Forex FOREX PRO WEEKLY, September 25 - 29, 2023

[Sive Morten]

Fundamentals

This time we need to consider only Fed meeting, because some interesting statements and events have happened. I see no big sense to show you a lot of charts now, because they have not changed significantly - picture shows massive decreasing and contraction of economy across the board. We just update few charts. At the same time, some experts point on nervousness in J. Powell behavior especially during press conference. I'm not a psychologist and have no experience of political fight under carpet, and can't say whether it is really take place. But, experts' logic deserves attention and we share with this analysis.

Finally, we explain you the Fed strategy in very simple way, without sophisticated and mind blowing economical issues. What actually has happened in recent two years, while inflation was "transitory".

Market overview
The U.S. dollar edged higher against a basket of currencies on Wednesday, after the Federal Reserve held interest rates steady but stiffened its hawkish stance with a further rate increase projected by the end of the year. As they did in June, Fed policymakers at the median still see the central bank's benchmark overnight interest rate peaking this year in the 5.50%-5.75% range, just a quarter of a percentage point above the current range.

But from there, the Fed's updated quarterly projections show rates falling only half a percentage point in 2024 compared with the full percentage point of cuts anticipated at the meeting in June.

"This wasn't a 'pause,' it was a 'skip,'" said Karl Schamotta, chief market strategist at Corpay in Toronto. "With the economy performing better than expected and inflation pressures remaining persistent, Fed officials chose to maintain a hawkishly data-contingent bias in this afternoon's statement and dot plot," Schamotta said.

Fed Chair Jerome Powell said that while some things are out of the central bank's control, there is a good chance the Fed's aggressive rate hikes will not send the economy into a downturn. Interest rate sensitive two-year Treasury yields hit 17-year highs on Wednesday after the Fed decision.

"It looks as though the Fed is trying to send as hawkish a signal as it possibly can," said Gennadiny Goldberg, interest rate strategist at TD Securities.

The U.S. dollar's recent rally has put it on track to form a golden cross - a bullish technical trading chart pattern - affirming an upbeat near-term view on the currency, according to a BofA Global Research note published on Wednesday. A golden cross occurs when a short-term moving average crosses above a long-term moving average. The dollar index's 200-day moving average of 103.036 is close to being topped by the 50-day moving average at 103.001, according to LSEG data.

"This supports our 4Q23 technical view of a supported and potentially stronger USD," BofA Global Research technical strategist Paul Ciana said in a note published on Wednesday. "A signal when price is near the highs may make it difficult to perform vs a signal that occurs just after a timely dip," he said.

The last time a golden cross was formed in the index, it went on to rise another 24% before peaking, according to a Reuters analysis. Ciana, however, noted that the index's recent strong rally presented a risk to the bullish signal. Such a move now would lift the dollar index to over 129, far above its 2022 high of 114.78.

"Inflation is still too high, and I expect it will likely be appropriate for the (Federal Open Market) Committee to raise rates further and hold them at a restrictive level for some time to return inflation to our 2% goal in a timely way," Fed Governor Michelle Bowman said in prepared remarks for an Independent Community Bankers of Colorado event. "Progress on inflation is likely to be slow given the current level of monetary policy restraint," she said, noting that in policymaker projections issued by the Fed earlier this week inflation remains above the 2% target "at least until the end of 2025."

In separate remarks to the Maine Bankers Association, Boston Fed President Susan Collins said a further tightening of monetary policy "is certainly not off the table.

"I expect rates may have to stay higher, and for longer, than previous projections had suggested," said Collins.

Minneapolis Fed President Neel Kashkari indirectly supports more hawkish policy, saying that consumer spending continues to exceed our expectations," Kashkari said. "I would have thought with 500 basis points or 525 basis points of interest rate increases we would have slammed the brakes on consumer spending, and it has not."

