Thread: Daily Market Analysis from ForexMart

EUR/USD. The euro bear trap

The EUR/USD pair remains sensitive to the release of inflation data today. Will there be a surge of interest in one direction or another, or will it remain trading in the current range for quite a long time? Payrolls, although they turned out to be far off from the forecast, failed to stir up traders of the EUR/USD pair.

In the coming sessions, only the dollar will do the weather in the pair, since the calendar of European data is very disappointing. EUR/USD is influenced by geopolitical factors, statistics from the United States and the Federal Reserve press conference. However, no major changes are expected. According to ING, the euro will continue to trade in the middle of the 1.0100-1.0300 range until the end of this year. There will be small bursts, but they will not break the range limits.

Even if an exit does happen, it is more likely to go down than up. The strongest CPI data, especially in detail, may change the forecast for US rates for September, which will put pressure on the quote. Meanwhile, a surprise downside inflation is likely to have traders betting on a less hawkish approach from the Federal Reserve next month.

Euro bulls are pulling like a magnet towards the August high of 1.0293. Pushing the euro beyond this value, bulls will return the upward dynamics for a short time. The exchange rate, under the most optimistic scenario for the euro, may be around 1.0386.

In general, you can't argue with the trend, a bearish view of the pair remains relevant. While EUR/USD is trading below 1.0913, there is no chance of a change in direction.

The picture is that the dollar will continue to receive support, and the euro, on the contrary, will be bombarded with new negative factors. The 1.0100 area is a strong support, but with a steady and strong negative, it may not be able to resist – and then hello parity again!

Catalysts for the Dollar

Rabobank believes that the Fed seems to be going to announce another rate hike of 75 bps. Such a decision may be supported by an impressive report on the US labor market for July, published last week.

In addition, the US currency will find support from the demand for safe assets. The dollar is a widely used billing currency in the world by a wide margin. This means that the growth of the exchange rate tends to have a depressive effect on trade.

Another risk to the global recovery is a decline in demand for commodities from China.

The dollar will remain stable until the situation with risky currencies improves. Consequently, there is a potential for further growth not only this year, but also next year, bank analysts write.

Catalysts for the Euro

A steady sell-off, according to Rabobank, will provoke a number of factors. Firstly, it is a harsh winter for Europe. Cold weather plus the possibility of a complete shutdown of the gas supply via the Nord Stream-1 will do their job.

High energy prices are a serious obstacle for businesses and consumers. The chances of a recession in the euro bloc are high, this is the opinion of most strategists and economists.

As we can see, the euro does not have the slightest hope for growth. In such conditions, how not to fall lower than expected.

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SEC on a new form of cryptocurrency regulation​​​​​​​

Sentiment to increase regulatory oversight of cryptocurrencies continues to gain momentum after it was revealed on Wednesday that the Securities and Exchange Commission (SEC) asked major hedge funds to report their exposure to cryptocurrencies.

Under the proposal, the SEC and the Commodity Futures Trading Commission (CFTC) are seeking to amend the Form PF process to require accurate reporting of digital asset strategies that involve an amount of at least $500 million.

Form PF was created in the aftermath of the 2008 financial crisis to help regulators identify asset bubbles and other potential risks to financial market stability by bringing greater transparency to the opaque private equity landscape.

Both agencies cited the rapid growth of the hedge fund industry as the main reason for the proposed changes, as well as the fact that cryptocurrencies did not yet exist when the form was originally introduced. Consultations have been held with the Treasury Department and the Federal Reserve to ensure that there are no risks to the private fund industry as a result of the changes.The number of private funds increased by about 55% from 2008 to the third quarter of 2021, according to a newsletter published with the offer, with IBISWorld data showing that there were 3,841 hedge funds in the US as of early 2022.

SEC Chairman Gary Gensler noted that under this form of regulation, which includes business practices, complexity, and changes in investment strategies, the gross asset value of the private fund industry has risen nearly 150 percent.

As to why he supports the proposal, Gensler stated that "if passed, it would improve the quality of the information we get from all PF form fillers, with a particular focus on large hedge fund advisors, which will help protect investors."

The proposal requires comments from the investment community on whether the funds should disclose details of the cryptocurrencies they hold, such as their name and characteristics.

Members of the Securities and Exchange Commission voted 3-2 in favor of passing the motion, with Republican commissioners Hester Pierce and Mark Ueda voting against. Concerns raised by those who disagree included whether the government really needed all the information the new PF form would collect.

