Forex FOREX PRO WEEKLY, September 27 - 01, 2021

Sive Morten

Special Consultant to the FPA
Messages
15,309
Fundamentals

This week stands under the sign of Fed statement and Evergrande turmoil. Despite that we have rather important events market reaction is not as strong as it could be. And if it is a lot of blank spots around Evergrande situation, as it changes day by day, reaction on Fed statement seems too weak, despite that J. Powell talked about important things and provided a lot of specific labels for tapering, rate hiking, inflation etc. This makes us think that major reaction on Fed statement is not happened yet. Investors are still analyzing it, trying to make investments decisions, which means that markets will react gradually and extentionally. And soon we should see the reaction.

Market overview

The dollar eased slightly from a one-month high on Thursday, after the Federal Reserve set the stage for rate hikes next year but left enough breathing room to slow things down if necessary, while sterling traded firmly ahead of a Bank of England meeting. The Fed left policy settings unchanged on Wednesday and, as expected, did not announce the beginning of asset purchase tapering. But chair Jerome Powell flagged that it was not far off, perhaps as near as November, and said board members thought tapering could conclude around mid-2022 - opening the way for rate hikes after that.

As well as helping the dollar, the U.S. yield curve flattened and Fed funds futures markets moved to price a 50% chance of a hike in October and to fully price a 25 basis point rate hike in December after his comments.

"Powell didn't give any specifics about the start of the taper, he said there was broad agreement in the end of taper, one which 'concludes around the middle of next year,'" said John Briggs, strategist at NatWest Markets. This is in our view more important than when the taper starts, as it starts the clock on when the next hike may occur."

Powell said tapering would not carry a "direct signal" on the rates outlook, even though median projections from Fed members showed liftoff in 2022.

China Evergrande's struggles to avoid defaulting also kept investors on edge. China's second largest property developer settled with bondholders over a domestic coupon payment, but still has to settle $83.5 million in interest on an offshore bond due on Thursday. Worries about Evergrande's payment obligations and what systemic risks to China's financial system the property giant's difficulties pose have weighed on global financial risk sentiment in recent sessions.

The Fed headlined a week of central bank meetings that will likely see Norway become the first developed nation to raise interest rates since the pandemic. The Fed too struck a hawkish tone, setting the stage to start tapering bond purchases in November and at a faster pace than analysts had anticipated. Nine of the U.S. central bank's 18 policymakers projected borrowing costs will need to rise next year, inducing markets to bring forward the timing of the first rate rise to January 2023.

The dollar and bond yields however fell, with many seeing the Fed as having left some policy wiggle room to slow down if needed.

"A lot of the dollar strength we saw on Friday and Monday was down to risk aversion. The Fed slightly raised its median (interest rate) expectations for 2023 but you are still talking of a terminal rate of 1.5%-1.7% which is ok but not situation where you get an aggressive bid for the dollar," said Peter Kinsella, head of FX strategy at asset manager UBP. To get the dollar to strengthen much you need to see the front end (of the Treasury yield curve) steepen and that's not happening."

The gap between five-year notes and 30-year bonds fell below 100 basis points after the Fed statement, the lowest since July 2020 while the 2-year/10-year curve has flattened more than 50 bps since end-March.

While positive for the dollar, the boost from the Fed's announcement was undercut by hawkish messages from several central banks in Europe, and as Norway became the first developed nation to raise rates. Norway's crown jumped to more than three-month highs versus the euro on Thursday after the central bank raised its benchmark interest rate and said more hikes will follow in the coming months.

Sterling extended its rise on Thursday after the Bank of England said two of its policymakers had voted for an early end to pandemic-era government bond buying and markets brought forward their expectations for an interest rate rise to March.

The dollar rose on Friday and was poised for its third straight week of gains against a basket of major currencies, as uncertainty over beleaguered Chinese property developer Evergrande helped the greenback bounce back from a sharp decline in the prior session.

