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EUR USD - FUNDAMENTAL DRIVERSEUR FUNDAMENTAL BIAS: NEUTRAL 1. Monetary Policy Hawkish! This sums up the Feb ECB policy meeting. The initial statement was in line with Dec guidance and offered very little surprises (which was initially seen as dovish). However, during the press conference President Lagarde explained that the upside surprises in CPI in Dec and Jan saw unanimous concern around the GC in the near-term and surprised markets by not repeating Dec language which said a 2022 rate hike was unlikely (which immediately saw STIR markets price in a 10bsp hike as soon as June). The president also made the March meeting live, by stating that they’ll use the March meeting to decide what the APP will look like for the rest of 2022 (which markets took as a signal that the APP could conclude somewhere in 2H22. After the meeting we had the customary sources comments which stated that the ECB is preparing for a potential policy recalibration in March (with some members wanting to change policy at today’s meeting already) and added that it is sensible not to exclude a 2022 hike as a possibility and also stated that the ECB is considering possibly ending the APP at the end of Q3 (which would put a Q4 hike in play). Furthermore, sources stated that if inflation does not ease, they’ll consider adjusting policy in March (which means incoming inflation data will be critical). The shift is stance and tone were significant for us to change the bank’s overall policy stance to neutral and to adjust the EUR’s fundamental bias from dovish to neutral as well. Incoming inflation data will be key from here. 2. Economic & Health Developments Even though the recent activity data suggests the hit to the economy from previous lockdowns weren’t as bad as feared, the additional lockdown measures across Europe has weighed on incoming data. Growth differentials still favour places like the US and UK above that of the EZ and alongside the clear monetary policy divergence means the bearish bias is firmly in place. On the fiscal front, attention is on ongoing discussions to potentially allow purchases of ‘green bonds’ NOT to count against budget deficits. If approved, this could drastically change the fiscal landscape for the EZ and would be seen as a big positive for the EUR and EU equities. 3. Funding Characteristics As a low yielder (like JPY & CHF), the EUR has been a funding choice among carry trades, especially during 2019 where it was a favourite against high yielding EM. As such, part of the EUR’s upside after the initial risk-off scare in March 2020 was attributed to a major unwind of large carry trades. As more central banks start normalizing policy and rate differentials widen, the EUR’s use as a funding currency could add additional pressure in the med-term , but keep in mind it could also spark risk off upside if some of those trades unwind. 4. CFTC Analysis Remember that the ECB meeting this past week took place on Thursday, that means that the most recent CFTC update will not include the big jolt higher in the EUR across the board. We would expect next week’s data to show a sizeable increase in large spec net-longs as well as a very big reduction in leveraged fund net-shorts. With so many negatives priced in for the EUR in recent weeks, the unwind could be punchy. 5. The Week Ahead In the week ahead we have a very light economic calendar coming up for the Eurozone, but we do have quite a few ECB speakers lined up and that will take centre stage for markets. Looking at the moves in both bund yields and the EUR, the ECB members will no doubt have quite a few questions they’ll need to answer and will want to give their own views and opinions. If the ECB thinks the markets overreacted to the message conveyed by President Lagarde, they will want to use this week to get on the wires as much as possible to correct any misplaced expectations. That means President Lagarde’s testimony before the EU Parliament Economic and Monetary Affairs Committee will be scrutinized for any additional details and info, especially with markets now pricing in over 50 basis points of tightening by year-end as well as a Q2 end to QE . Without any strong push back from the ECB in the week ahead will likely lead to a further unwind in short-positioning and should continue to be supportive for the EUR in the very short-term. USD FUNDAMENTAL BIAS: BULLISH 1. Monetary Policy The Jan FOMC decision was hawkish on multiple fronts. The