The music did not play for long, the yen danced for a short time

The dollar is getting up from its knees after a crushing fall on Wednesday. The yen is currently feeling the greatest pressure from the greenback, which showed the strongest growth on the US inflation data the day before.

The market freaked out
By the end of the week, investors continue to digest the July statistics on US inflation. Recall that the data turned out to be cooler than forecasts, which caused a large-scale sell-off of the dollar.

Last month, annual inflation in the US fell from the previous value of 9.1% to 8.5%, although economists had expected the CPI to fall to 8.7%.

A significant easing of inflationary pressures has increased fears that the Federal Reserve may reduce the degree of its aggressiveness with respect to interest rates already at the September meeting.

The reaction of the market was lightning-fast and very emotional: the yield of US government bonds fell sharply, followed by a plunge in the dollar. The DXY index sank 1.5% to a low of 104.646 on Wednesday.

The dollar's weakness provided support to all major currencies, but the yen gained the most in this situation. The yen soared by more than 1.6% against its US counterpart, to a mark of 135.

The dollar is gaining momentum
After a loud fall on Wednesday, the yield of 10-year US government bonds turned towards growth yesterday. It rose by 3.41% during the day and reached a new high of 2.902%.

The sharp increase in the indicator again widened the gap between the yields of US treasury bonds and their Japanese counterparts.

The yen, which is very sensitive to this difference, could not resist the pressure and moved to decline.

The USD/JPY pair managed to recover by 0.12% to 133.19 on Thursday. It was also supported by the general strengthening of the dollar.

The greenback grew by 0.1% against its main competitors. Its index remained almost unchanged and stayed at 105.2 during the day.

Yesterday's comments by Federal Reserve members contributed to the reversal of the yield of US government bonds and the dollar. Despite the slowdown in inflation in July, the tone of officials still remains hawkish.

Neil Kashkari, president of the Federal Reserve Bank of Minneapolis, said that the latest CPI data did not change his expectations about the Fed's future course.

In addition, he stressed that the central bank is still very far from declaring victory over inflation.

The head of the San Francisco Federal Reserve, Mary Daly, was in solidarity with her colleague. She also does not rule out the continuation of the Fed's hawkish policy, unless, of course, the next portions of macro data will favor such a sharp increase.

Recall that the key Fed's goal is to bring interest rates from the current level of 2.25–2.5% to 4% by the end of the year.

Some analysts believe that the central bank will try to solve this problem as soon as possible, and predict another rate increase of 75 bps at a meeting in September.

Why does the yen have no chance?
This year the dollar index rose by 10%. The greenback received such a solid increase thanks to the aggressive policy of the Fed.

Since March, the US central bank has raised interest rates by 225 bps. This makes it the undisputed leader: none of the major central banks can compete with the Fed in the pace of tightening.

But the biggest divergence in monetary policy right now is between the US and Japan. Despite the global increase in rates, the Bank of Japan is still bending its line and continues to keep the rate at a low level.

The priority for the Japanese central bank is not to fight inflation, but to restore the economy, which has been hit hard by the COVID-19 pandemic.

Unlike the US and EU, which have already managed to get out of the crisis caused by the coronavirus, the Japanese economy is just beginning to show signs of recovery.

According to preliminary estimates, in the second quarter, Japan's annual GDP could show growth of 2.7%, which is in line with pre-pandemic indicators.

Statistics on the gross domestic product will be published on Monday. But even if the data turns out to be positive, it most likely will not affect the policies of BOJ Governor Haruhiko Kuroda in any way.

Many experts are inclined to believe that the head of the BOJ will not give up his commitment to a super-soft monetary rate. The main argument in its favor now will be the low wages remaining in the country.

At this stage, salaries in Japan are far behind the rate of inflation, which undermines the purchasing power of citizens.

Another big reason to keep rates low is the coronavirus statistics. Japan is at the epicenter of a new COVID-19 outbreak, posing a major threat to the world's third largest economy.

According to economists at the Japan Research Institute, the BOJ's position can be changed to hawkish only after Kuroda leaves his post.

Given that he is due to retire no earlier than April 2023, one can estimate how long the downward trend promises to be for the yen.

Analysts at the Finnish bank Nordea predict that the USD/JPY pair will continue to strengthen on the tight policy of the Fed and reach the level of 140 in the foreseeable future.

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GBP/USD: How deep could GBP fall?