China Evergrande Group owes $305 billion and has run short on cash, missing a Thursday deadline for paying $83.5 million and leaving investors questioning whether it will make the payment before a 30-day grace period expires. A collapse of the company could create systemic risks to China’s financial system. On Thursday after Beijing injected new cash into the financial system and Evergrande announced it would make interest payments on an onshore bond, boosting risk sentiment.

Kansas City Fed President Esther George said the U.S. labor market has already met the central bank’s test to pare its monthly bond purchases, and the discussion should now turn to how its massive bondholding could complicate the decision on when to hike rates.

Cleveland Fed President Loretta Mester echoed the sentiment for a tapering this year, and said the central bank could start raising rates by the end of next year should the job market continue to improve as expected.

Weak German business confidence data prompted investors to book some profits after a mid-week rally. Ifo Institute showed German business morale in September fell for a third straight month, hit by supply chain woes that are causing a “bottleneck recession” for manufacturers in Europe’s largest economy.

House Democratic leaders said on Friday they intended to forge ahead next week with U.S. President Joe Biden’s $3.5 trillion social agenda as well as a $1 trillion bipartisan infrastructure bill. But with Democrats continuing to squabble over details of the social spending, it was unclear when votes would actually occur. House Speaker Nancy Pelosi wrote a letter to fellow Democrats vowing to “move forward to pass two jobs bills next week.”



“The bill will come up on Monday,” Pelosi told reporters, referring to the smaller of the two measures that would help spark road, bridge, airport, school and other construction projects. The Senate passed that bill with bipartisan support on Aug. 10.

Far more complex is Democrats’ drive for $3.5 trillion for expanding healthcare for children and the elderly and for investing in steps to drastically reduce carbon dioxide and other emissions blamed for climate change. Asked about the timing for that legislation on the House floor, Pelosi told reporters, “Have a little patience. Follow it, see it unfold. It’s interesting. We’re very encouraged.”



A large group of progressive lawmakers insist that the $1 trillion infrastructure bill be held back until the $3.5 trillion was ready. Moderates want the $1 trillion bill enacted no matter the progress on the larger measure. The moderates extracted a promise from Pelosi for a House vote on it by Sept. 27.

Market watchers have also kept a close eye on Treasury yields, which have risen since the Fed meeting as expectations of stronger growth and inflation worries drove some investors out of safe-haven government bonds.

The benchmark U.S. 10-year yield recently stood at 1.45%, near its highest level since the start of July. Higher yields on Treasuries make some stocks less attractive.

Analysts at UBS Global Wealth Management said the 10-year yield will rise to 1.8% by year-end but do not believe such a move will disrupt equities. The pace of any rise would be key: the bank’s research showed that a three-month change in nominal yields of between 50 and 100 basis points has been accompanied by a 5.7% return in the MSCI US index since 1997.

“Only a rise in real yields of more than 50 bps over three months would likely weigh on equity returns, particularly in emerging markets,” the bank said in a report.

Investors will watch a raft of U.S. economic indicators next week, including durable goods orders and the ISM manufacturing index, as well as the progress of debt ceiling negotiations in Washington. Investors will also monitor developments in the Evergrande saga, after the heavily indebted Chinese company missed a payment deadline on a dollar bond this week, leaving global investors wondering if they will have to swallow large losses when a 30-day grace period ends.

At the same time, investor confidence in the economy could be dented by a prolonged fight over raising the U.S. debt ceiling, analysts at Capital Economics said.
The U.S. Senate is days away from voting on a measure to suspend the $28.4 trillion debt ceiling and keep federal agencies operating after Sept. 30, the end of the fiscal year.

“Next week the focus will shift to fiscal policy," Capital Economics said in a report. "A debt ceiling crisis in late-October could even delay the Fed’s taper plans,” the firm said.