statement signalled a March hike as expected, but Chair Powell portrayed a very hawkish tone. Even though Powell said they can’t predict the rate path with certainty, he stressed the economy is in much better shape compared to the 2015 cycle and that will have implications for the pace of hikes (more and faster). Furthermore, he explained that there is ‘quite a bit of room’ to raise rates without damaging employment, which suggests upside risks to the rate path. A big question going into the meeting was how concerned the Fed was about recent equity market volatility . But the Chair explained that markets and financial conditions are reflecting policy changes in advance and that in aggregate the measures they look at isn’t showing red lights. Thus, any ‘Fed Put’ is much further away and inflation is the Fed’s biggest concern right now. The Chair also didn’t rule out the possibility of a 50bsp hike in March or possibly hiking at every meeting this year, which was hawkish as it means the Fed wants optionality to move more aggressive if they need to. We didn’t get new info on the balance sheet and Powell reiterated that they’re contemplating a start of QT after hiking has begun and they’ll discuss this in coming meetings. Overall, the tone and language was lot more hawkish than the Dec meeting and more hawkish than consensus was expecting. 2. Global & Domestic Economy As the reserve currency, the USD’s global usage means it’s usually inversely correlated to the global economy and global trade. Thus, USD usually appreciates when growth & inflation slow (disinflation) and depreciates when growth & inflation accelerates (reflation). With expectations that growth and inflation will decelerate this year that should be a positive input for the USD. However, incoming data will also be important in relation to the ‘Fed Put’. There are many similarities between now and 4Q18, where the Fed were also tightening aggressively going into an economic slowdown. As long as growth data slows and the Fed stays aggressive that is a positive for the USD, but if it causes a dovish Fed pivot and lower rate repricing it would be a negative input for the USD. 3. CFTC Analysis The USD came under some pressure this week, mainly due to overdue mean reversion, recovery in risk assets and of course the surprise hawkish actions by the BoE and more specifically the ECB. Keep in mind that half of the USD’s drop this week occurred outside the CFTC reference period which would explain more limited unwinding in net-longs, and we would expect this number to be much bigger next week. With positioning still in net-long territory for leveraged funds and large specs, and with leveraged funds sitting on a sizeable net-short in the EUR the recent hawkish pivot from the ECB could see some further damage for the USD in the short-term. 4. The Week Ahead After last week’s much better than expected Average Hourly Earnings data out of the US, the main event for the USD as well as markets in general will be the January CPI print for the US scheduled for Wednesday. With another month of upside surprises for inflation data in other global economies, the markets will be watching the US CPI for Jan very closely. Right now, Fed policy has tunnel vision for inflation , and with the surprise beat in Friday’s NFP as well as the surprise punchy upward revisions, the labour market won’t deter the Fed from going all-in to fight inflation . The big dynamic to watch for is wages. Friday’s Average Hourly Earnings print of 5.7% was much higher than expected and saw an immediate jolt higher in US bond yields, with Fed Fund Futures now comfortably pricing in well over 5 hikes by the end of the year. Starting the new year, the biggest reason for expecting a deceleration in inflation was firstly due to base effects, secondly due to expectations that supply chain disruptions ease, and very importantly that commodity prices being cooling down. Out of these three, the last one has not happened yet with oil prices continuing their grind higher (which adds upside risks to headline numbers). Two important components to keep on the radar is wages and shelter prices, which for some means there is very little downside risk to this week’s CPI . How will the USD likely react? Recently the USD has reaction cyclically towards inflation data, which means a solid beat should be supportive, but at the same time a miss would be a far more attractive shorting opportunity, especially against the EUR after the ECB’s pivot .
