It still stands bearish.
In short-term perspective situation might be interesting. It is good that GBP provides clear setup for short entry, but what is really interesting - whether GBP turns to long-term downside action again...
The technical portion of Sive's analysis owes a great deal to Joe DiNapoli's methods, and uses a number of Joe's proprietary indicators. Please note that Sive's analysis is his own view of the market and is not endorsed by Joe DiNapoli or any related companies.
This week our attention mostly will be on short-term factors, as long-term ones stands without significant changes. So, we keep our long-term view on dollar appreciation in relation to EUR and GBP within a year or so.
Speaking on Brexit negotiations - we've missed just for one day, guys. Factors that I've explained in details in Thu video have been triggered on Friday and GBP collapsed. Daily setup has worked perfect as market has not passed through K-resistance, while intraday Thu setup has been erased by price action...
As Reuters reports - Sterling plunged on Friday, driving the U.S. dollar up, after fears rose that Britain would
leave the European Union without a trade deal. British Prime Minister Theresa May said on Friday the European Union must supply an alternative Brexit proposal, saying talks had reached an impasse after the bloc's leaders had rejected her plans without fully explaining why.
That's what we've talked about. It is useless to expect some steps from EU, because Brexit was initiated by GB, and all troubles concerning border as physical as economical will be GB burden. EU has better and stronger position in this dispute, since they actually don't care where border will be and whether GB will keep place in EU trading space or not. In fact, GB staying with EU trading space is another strong argument in hands of Brussels, and it could use it to force GB accept EU-favored position on Brexit, or to get big reparations.
"Sterling bears are out in full force. They've pushed the pound quite aggressively down this morning," said Dean Popplewell, chief currency strategist at Oanda in Toronto, "and it looks like they want to push things further."
"On the back of (the pound's fall), it's interesting the dollar got a bit of a bid as well. The trade woes in the last 48 hours took a bit of a back seat and it did allow some of the risk takers to set their sights on some of the other G7 currencies," said Popplewell.
With trade war concerns receding and emerging market central banks led by Turkey taking measures to stabilize their currencies, investors pushed the euro just past the $1.18 line for the first time in more than three months during the European session. The dollar's bounce, however, pulled the single currency back into the red, last at $1.174.
The safe-haven bid into the dollar has been bolstered by strong U.S. economic data, boosting the value of the currency as trade tension between Washington and Beijing escalates. As the tariff talk has faded out of focus, traders have made classic risk-on moves.
The market will be focused on the Federal Reserve's policymaking committee meeting next week, at which a hike in interest rates is expected by 93.8 percent of traders, according to CME Group's FedWatch tool.
With the likelihood of a Fed hike almost fully priced in by the market, analysts at TD Securities suggest that might yield an "asymmetric response in the FX markets where the dollar weakens more on a dovish take than rallies on a hawkish one."
Now, if we will take a look what's going on in US, recent Fathom consulting update on US economy sentiment tells that everything stands rather positive.
"We expect US GDP growth to remain between 3.5% and 4.0% in Q3 and Q4, after increasing by an annualised 4.2% in Q2. The latest reading of our US Economic Sentiment Indicator (ESI) supports that view after it climbed from 5.5% to 6.0% in August. Trade tensions between the US and China continue to escalate, but there has been some cooling of tensions between the US and other trading partners, such as Mexico. While consumer sentiment remains upbeat by past standards, the rise in the ESI was driven by businesses, with the readings on 10 out of 14 business surveys increasing in August."
Taking it all together, guys, about GBP - it seems that this is good moment to short GBP. Problems are not resolving, but time of divorce closer and closer. It means that domestic political pressure on T. May will rise, and negotiations will be harder. Now I do not want even to talk on border problems and what will happen inside GB, if they will decide, say, to split Ireland again or separate UK economy in two parts. Any of these solutions will be disaster. If we add here UK economy problems that were mentioned many times here and relatively positive perspective of US economy - from fundamental point of view, conclusion is obvious.
It might happen, that by recent drop GBP turns back to long-term bear trend.
And the last thing for today. If you remember within two previous reports we've talked about Fathom analysis of possible global crisis in 2020. Also I've put some technical charts of DAX, NASDAQ and DJIA indexes, where all of them stand at all-time targets.
Today, Fathom also has released analysis on small cap US stocks where it comes to conclusion of possible soon reversal there. I read this reports, since I mostly deal with equity options right now. When I saw H&S on DAX in January - this was first warning sign. Now, with Fathom view on small caps, this could be early bell on stock market era is over.