Fed Statement Content

The Federal Reserve on Wednesday cleared the way to reduce its monthly bond purchases “soon” and signaled interest rate increases may follow more quickly than expected, with nine of 18 U.S. central bank policymakers projecting borrowing costs will need to rise in 2022. The actions, which were included in the Fed’s latest policy statement and separate economic projections, represent a hawkish tilt by a central bank that sees inflation running this year at 4.2%, more than double its target rate, and is positioning itself to act against it.

In a press conference after the statement Fed Chair Jerome Powell elaborated that if the economy continues to improve the FOMC could easily move ahead with tapering at the next meeting in November. The bar for lifting rates from zero is much higher than for tapering, he said.

The Federal Reserve has said it will start to reduce its bond purchases as soon as November if the economy continues on its current track. Some officials will watch the September jobs report, due Oct. 8, for a final bit of evidence that the labor market has achieved “substantial further progress” in its recovery. Others feel the benchmark has been met and are ready to start the process.

Following is a running tally of where officials have said they stand on the question since the Federal Open Market Committee’s Sept. 21-22 meeting. It will be updated as officials make their positions public.

LORETTA MESTER, PRESIDENT, CLEVELAND FED (non-voter in 2021/voter in 2022), Sept. 24:

“In my view, the economy has met those conditions, and I support starting to dial back our purchases in November and concluding them over the first half of next year. I support starting to dial back our purchases in November and concluding them over the first half of next year,” Mester said during an event organized by the Ohio Bankers League."

ESTHER GEORGE, PRESIDENT, KANSAS CITY FED (non-voter in 2021/voter in 2022), Sept 24:

“In my view, the criteria for substantial further progress have been met, with inflation running well above our target and the unemployment rate at 5.2%, down 1.5 percentage points relative to December. Under these conditions, the rationale for continuing to add to our asset holdings each month has waned, and signaling that we will soon consider bringing our asset purchases to an end is appropriate.”

More Fed policymakers are due to address the issue next week, including Chicago Fed President Charles Evans and Fed Governor Lael Brainard on Monday, who have had a more dovish stance on policy, as well as New York Fed President John Williams.

After the 2007 to 2009 financial crisis, the Fed waited a year between the end of its bond “taper” and the first increase of its policy interest rate. It was two more years before the Fed began allowing the balance sheet - at the time about half its current size - to shrink.

The process may happen faster this time, with the taper not expected to end until the middle of next year and policymakers now pointing to a rate hike later that year. According to recent Fed Fund Futures rates - markets expect first Fed move somewhere in October-November of 2022.

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CME Fed Watch Tool


Markets initially read the statement as hawkish, but that reaction is fading out as traders read more deeply into the Statement of Economic Projections. Fed officials acknowledged making ‘substantial further progress’ toward the central bank’s inflation goal, and demonstrated confidence in the labor market meeting that test by the end of the year. The FOMC warned markets of an imminent tapering decision, saying that a ‘moderation in the pace of asset purchases may soon be warranted’ if economic conditions continue to evolve as expected.

A record number of participants are worried about upside risks on the inflation front, suggesting that the central bank could move aggressively if price growth remains elevated into the early part of next year. Officials are now deadlocked on raising rates in 2022, but the median forecast is for a 1% Fed funds rate in 2023, and only 1.8% by the end of 2024. This is not rapid tightening by any means - it’s slightly slower than the 25-basis-point-per-quarter pace seen in previous cycles.



This could also mean that estimates of the ‘terminal rate’ at the end of the cycle have been lowered. This is dovish, and will be welcomed in financial markets. The dollar could tumble from here, particularly if Powell follows prior patterns and tramples on the dot plot during the presser, said Karl Schamotta, Cambridge Global Payments, Toronto.


The key behind the potential rate hike was the upgrade to their inflation outlook. There are signs inflationary pressures are going to be transitory, but they are more persistent than expected. That’s the key driver as to why the balance has shifted to a potential rate hike in 2022 as opposed to 2023. We’re watching yield curves flatten. The Treasury market’s interpreting it as a hawkish surprise, said Tom Garretson from RBC Wealth Management, Minneapolis.