"I don't think the Fed's forecasts are consistent with the most likely outcome of how the economy evolves and how things get back to normal," said Joe LaVorgna, chief economist SMBC Nikko Securities America in New York. "I don't see a soft landing," he said, citing the yield curve's inversion. "The only way out of this is going to be a recession where the Fed has to cut rates."

New projections issued at the end of a two-day policy meeting on Wednesday showed 12 of 19 Fed officials expect one additional quarter point rate increase this year. The Fed has two scheduled sessions left in 2023, concluding on Nov. 1 and Dec. 13.

Yields on two- and 10-year notes remained inverted at -67.6 basis points as the shorter-dated note yields more than the longer one. The inversion is seen as a reliable recession harbinger. Not many people point on this, but the current yield curve inversion has reached the same level as in 1928 - the year before the Great Depression, and almost equal to the level of pre-Volcker inflation spiral in 70s.

The Federal Reserve's expectations that the U.S. economy will continue to expand and necessitate additional interest rate hikes to combat inflation prompted HSBC to raise its year-end forecast for 10-year U.S. Treasury yields to 3.5% from 3%, strategists at the bank wrote in a note on Thursday.

"At a time when the Fed remains hawkish with the support of recent GDP data, there is pressure for short-dated bond yields to remain elevated, and this affects the whole curve," wrote the firm's analysts, led by Steven Major, the global head of fixed income. Despite all the talk of 'higher for longer,' we believe that the global monetary policy tightening cycle is drawing to a close," the firm wrote.

Hedge funds cut their net short dollar position by nearly $5 billion last week, according to the latest U.S. futures markets data, the biggest swing towards a more bullish dollar stance since May last year. The dollar-positive shift, in light of resilient U.S. economic data, bond yields and rate expectations - nominally and relative to major peers - has been pretty rapid. Less than two months ago, funds' were net short of dollars to the tune of $21.3 billion, the biggest bet against the greenback since June 2021.

The biggest move in the latest week was in the euro. Funds cut their net long holdings by 23,151 contracts to 113,080 contracts, the smallest net long since November and the biggest week-on-week reduction since June last year. The European Central Bank's 'dovish hike' last week could encourage further long liquidation from the speculative community, whose position is still effectively a $15 billion bet that the euro will rise.

The main ECB refinancing rate hits 4.5% and the deposit rate equalling its all-time high of 4.0%. The last time the deposit rate was that high was more than 20 years ago, so soon after the euro’s creation that physical coins were not even in circulation yet. Given the material risks of a recession in the single currency bloc (Fathom judges these to be in excess of 50% over the coming twelve months), the central bank is unlikely to hike much further, and may soon find itself cutting rates. The recession risks arise from two main sources: the delayed impact of higher rates and the lingering cost-of-living crisis. Data released last week showed that the crisis in living costs has not yet passed, with nominal wage growth slowing from 4.9% in Q1 to 4.6% in Q2, and real wages remaining negative. Overall, Fathom sees a greater than 60% chance that the euro area suffers a recession within the next year.

That's being said, the European Central Bank is done hiking interest rates and will stay on hold until at least July next year, according to economists in a Reuters poll, who said there was only a one-in-five chance the central bank hikes again this year. The probability of at least one more hike this year is 20%, according to the median of 32 respondents. Responses ranged from 5% to 35%. Interest rate futures are pricing a roughly 25% chance of another increase by year-end.

The data comes on the heels of disappointing data from Europe, which showed that economic activity in France fell much more quickly than expected in September.
Separate survey data covering the whole euro zone showed that the economy likely contracted in the third quarter.

"The U.S. is continuing to outpace the rest of the world and I think it will continue to do so for some time," Michael Brown, market analyst at Trader X, said of the U.S. data.Unless we see a sustained pickup in growth in the rest of DM (developed markets), I struggle to take a bearish view on the buck over the medium-term, as the FX market's focus increasingly shifts to which central bank will spend the longest time at its terminal rate," Brown said.