by thunderpips
EUR USD - FUNDAMENTAL DRIVERSEUR FUNDAMENTAL BIAS: NEUTRAL 1. Monetary Policy Hawkish! This sums up the Feb ECB policy meeting. The initial statement was in line with Dec guidance and offered very little surprises (which was initially seen as dovish). However, during the press conference President Lagarde explained that the upside surprises in CPI in Dec and Jan saw unanimous concern around the GC in the near-term and surprised markets by not repeating Dec language which said a 2022 rate hike was unlikely (which immediately saw STIR markets price in a 10bsp hike as soon as June). The president also made the March meeting live, by stating that they’ll use the March meeting to decide what the APP will look like for the rest of 2022 (which markets took as a signal that the APP could conclude somewhere in 2H22. After the meeting we had the customary sources comments which stated that the ECB is preparing for a potential policy recalibration in March (with some members wanting to change policy at today’s meeting already) and added that it is sensible not to exclude a 2022 hike as a possibility and also stated that the ECB is considering possibly ending the APP at the end of Q3 (which would put a Q4 hike in play). Furthermore, sources stated that if inflation does not ease, they’ll consider adjusting policy in March (which means incoming inflation data will be critical). The shift is stance and tone were significant for us to change the bank’s overall policy stance to neutral and to adjust the EUR’s fundamental bias from dovish to neutral as well. Incoming inflation data will be key from here. 2. Economic & Health Developments Even though the recent activity data suggests the hit to the economy from previous lockdowns weren’t as bad as feared, the additional lockdown measures across Europe has weighed on incoming data. Growth differentials still favour places like the US and UK above that of the EZ and alongside the clear monetary policy divergence means the bearish bias is firmly in place. On the fiscal front, attention is on ongoing discussions to potentially allow purchases of ‘green bonds’ NOT to count against budget deficits. If approved, this could drastically change the fiscal landscape for the EZ and would be seen as a big positive for the EUR and EU equities. 3. Funding Characteristics As a low yielder (like JPY & CHF), the EUR has been a funding choice among carry trades, especially during 2019 where it was a favourite against high yielding EM. As such, part of the EUR’s upside after the initial risk-off scare in March 2020 was attributed to a major unwind of large carry trades. As more central banks start normalizing policy and rate differentials widen, the EUR’s use as a funding currency could add additional pressure in the med-term, but keep in mind it could also spark risk off upside if some of those trades unwind. 4. CFTC Analysis Remember that the ECB meeting this past week took place on Thursday, that means that the most recent CFTC update will not include the big jolt higher in the EUR across the board. We would expect next week’s data to show a sizeable increase in large spec net-longs as well as a very big reduction in leveraged fund net-shorts. With so many negatives priced in for the EUR in recent weeks, the unwind could be punchy. 5. The Week Ahead In the week ahead we have a very light economic calendar coming up for the Eurozone, but we do have quite a few ECB speakers lined up and that will take centre stage for markets. Looking at the moves in both bund yields and the EUR, the ECB members will no doubt have quite a few questions they’ll need to answer and will want to give their own views and opinions. If the ECB thinks the markets overreacted to the message conveyed by President Lagarde, they will want to use this week to get on the wires as much as possible to correct any misplaced expectations. That means President Lagarde’s testimony before the EU Parliament Economic and Monetary Affairs Committee will be scrutinized for any additional details and info, especially with markets now pricing in over 50 basis points of tightening by year-end as well as a Q2 end to QE. Without any strong push back from the ECB in the week ahead will likely lead to a further unwind in short-positioning and should continue to be supportive for the EUR in the very short-term. USD FUNDAMENTAL BIAS: BULLISH 1. Monetary Policy The Jan FOMC decision was hawkish on multiple fronts. The statement signalled a March hike as expected, but Chair Powell portrayed a very hawkish tone. Even though Powell said they can’t predict the rate path with certainty, he stressed the economy is in much better shape compared to the 2015 cycle and that will have implications for the pace of hikes (more and faster). Furthermore, he explained that there is ‘quite a bit of room’ to raise rates without damaging employment, which suggests upside