The pound encountered support after the release of better-than-expected data. The fact that the British economy is not in its best state ahead of the winter season is clear. There are great risks of a recession in the country as monetary tightening along with high energy prices are posing a threat to the economy.

Meanwhile, Pantheon Macroeconomics sees Q4 GDP rising by 0.3% from the previous period.

"A winter recession can't be ruled out, given that the rise in Ofgem's energy price cap in October will boost CPI inflation—and hence reduce real incomes—by nearly four percentage points. But with fiscal support likely to be scaled up considerably by the next PM and high income households still possessing substantial savings, we think that GDP will flatline through the winter, rather than fall," economists at Pantheon Macroeconomics said.

In the second quarter, the British economy contracted by 0.1%, below the expected 0.2%. Overall, the economy expanded by 2.9% year-on-year, above the market forecast of 2.8%.

The pound saw an increase in volatility, but traders made no attempts to trade in any direction. In light of a rise in the dollar, however, a sell-off occurred. At the beginning of the trading week, the pair is trying to consolidate. Demand for the pound is decreasing and the currency is edging down amid gloomy forecasts made by the Bank of England.

On Monday, bearish pressure on the pound increased, and the price fell below 1.2100. So, GBP/USD was unable to rise on better-than-expected macro data.

At the same time, the dollar does not show steady growth either. Traders are now uncertain about the Federal Reserve's further monetary stance. The hawkish comments of some policymakers hint that the regulator will remain aggressive. Yet, there are still questions. The situation will get clearer when the FOMC Minutes are released this week. Should the Federal Reserve stay aggressive, the greenback's rally will extend.

Therefore, the dollar is unlikely to be bearish at the beginning of the trading week although its growth potential will be limited. So, GBP/USD may recover eventually.

Weekly outlook for GBP

This week, the focus will be on the retail sales report scheduled for Wednesday as well as US weekly jobless claims and the FOMC Minutes.

"Next week's FOMC minutes will contain some discussion of the FOMC's apparent desire to slow the pace of hikes soon. But we do not expect it to be a lasting relief," Goldman Sachs said.

Analysts now see a 50 basis-point hike as the unlikely outcome at the September meeting.

US macro data will surely be of great importance to the GBP/USD quotes. Still, macro results in the United Kingdom could affect the Bank of England's interest rate forecast.

On Tuesday, traders will see the release of data on the UK labor market report, which will influence the Bank of England's monetary policy stance.

Meanwhile, the inflation report published on Wednesday will be of primary importance as it will affect both the BoE's monetary policy and the pound's short-term potential. At this point, it is unclear how the market could react to a possible increase or decrease in rate hikes.

Therefore, in light of a busy trading week, the pound is likely to trade in a trend in the coming days after consolidation.On Monday, bullish demand for the pound is falling. In the short-term, the pair is expected to be bearish, with targets at 1.2050 and 1.2000 (psychological level).

Resistance is seen at 1.2200, 1.2265, and 1.2315. Support stands at 1.2080, 1.2030, and 1.1965.

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Tips for beginner traders in EUR/USD and GBP/USD on August 16, 2022

Details of the economic calendar for August 15

Monday was traditionally accompanied by an empty macroeconomic calendar. Important statistics in Europe, the United Kingdom, and the United States were not released.

In this regard, traders focused on the information flow, and practiced technical analysis.

Analysis of trading charts from August 15

The EURUSD currency pair, during an intense downward movement from the resistance level of 1.0350, reached the lower limit of the previously passed flat of 1.0150/1.0270. As a result, there was a local reduction in the volume of short positions in the market, which led to a slowdown.

The GBPUSD currency pair accelerated its decline after breaking through a number of variable levels. As a result, the quote came close to the important psychological level of 1.2000, where it formed a small stagnation.

Economic calendar for August 16

At the opening of the European session, the UK labor market data was released, where unemployment remained at the same level of 3.8%. At the same time, employment in the country increased by 160,000 against 296,000 in the previous reporting period. Forecasts assumed that employment would grow by 256,000. At the same time, the change in the number of applications for unemployment benefits in July decreased by 10,500, which is good, but forecasts assumed -32,000.

Statistics for the UK stand out only by the unemployment rate, since everything is ambiguous on other indicators. The pound sterling was standing still at that time.

During the American trading session, data on the construction sector in the United States will be published. The number of issued building permits and the volume of new housing starts is assumed to decrease.

Subsequently, data on the volume of industrial production will be published, which is assumed to decline from 4.2% to 4.0% YoY and grow by 0.3% MoM.