FED MEETING

This decision could raise a question, especially given the fact that inflation indicators have slightly increased. More precisely, the consumer price index was 3.7% year - on-year as of September 13, with the previous value (as of mid-August) of 3.2% and the forecast of 3.6%. However, the main event took place at a press conference. And in our daily videos we've said that the Fed could decide to act in advance, changing rate in September. Chances were anemic, and this has not happened, but still...

In fact, Fed Chairman Powell threw a tantrum on it, repeating several times the same thesis that the maximum point of rates, although close, is unknown to the Fed and that the processes taking place in the Fed's economy are not clear. Probably you agree that this sounds rather strange from the Head of FOMC.

We can only make a guess. The fact is that this week UN Secretary-General Gutierrez said that the Bretton Woods system (like the UN) needs to be reformed. Given the fact that official liberal propaganda believes that the B.-V. system ceased to operate in 1971, this statement seems rather unexpected. But at the same time-repeated, since the first time he said this in May of this year. Given that the fate of the B-V system is not in any way part of the UN Secretary-General's mandate, the combination of these factors makes it possible to make a (relatively) plausible assumption.

Its essence is that the Fed's helplessness in determining the causes of the crisis causes natural irritation among the elite of the "Western" global project and US political elites. And it is possible that in May of this year, Powell was given a strict condition to correct the situation (conditionally, until the end of the year). And in order that this warning did not look like an empty threat, Gutierrez was used.

Otherwise, the dollar system will be reformed, since the rate of accumulation of debt clearly exceeds all reasonable limits. Well, something needs to be done. At the same time, by the way, a serious question is whether dollar debts will be saved (or to what extent they will be saved). And, thus, the current leadership of the Fed and other Bretton Woods institutions (the IMF, the World Bank, the WTO, and so on) will face serious problems.

And if we consider that with the arrival of fundamentally new people, it is possible to conduct a thorough audit, Powell's nervous reaction becomes understandable. And his words, in fact, are addressed to all potential victims of this reform and are a proposal to do something real. From system support to suggestions on how to fix the situation. Of course, this is only a hypothesis.

Speaking about major points of J. Powell speech - we do not put all of them here, but pay attention to most interesting and a kind of unexpected. Such as:

• a "soft landing" of the US economy is not a baseline scenario;
• a "soft landing" is quite a likely result, but there are factors beyond our control;
• we will discuss all the data at the last two meetings that we will hold this year;
• when I answer questions about lowering rates, I'm not going to announce any deadlines!
• US GDP is not the goal of our mandate! (Fed double mandate is inflation and unemployment);
• we are still in search of a peak rate level;
• rising energy prices are a significant factor for inflationary spikes;
• forecasts are very uncertain;
• the increase in the yield of government bonds is not associated with an increase in inflation, but with an increase in the supply of these securities on the market."

Indeed, if we take a look at the relation of US bonds turnover to the debt - we see how liquidity drops:

Mostly, Powell has confirmed all our points that we've discussed in recent month - energy prices no doubts will boost inflation in nearest 1-2 months, Fed will raise the rate more. Here is very interesting the comments from big banks, such as HSBC mentioned above and some others, and absolutely different positions of Hedge funds that have changed only two weeks ago. We talk about it below:

WHAT FED IS DOING (real simple explanation)

Let me remind you that the Fed's inflation target has always been 2%. No higher or lower than this parameter was considered a good job. And now we have brief historical excursus:

In April 2021, inflation jumped sharply by 2.6%. The market thought that the Fed would soon stop printing money and start cooling the economy in order to keep inflation within the limits. Those, who remembers - Bitcoin then fell from $60,000 to $30,000.
After 2 months in June, inflation doubled to 5%. The real rate at that time was equal to the inflation itself with a negative value, i.e. -5%, since the rate was zero and, accordingly, the yield on the US government debt was somewhere near zero.

And then Powell sang about a kind of temporary inflation, which occurred not because they "print and distribute", but because supply chains simply have not yet been rebuilt to meet sharply increased demand. Looking at all this, the market ran to escape into any assets: stocks, raw materials, crypto, long-term consumer goods. The motto then was: "cash is trash", that is, money is garbage, that is, the dollar is garbage.