COT Report

As we've said - this time CFTC data should include recent supportive factors of the previous week and we've got solid drop in net long position on EUR with rising open interest. It was before the Fed statement and impact of meeting we will see only next week. But as it was not dovish actually, hardly it brings positive impact on EUR net position. Currently it would be proper to treat sentiment as moderately bearish:

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Next week to watch

#1 Germany elections results

Sunday's German election is a close call and stakes for Europe's biggest economy couldn't be higher. After 16 years of steady, centre-right leadership, Chancellor Angela Merkel will be stepping down. Polls suggest the centre-left Social Democrats (SPD) will form a coalition with the Greens and the liberal FDP, dubbed the traffic light alliance because of the parties' red, green and yellow colours. But the number of undecided voters is at its highest in recent memory, so other outcomes are possible. The SPD's Olaf Scholz is the voters' choice to succeed Merkel, but coalition talks could take weeks, even months. Initial market reactions to the election outcome could prove premature.
The latest polls:

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#2 PCE and Real Estate data

The Federal Reserve has cut its 2021 U.S. growth forecasts and projects a 5.9% rate, versus 7% previously. Upcoming data will show if the coronavirus continues to undermine the recovery. Consumer confidence in September is on tap, after August readings came in well short of estimates, dropping to a six-month low.

Markets will get a fresh view on the housing market in the form of data on home prices and home sales, while the personal consumption expenditures (PCE) index will offer a glimpse of inflation. A Reuters poll forecasts a 3.7% annual rise in the Fed's favourite inflation gauge, a touch above 3.6% in July.

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#3 Fragile China

The woes of debt-saddled Chinese developer Evergrande are gnawing at global markets. Unsurprising because the property sector has a bearing, direct or indirect, on a quarter of the country's huge economy. The developer has more payment deadlines next week, but the bigger picture, the sheer size of the Chinese economy, implies the risk is high of a global growth hit -- commodity prices, emerging market currencies and even European elevator-makers have all felt the heat.

BIS data shows Chinese banks had around $1.6 trillion of cross-border liabilities as of early 2021. Given their exposure to real estate, through mortgage loans and lending to property companies, any implosion could send ripples worldwide.

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#4 EU HICP

The ECB reportedly expects inflation to hit 2% by 2025. Despite analysts' scepticism, surging power prices and the seep-through elsewhere, including into inflation expectations, could mean it may not be too far off that mark.

In that light, advance readings of German and euro zone HICP -- the harmonised index of consumer prices used by the ECB -- due Thursday and Friday respectively -- are of interest. German HICP hit a 13-year high of 3.4% in August, while consumer inflation at 3.9% was the highest since 1993.

Euro area consumer inflation expectations have doubled this year, surveys suggest, while bloc-wide HICP hit 3% in August, the highest since 2012. Power price rises have already impacted headline readings and September may show another increase.

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So, as we've said in the beginning of research - investors are still indecision. Some treat statement as a hawkish because interest rates' spread flattened. Others think that it is mostly dovish because Fed statement suggests lower tempo of economy growth and very slow rate change. Our opinion on this subject stands twofold. First is, we wouldn't pay too much attention to forecasts of 2022 and 2023 as they are subject to often changes. The picture could start looking differ even on 8th of October when NFP data will be released. These forecasts could be reviewed not once and not even twice probably within a very short-term period. Besides, they mostly stand for long term perspective.

We should focus more on shorter term, more actual information to us. And this information suggests that tapering starts in December and should be finished somewhere in the middle of 2022. First rate hike takes place in September-November of 2022. No doubts this statement looks strong and brings a lot of clarity compares to long chain of anemic statements through the 2020-2021 years. So, this information is more tangible and has more practical application to the markets. This is the reason why we treat it as primary in relation to more dovish Fed forecast of US economy and inflation that stands slightly behind and farer in the future.