But here, we're mostly interested in FX market, and another phrase is attracted my attention. Fathom writes:
"US dollar might not continue to support smaller companies as it has over the past few months. If the Fed delivers a rate hike per quarter until 2020, per our expectations, the extra financing costs from higher rates will probably offset any short-term relative gain even if the dollar does appreciate."
So, they expect rate increase by Fed every quarter till 2020. This is important. Speaking on small caps stock, conclusion stands as follows:
"We think that small-cap stocks may be approaching the end of their strong relative outperformance as this performance has become increasingly extreme."
COT Report
As you understand, today we will take a look at GBP, mostly because it could stay at decisive moment and, as we've said above - long term bear trend could continue right from here. Sentiment shows sad picture, it's bearish. Net short position has increased last week, while open interest has dropped for ~45 K contracts. It means that speculators were closing long positions on GBP:
Still, as you can see on the chart - net short position has not reached the bottom yet and has some potential to decrease even more.
Source: CFTC.gov
Charting by Investing.com
Technicals
Monthly
Although we've made no weekly reports on GBP within 2 months, monthly chart has not changed significantly. As you can see price is coiling around Yearly Pivot in August and September. Trend stands bearish here, no overbought. Fluctuations are too small to make impact on monthly chart, and we could say that bearish context here still stands intact.
Long term charts mostly stand in relation to fundamental processes rather some technical short-term issues. From this point of view GBP action on monthly chart absolutely corresponds to our view on UK economy and its perspectives. Once our previous target of YPP has been completed at 1.30 area, now we could talk about YPS1 at 1.2440.
At the same time we remind you our long tong all-time AB=CD OP target around 0.95. Recent bottom of 1.22 is, actually, COP target.
It is difficult to talk definitely guys, but in my opinion most undervalued factor for UK is flaw in its relation with EU as economical as political. Now, when US steps in in this conversation, situation has become even more difficult.
Speaking on long-term perspective, in July we've mentioned that EU is turning East right now to huge new markets and economical possibilities - Iran, Middle East, Asia and Russia, of course. This is alternative to UK market, especially when UK turns up its nose. At the same time, UK is an island, it strongly depends on its closest neighbor - EU. Not only in terms of mutual trading, but also in terms of goods logistic. If this flaw will start to wide - 0.95 of GBP/USD could become a reality.
Pivot framework looks very bright here. Cable has failed to break through Yearly Pivot resistance 1. This fact tells, that upside action to 1.40 was just a retracement within long-term bear trend, and this retracement is over. Following this logic, current downward action is another leg of bear trend. Thus, we should not be surprised by unexpected downside accelerations.
Weekly
Here we do not need many comments, guys. You probably understand everything - yes, here we have very good B&B "Sell" pattern, which still has potential down. As you know, minimal target of B&B is 5/8 Fib support of whole upside retracement action, and this level has not been reached yet.
At the same time, taking in consideration bearish sentiment around GBP, B&B could become the pattern that will trigger downside continuation. Major 5/8 Fib support here was deeply penetrated by downside thrust. Below this level market has no strong supports any more till 1.20 area.
Daily
Despite we've missed one day with expectation of impact of fundamental factors on GBP - daily setup has worked perfect. Market has failed to break K-resistance and collapsed. Now we have multiple bearish signs and patterns here. First is our "222" Sell, second - we have bearish "Stretch" pattern, as market overbought at K-resistance. Finally, GBP has failed to pass through MPR1 and WPR1. As we've explained, this is important issue for identification of retracement.
"222" already has reached minimal target - this is 3/8 Fib support. But, as we also have weekly B&B, we could watch for some continuation, at least to major 5/8 daily support.
Intraday
Indeed, market has reached K-support area around 1.3050. Here also you can see that B&B minimal target is ~1.29. Market has formed bearish reversal swing, so chances on upside bounce are not bad.
On 1H we have very good thrust down, that's suitable for DiNapoli B&B or even DRPO "Buy" patterns.
Here is as usual - watch for upside retracement and bearish continuation patterns, B&B "Sell", "222" etc.
1.3140 Fib resistance and WPP now seems like attractive level, where downside action could be re-established.
Conclusion:
As we've updated long-term inputs on UK and GBP, they bring nothing yet that could force us to change opinion on GBP perspective. It still stands bearish.
In short-term perspective situation might be interesting. It is good that GBP provides clear setup for short entry, but what is really interesting - whether GBP turns to long-term downside action again...
The technical portion of Sive's analysis owes a great deal to Joe DiNapoli's methods, and uses a number of Joe's proprietary indicators. Please note that Sive's analysis is his own view of the market and is not endorsed by Joe DiNapoli or any related companies.