By May 2021, inflation was already 7%, and the real rate was already -7%. That is, owning the US national debt, you just stupidly lost 7% of your capital every year. And I emphasize: all this was before Russian Special Military Operation (SMO)and other Putin's tricks. Powell continued to tell that now-now enterprises will a kind a produce goods, a kind a fill up the market with them!

So by July 2022, a complete catastrophe was already unfolding. With inflation of 9.1%, the rate was 1.5%, that is, the real yield was -7.6%. And only in the last couple of months has the real rate moved into a positive area. And those who believed that the Fed is strong at the beginning of 2021 have already received a depreciation of their capital by about 15% in 2 years.

But this is correct only if they keep their bonds to maturity. In reality, If they held any 10- or 20-year securities, then there, due to the collapse of the value multiplied by the maturity (duration), a general rout turned out. "The most reliable public debt in the world" crashed by 30-50%. That is, by the current moment, holders will simply lose half of their capital if they fix a loss. Reliability as it is.

There is a tales saying that they just need to hold out, wait for the rate cut and then the price of securities will recover. There are a few "but":
1. they have definitely lost 15%;
2. a reduction in the rate will now definitely cause a devaluation of the dollar, so the losses will simply be expressed differently: through the exchange rate;
3. devaluation will cause a new surge in inflation. Inflation is already going on without any rate cuts. And what will happen with a decline is already clear to everyone: the second more powerful inflationary cycle.

Powell, by the way, said this week that "he was mistaken that inflation was temporary." Thus, those who believed the head of the Fed at the moment have lost half of their capital. And this is not some kind of joke. In the USA, 60/40 portfolios are extremely popular, where 60% are stocks and 40% are bonds. That is, Powell stupidly framed the huge number of pensioners who have become an "investors".

But this is still half the trouble. When Powell was talking about temporary inflation - he was just burning debts by inflation. He held a deeply negative real rate for 2 years and thus reduced the size of debt by 15%. Beauty as it is.

When Powell now plays the fight against inflation and raises rates, this is nothing more than moving pensioners on the second round. In the 1970s, in a similar situation, we had 3 waves of increasingly strong inflation.

And indeed, all over YouTube all this winter, then spring and even summer, a kind of investors-influencers ran around and told that Powell gives a very good yield in dollars. It is necessary to take while they give. In winter it was 2%, in spring 3%, in summer 4%, now we are talking about almost 5%. As you understand, those investors who have bought this trick on first stage now are in phantasmagoric losses.

In fact, all that Fed was doing and is doing is pushing households and retired ones stupidly into debt with a temporarily acceptable real yield in order to bring down an inflationary tsunami of 10-12% on them a year later, burning their savings by the US debt.

Now when Powell, who 2 years ago argued that there is no need to worry about inflation, mumbles something about continuing to raise the rate. For a whole year, he was pushing investors in US papers, and then when it becomes too painful to get out of them, he will close the mousetrap with a sharp jump in inflation due to super QE. The good old scheme of solving the problem of debt that cannot be repaid.

Conclusion:

The story above, by the way, explains why Hedge funds have reversed recently. Just two weeks ago they were keeping largest shorts against USD. But why, if all big banks are running around and talking about Fed pivot and rate cut? Supposedly they should have opposite position. The answer is simple.while big banks are working out the Fed tasks as all of them are primary dealers of US debt and they have to attract more and more victims to keep the oven hot, Hedge Funds are interested with the profit, that's it. And they were preparing for super QE. Now, when it is becoming obvious that it is postponing, they start changing positions.

Now the major Fed task is to distribute as much debt as possible among relatively small investors and pension funds (preferably foreign ones), to put them there and then lock them for considerable period (2-3 years at least), so that they just wait for breakeven point to out. Then, with massive new QE devalue those debt first by currency devaluation, then - by another inflation spiral.