Finally everything should be valued in comparison as we trade EUR in relation to USD. From this point of view USD position looks stronger and clearer than the one of EU. It seems that ECB doesn't know what to do in current situation. From that standpoint recent CFTC data seems fair and investors properly value the EUR/USD ratio. That's being said, it seems that in a nearest few months we could see slow but stable dollar appreciation, especially if we get injections of positive statistics from time to time. As Fed statement gives a lot of room to free fluctuations because its statement doesn't set strict limits to the market, the direction also could be blur and we could not get the trending action or it will be a bit wobbling.


Technicals
Monthly


Monthly picture has not changed too much. The major thing here is EUR still stands below triangle consolidation and potentially keeps chances on downside continuation and even to form bearish reversal month. Overall sentiment and fundamental background is bearish for EUR now. Technical picture is also stands tough.
So situation could change drastically, if September close appears to be below August lows. Monthly trend stands bearish and EUR has all chances to challenge the YPP around 1.1620 area.

Now by the hindsight - it seems that fake breakout was the reflection of hopes that ECB starts to taper PEPP programme. But this has not happened. The vital area for the monthly chart now is YPP. Downside breakout lets EUR to move in direction of YPS1 and 1.10 area, but it is not clear what driving factors could stand behind of this action.

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Weekly

Trend stands bearish here and weekly chart reflects the overall sentiment on the market this week - indecision. Trading range is very small and price closed in the middle of it. Investors are still analyzing Fed comments and next week we should get some progress. Technical picture stands in favor of downside continuation. Besides, don't forget about DXY weekly grabbers that suggest EUR to drop below recent lows:
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Daily

As we're coming to culmination - its time to recall major daily pattern. Action of this week stands too narrow to make impact on daily chart, so it is interesting only on intraday performance. While on daily time frame our position mostly stands the same - no longs by far until price hits 1.1620 major target and support area:

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Intraday

It seems that our Friday's scenario is completed very accurately. H&S is formed indeed, so those who would like to close shorts were able to do this. But second question that we were asking is more important - what this pattern is? Should we treat it as staring point of upside reversal or, we should ignore it. My opinion guys is the second one. Of course, miracle could happen, but in recent times it happens rather seldom.
By taking a look at the shape of this pattern - we again have sell-off to the arm's bottom, and, second - we do not see any strength in upward action. It takes the shape of AB-CD, that potentially could give us "222" Sell and downside continuation. I put this possible scenario on the chart. Besides, Evergrande goes to culmination and it could trigger short-term demand for USD again as speculators start to shake the boat. Thus, personally I do not have any desire to take long position based on this pattern...
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Sive Morten

Special Consultant to the FPA
Messages
15,309
Greetings everybody,

So, EUR shows the performance that we've suggested in weekend. And in general, now we could do nothing but wait for downside breakout. Obviously we do not want to buy right now. For taking bearish position we have few options but you should recognize that volatility increases as it usually happens during breakouts.

On daily chart we're watching for major OP @ 1.1620 where we suggest appearing setups for short-term buying:
eur_d_28_09_21.png


On 4H chart H&S has failed indeed and following the mechanics of AB-CD action now EUR stands in extension to XOP target. Downside action should continue if everything goes as it should to:
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On 1H chart we have few minor extensions. First one is based on daily reversal bar with OP right below the recent lows. Another one is even smaller scale with the same pattern. Don't be confused with very slow downside action. Once market challenges the lows, drop should accelerate because of triggered stops and breakout trades step-in.
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If you're ready to take volatility risk here, you could consider short entry setup with using Stop "Sell" order between "B" lows and OP target. The major risk that we could meet here is W&R. Actually we do not want to see it, as we're aimed on challenge the major lows on daily chart that stand even lower. Appearing of W&R around 1.1675 postpones downside breakout. We want EUR to stay under these lows after breakout. So, this is most tricky moment for bearish position right now.
 