Time targeting:

U.S. Building Permits Issued – 12:30 UTC (prev. 1.696M; prog. 1.65M)

US Housing Starts – 12:30 UTC (prev. 1.55 M; prog. 1.54 M)

US Industrial Production – 13:15 UTC

Trading plan for EUR/USD on August 16

Presumably, the 1.0150 area will put pressure on sellers, which may lead to a gradual slowdown in the downward cycle, resulting in a technical pullback in the market.

Traders will consider a prolonged downward cycle if the price stays below 1.0100. In this case, the quote will rush towards the parity level.

Trading plan for GBP/USD on August 16

In this situation, the area of the control level puts pressure on sellers, negatively affecting the volume of short positions. In view of the local signal about the oversold pound sterling, we can assume the formation of a pullback.

Traders will consider the next downward move if the price holds below 1.1950. Under this scenario, a resumption of the medium-term downward trend is possible.

Tips for beginner traders in EUR/USD and GBP/USD on August 17, 2022

Details of the economic calendar for August 16

The UK's Office for National Statistics (ONS) report on the labor market yesterday showed unemployment rate stabilized at around 3.8%. Employment in the country increased by 160,000 against 296,000 in the previous reporting period. Forecasts predicted that employment would grow by 256,000. At the same time, the change in the number of applications for unemployment benefits in July decreased by 10,500, which is good, but they predicted -32,000.

Statistics for the UK stand out only by the unemployment rate, since everything is ambiguous on other indicators. The pound sterling stood still at the time of publication.

During the American trading session, data on the construction sector in the United States were published, which recorded a widespread decline in performance.

Details:

U.S. Building Permits Issued – Prev. 1.696M; Fact. 1.674M.

U.S. Housing Starts – Prev. 1.599M; Fact. 1.446M.

Subsequently, data on the volume of industrial production were published, which recorded a slowdown from 4.02% to 3.9% YoY, and increased by 0.6% MoM.

Conclusion:

Data on the US came out negatively; the dollar was under pressure from sellers.

Analysis of trading charts from August 16

The EURUSD currency pair overcame the support level of 1.0150 locally during an intense downward movement, but the sellers failed to stay below the reference value of 1.0100. As a result, there was a pullback in the market above the support level.

The GBPUSD currency pair rebounded from the psychological level of 1.2000 with surgical precision. As a result, there was an increase in the volume of long positions, strengthening the pound sterling by about 100 points.

Economic calendar for August 17

At the opening of the European session, data on UK inflation was published, which recorded an increase from 9.4% to 10.1%. Such a high level of inflation is likely to lead to an even stronger increase in the interest rates of the Bank of England.

In Europe, the second estimate of GDP for the second quarter will be published, where no reaction is expected since it should coincide with the first estimate, which is already included in the current quotes.

During the American trading session, traders expect retail sales data in the United States, the growth rate of which is likely to slow down from 8.4% to 8.1%. Even with a possible slowdown, retail sales are still at a high level. However, the very fact of a slowdown amid fears of a recession will be a catalyst for fear among investors. Thus, the US dollar may be under pressure.

Near the closing of the European session, and when Western traders will be in the active phase, the FOMC minutes will be published.

Time targeting:

EU GDP – 09:00 UTC

US Retail Sales – 12:30 UTC

FOMC protocol – 18:00 UTC

Trading plan for EUR/USD on August 17

Presumably, the area of the level of 1.0150 is still putting pressure on sellers. For this reason, one of the possible scenarios for the price development is a rebound towards 1.0240.

As for the prolongation of the downward cycle, this scenario will be relevant only after holding the price below 1.0100 for at least a four-hour period. In this case, the quote will rush towards the parity level.

The pullback stage may well slow down the move around 1.2120/1.2150. In this case, there will be a gradual increase in the volume of short positions, returning the quote to the psychological level of 1.2000.

Prolonging the current pullback will be considered if the price holds above the value of 1.2160 in a four-hour period.

Dollar - period. USD again trumps on all fronts

The FOMC minutes, published on Wednesday, became another springboard for the dollar. Today, the US currency, inspired by the hawkish mood of the Federal Reserve officials, is growing in all directions.

Temporary weakness
Yesterday investors focused on the minutes of the FOMC meeting. Immediately after its release, the dollar was defeated, but a little later the market interpreted the report in favor of the greenback.

Short-term pressure on the USD came from Fed officials' concerns about a recession. During the meeting, it was noted more than once that sectors of the economy that are sensitive to higher interest rates have already begun to show signs of slowing down.