Speaking on EU situation, we also think that this was a final rate hike by ECB. Actually we've said about this two weeks ago - "this is last chance for the ECB to change the rate, because then we will see how data will worsen significantly". If consumption in the US still has some safety margin, in EU it is coming to an edge. Taking it all together we suggest that EUR/USD should keep going lower. Just take a look at this:

Another rate hike, together with raising energy prices just will kill the EU economy totally.

 

[Sive Morten]

Technicals
Monthly

On monthly chart changes come slowly. Formally, trend remains bullish by far. But it seems that fundamental background should catch up with it sooner rather than later. In nearest few weeks we will be busy with 1.0450-1.06 weekly K-area but here makes sense to mention major long term target around 0.9, just to recall it:

Weekly

Market starts flirting with K-area of 1.0430-1.0610. Downside action is gradual, so it makes sense to count on pullback, but here we do not have any signs to suggest from where it could start. So, we have to look for it on lower time frames.

Although downside action looks small, but it only on a background of big swings. In fact, we could get small B&B "Sell" here, if upside bounce will be strong enough on daily and intraday charts:

Daily

Friday session brought nothing new, and, as we've suggested, was suitable only for scalp bearish activity. Nearest target stands around 1.0475. Here we need to watch for price behavior. Now it looks bearish because market can't get started any bounce. Recently we've got 2nd grabber and need to see whether they bring any fruits.

In general, as market shows no response to OP and stands flat, moving slowly down - this is a bearish sign.

Intraday

On 4H chart we have rather extended channel, showing that 1.0730-1.0740 seems to be a vital area for short-term trading. With the daily grabbers and weekly K-area in place, I would wait with new shorts by far:

1H chart brings no clarity as price stands in sideways action. Despite that Friday's trading plan was OK, now it would be better to wait few sessions. If grabbers fizzle and we get signs of bearish dynamic pressure - it will be possible to consider new short-positions. Otherwise stronger upside bounce should start.

 

[Sive Morten]

Morning everybody,

So, EUR has shown another downside tick, trying to break the way through weekly K-area. Daily chart shows few bearish signs. First is, recent grabbers have been erased. Second - market drops below 1.0630 lows and stands here, making no attempt to return back. It is not at oversold, but weekly K-area is a barrier, suggesting that downside will be easy:

For short-term bearish setup market has to stay under recent lows and 1.0620-1.0630 resistance area. Upward breakout is not a danger for long-term downside tendency but it could lead to higher retracement of a larger scale. For example, EUR could keep going to 1.0670 area and reverse H&S pattern might be formed:

That's why to deal with short-term current bearish context, it is not necessary to hide too far stop. We could keep an eye on K-area to consider entry. Upward breakout means that short-term bearish context is broken and it would be better to out.

As a conservative target we could use current 1.0590-1.06 lows.

 

[Sive Morten]

Morning everybody,

So, yesterday we were right on direction, but EUR was not able to show 1.0620 bounce and has reached only 3/8 level. Now price stands under 1.0611 support area and we consider XOP @1.0475 as nearest downside target:

Still, this time we have more reasons to suggest a bit higher pullback than yesterday. First is 4H channel - on a way down after any touch EUR shows the bounce, at least to the middle of the channel. Now this level is around 1.0635-1.0645, based on swing harmony:

Meantime somewhere around we have the same K-area on 1H chart. So, it makes sense to not jump in right now and wait for the pullback. We do not consider any longs (except you trade under 1H time frame). For short entry - it would be better to see first how pullback will go, then decide on the level where to enter, etc. Because, potentially we could get here reverse H&S with following re-testing of the K-resistance and 1.0640 level...

 

[Sive Morten]

Greetings everybody,

So, market moves even faster than we thought. 1.0475 target is done within just a single session. Probably it is not surprising on unstoppable rally on US yields, when 10-year ones are around 4.6% already...