Sive Morten

Special Consultant to the FPA
Messages
15,309
Morning guys,

Well, everything goes according to the plan by far. DXY is already completed major AB-CD, but we still hope that 3-Drive pattern also will be completed right in the moment when EUR hits 1.1620 area. There are few external factors that now support dollar - energy collapse in China and GB, rising prices on all hydrocarbons - gas, oil etc. Second is 10-year yield, which sets the new record recently. These moments makes us think that reaching of 1.1620 is just a question of time:
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Besides, on intraday charts we have technical bearish signs that now stand in place. Yesterday we've said that we do not want to get W&R. For our scenario EUR has to stay below local lows on 4H chart. And that is what we see here. EUR has formed the grabber and we've got high wave pattern that indicates some indecision. Direction very often depends on the breakout of HW. Grabber suggests that breakout should be downside.
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On 1H chart individual traders now butt their heads with market-makers who sense the smell of juicy stops below 1.1665. Price now stands between local bottom and major daily lows and this is an area where market makers step in. They start push price down, providing bearish liquidity and then close their shorts on individual stops that stand now under 1.1665. So, current moment is not a subject of some fundamentals or even technical analysis. This is the question of a lower scale performance - market mechanics.
Besides, here we see some signs of bearish dynamic pressure and you clearly see how market-makers protect broken lows.
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Obviously we do not consider any longs by far. For short entry this is a tricky moment as you can see high volatility. Theoretically you could try to sell until breakout happens using either Limit or even Stop selling order.
 

Sive Morten

Special Consultant to the FPA
Messages
15,309
Morning everybody,

As EUR as DXY have completed long-term targets and stand at strong K-areas. Still, as we have some difference in performance of EUR and DXY - this might confuse you and put wrong conclusions on current situation. Thus, EUR stands slightly under weekly K-support and it might seem that area is broken. But it is not correct. If you take a look at DXY - it is just coming to test K-area and this is the reason why EUR stands slight below this area. In such moments minor divergences could exist but correct view is formed based on compound analysis of both markets.
The same we could say about DXY 3-Drive "Sell". If we wouldn't have K-area, I would say that it is failed as we have strong acceleration in last stage of bearish reversal pattern. But, with K-area above - downside reaction still has good chances to happen:
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The same we could say about tops to the left of the charts - on EUR they are taken out already while on DXY are not yet. So, don't be surprise that EUR could drift slightly lower and keep an eye on DXY performance.

In general, currently not many things we could do. It is early to go long as we do not have yet any background. EUR just has touched the support and has not enough time to shape the reaction. Taking the short position is not logical as market stands at support and strong action could start at any moment.

The only thing that is possible to consider - some intraday short term setups. For example, maybe we get DRPO here, on 1H chart with minor upside reaction to 1.1635 area. But to be honest, I would wait for reaction from DXY chart, so something more or less interesting we get only next week probably.

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Sive Morten

Special Consultant to the FPA
Messages
15,309
Morning everybody,

So, as EUR shows nothing interesting by far, let's update our GBP view. In fact, DXY yesterday has finally hit major long-term resistance and even gives some hints on reaction. It means that EUR probably also should start showing something, but maybe next week.

Meantime, the GBP chart is not something new to us as we already have traded H&S pattern there. Now,
the price has broken the neckline and is underway to OP target. But, now it stands at daily oversold and hits few intraday targets that could trigger some pullback:

gbp_d_01_10_21.png


On the 4H chart, the price hits the first 1.27 butterfly extension. The way of price action suggests that later it should keep going down, but we could get some retracement with DXY resistance and Oversold here. Major butterfly target and inner AB-CD pattern XOP agree with daily major OP Agreement at 1.33 area:
gbp_4h_01_10_21.png


Thus, if somehow we get upside bounce, then 1.36 K-area looks attractive to consider short entry, as it coincides with previous daily lows. Therefore, entry around 1.36 with a 1.33 target might be a not bad scenario to consider. Hopefully, we get "222" Sell or something else on the way up or something else.
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