Some Fed members fear that as part of their commitment to bring inflation under control, the central bank may tighten policy more than is necessary to restore price stability. In this case, the American economy is unlikely to survive.

The rhetoric of the FOMC meeting participants initially seemed dovish to the market. After the release of the minutes, the probability of a rate hike by 75 bps fell to 40% in September, while earlier traders estimated it at 52%.

Against this background, the yield of US government bonds began to decline, which provoked a fall in the dollar index. The greenback's low from yesterday was the 106.39 mark.

The euro won the most from the short-term rebound of the greenback. After the release of the July minutes, the EUR/USD pair rose by almost 50 points and reached the level of 1.0202.

This helped the euro to close the day with a slight increase (+0.13%), while other major currencies, on the contrary, sank in tandem with the USD.

Invincible Hulk
Despite short-term weakness, the dollar index finished Wednesday's session with growth. The revaluation of the FOMC minutes by the market helped it recover.

When the first emotions subsided, the main thing came to the fore: the Fed still intends to fight inflation, which implies further aggression towards interest rates.

At the July meeting, absolutely all of its participants agreed to raise rates by 75 bps. Moreover, many of them supported the view that the Fed will continue to move at the same pace if necessary.

Of course, by "necessary" we mean the persistence of inflationary pressures. At this stage, Fed members do not see convincing signs of a decrease in price growth, so they do not exclude that even more efforts will be needed to resolve the situation.

As for the economy, politicians said they would closely monitor its adaptation to the new monetary rate and take all necessary measures to prevent a recession.

In the ranks of the Fed, they do not deny a possible slowdown in economic growth, but at the same time officials manage to remain optimistic. Many of them believe that thanks to a strong labor market, US GDP could grow in the third quarter.

The data on retail sales in America, which were published on Wednesday, also helped reduce fears of a recession.

The US Department of Commerce said that in July the indicator rose by 10.3% year on year, which is higher than the forecast estimate (8.3%) and more than the previous month's value (8.5%).

A positive retail sales report coupled with hawkish FOMC minutes provided strong support for the dollar. Yesterday, the US currency managed to strengthen against its competitors by almost 0.1%.

The most important outsider was the Australian dollar. It plunged 1.23% against the greenback. The aussie's appeal has also been eroded by heightened concerns about Chinese demand for commodities, including iron ore.

The greenback soared 0.98% against the New Zealand dollar, negating the earlier growth of the NZD. Recall that on Wednesday the Reserve Bank of New Zealand increased interest rates by 50 bps to 3%, and signaled the continuation of the aggressive rate in the coming months. This triggered the rise of the kiwi.

The US dollar jumped 0.55% against the Japanese yen to 134.97. Such significant dynamics is a completely logical reaction of the USD/JPY pair to another increase in the gap between the yields of US and Japanese government bonds.

The greenback edged up 0.34% against the pound. The pound's weakening on Wednesday was also facilitated by the release of July statistics on inflation in the UK.

The report showed that consumer prices in the peninsula hit 10.1% last month, the highest in 40 years.

Double-digit inflation has heightened investor fears that the Bank of England will have to be even more aggressive on rates. This raises the already high risk of a recession in Britain.

Brilliant outlook for USD
"Now the overall picture for the dollar looks very positive. It is in a strong upward trend across the board," notes analyst Matt Simpson.

On Thursday morning, under the pressure of the greenback, the euro, the only currency from the group of 10, which showed growth yesterday in tandem with the USD, could not resist.

EUR/USD fell to 1.0150 amid growing recession risks. Recall that yesterday Eurostat presented the second estimate of the eurozone GDP for the second quarter. The indicator was revised downward.

Also, the euro is under strong pressure from the energy crisis flaring up in the eurozone, which is aggravated by abnormal heat.

Record high temperatures and a lack of rainfall caused the Rhine to dry up in Germany. Since the water level in the river has fallen below the critical level of 40 cm, the transport of coal, food and other goods has been significantly reduced.

Also, the appetite for the euro is now declining amid anti-risk sentiment among investors. The safe dollar is in high demand due to another escalation in geopolitical tensions between the US and China. Washington just announced official trade talks with Taiwan earlier this fall.

As you can see, the EUR/USD pair has fallen into a "perfect storm". According to analysts' forecasts, the dollar will continue to strengthen against the euro in the foreseeable future. Its growth is also expected in other directions.