So, due to big moves, we probably will have to increase the scale of our analysis soon, because it is becoming impossible to trade on 4H chart as there we do not see any setups. Meantime, on daily chart EUR hits oversold and obviously this is not the best place for new short position - need to wait for a bounce:

As we've said - on 4H chart we see nothing, except channel breakout:

But, on 1H chart we could get DRPO "Buy" with minimum target around 1.0560 K-area. Thus, it makes sense to wait at least until this level, if even there will be no DRPO.

That's being said, no longs, for new shorts lets wait at least until 1.0560

 

[Sive Morten]

Morning everybody,

So, it seems that our suggestion on EUR pullback was correct and 1H DRPO "Buy" has started and is still working perfect. Now market is coming to 1.0610 intraday resistance, but based on the price behavior, it seems that we gonna get more extended upside bounce. So, still no shorts.

Today I would like to show you something interesting on GBP. As you know recent BoE step was dovish. As a result GBP has turned down and now price stands at major 3/8 weekly Fib support:

Upward action was lasting more than a year and now price has formed bearish reversal swing. Both moments suggest deep upside bounce, at least theoretically. Unfortunately GBP is not at weekly oversold, but we hope that it will not become a problem.

On daily chart we have perfect downside thrust, that might be a background for multiple trading setups. B&B "Sell" here looks more logic, but if we get DRPO "Buy" - it is also not bad. As B&B as DRPO have solid potential of 200-400 pips, so it is definitely worthy to keep an eye on them. I'm writing update a bit in advance - no one pattern are formed yet...just to prepare you for coming trading setups.

 

[jianean]

Morning everybody,

So, it seems that our suggestion on EUR pullback was correct and 1H DRPO "Buy" has started and is still working perfect. Now market is coming to 1.0610 intraday resistance, but based on the price behavior, it seems that we gonna get more extended upside bounce. So, still no shorts.

Today I would like to show you something interesting on GBP. As you know recent BoE step was dovish. As a result GBP has turned down and now price stands at major 3/8 weekly Fib support:
View attachment 86943

Upward action was lasting more than a year and now price has formed bearish reversal swing. Both moments suggest deep upside bounce, at least theoretically. Unfortunately GBP is not at weekly oversold, but we hope that it will not become a problem.

On daily chart we have perfect downside thrust, that might be a background for multiple trading setups. B&B "Sell" here looks more logic, but if we get DRPO "Buy" - it is also not bad. As B&B as DRPO have solid potential of 200-400 pips, so it is definitely worthy to keep an eye on them. I'm writing update a bit in advance - no one pattern are formed yet...just to prepare you for coming trading setups.
View attachment 86944

As you know GBP is ALWAYS very welcome. It has been ages since I saw the previous one.
Unfortunately, it is usually just the one day, so no follow through in the following few days.
Is there any point asking for at least a little GB/US snippet once a week? Surely it cannot be just me that would be very pleased if we did have it and how would you feel about it? I don't want to upset the applecart and it is certainly not a complaint - what you put into this daily dose is, as I have mentioned many times, absolutely fantastic. I seem to think I could not survive, without my daily dose of "Sive".

 

[Sive Morten]

As you know GBP is ALWAYS very welcome. It has been ages since I saw the previous one.
Unfortunately, it is usually just the one day, so no follow through in the following few days.
Is there any point asking for at least a little GB/US snippet once a week? Surely it cannot be just me that would be very pleased if we did have it and how would you feel about it? I don't want to upset the applecart and it is certainly not a complaint - what you put into this daily dose is, as I have mentioned many times, absolutely fantastic. I seem to think I could not survive, without my daily dose of "Sive".

Hi Jianean, thank you for your warm feedback. Well, we definitely will keep tracking current setup on GBP, because it potentially very attractive.

Speaking on the rest - yes, you probably right that we could take a look at GBP a bit more often. But to be honest I'm not as good on UK economy background as on the US and EU, which are my primary objects of analysis. Ok, I think about to prepare at least 1 report in a month on GBP. Indeed last time we did it in April.