risks to the rate path. A big question going into the meeting was how concerned the Fed was about recent equity market volatility. But the Chair explained that markets and financial conditions are reflecting policy changes in advance and that in aggregate the measures they look at isn’t showing red lights. Thus, any ‘Fed Put’ is much further away and inflation is the Fed’s biggest concern right now. The Chair also didn’t rule out the possibility of a 50bsp hike in March or possibly hiking at every meeting this year, which was hawkish as it means the Fed wants optionality to move more aggressive if they need to. We didn’t get new info on the balance sheet and Powell reiterated that they’re contemplating a start of QT after hiking has begun and they’ll discuss this in coming meetings. Overall, the tone and language was lot more hawkish than the Dec meeting and more hawkish than consensus was expecting. 2. Global & Domestic Economy As the reserve currency, the USD’s global usage means it’s usually inversely correlated to the global economy and global trade. Thus, USD usually appreciates when growth & inflation slow (disinflation) and depreciates when growth & inflation accelerates (reflation). With expectations that growth and inflation will decelerate this year that should be a positive input for the USD. However, incoming data will also be important in relation to the ‘Fed Put’. There are many similarities between now and 4Q18, where the Fed were also tightening aggressively going into an economic slowdown. As long as growth data slows and the Fed stays aggressive that is a positive for the USD, but if it causes a dovish Fed pivot and lower rate repricing it would be a negative input for the USD. 3. CFTC Analysis The USD came under some pressure this week, mainly due to overdue mean reversion, recovery in risk assets and of course the surprise hawkish actions by the BoE and more specifically the ECB. Keep in mind that half of the USD’s drop this week occurred outside the CFTC reference period which would explain more limited unwinding in net-longs, and we would expect this number to be much bigger next week. With positioning still in net-long territory for leveraged funds and large specs, and with leveraged funds sitting on a sizeable net-short in the EUR the recent hawkish pivot from the ECB could see some further damage for the USD in the short-term. 4. The Week Ahead After last week’s much better than expected Average Hourly Earnings data out of the US, the main event for the USD as well as markets in general will be the January CPI print for the US scheduled for Wednesday. With another month of upside surprises for inflation data in other global economies, the markets will be watching the US CPI for Jan very closely. Right now, Fed policy has tunnel vision for inflation, and with the surprise beat in Friday’s NFP as well as the surprise punchy upward revisions, the labour market won’t deter the Fed from going all-in to fight inflation. The big dynamic to watch for is wages. Friday’s Average Hourly Earnings print of 5.7% was much higher than expected and saw an immediate jolt higher in US bond yields, with Fed Fund Futures now comfortably pricing in well over 5 hikes by the end of the year. Starting the new year, the biggest reason for expecting a deceleration in inflation was firstly due to base effects, secondly due to expectations that supply chain disruptions ease, and very importantly that commodity prices being cooling down. Out of these three, the last one has not happened yet with oil prices continuing their grind higher (which adds upside risks to headline numbers). Two important components to keep on the radar is wages and shelter prices, which for some means there is very little downside risk to this week’s CPI. How will the USD likely react? Recently the USD has reaction cyclically towards inflation data, which means a solid beat should be supportive, but at the same time a miss would be a far more attractive shorting opportunity, especially against the EUR after the ECB’s pivot.
by thunderpips
6
EUR USD - FUNDAMENTAL DRIVERSEUR FUNDAMENTAL BIAS: BEARISH 1. Monetary Policy Less dovish than expected can sum up the ECB Dec decision. As expected, they announced that PEPP will discontinue from March 2022, but also announced a surprise decline in monthly purchases under the APP, which will see purchases increased to EUR 40bln from the current EUR 20bln from2Q22 and then subsequently lowered to EUR 30bln in 3Q22 and down to EUR 20bln in 4Q22. Markets were not expecting any reduced purchases under the APP, so expecting the APP amount to return to EUR 20 billion by end 2022 was less dovish than expected. On inflation there was no surprises with updated staff econ projections showing 2023 HICP at 1.8% which reiterated the bank’s view that inflation will return to below target in the med-term. President Lagarde struck a familiar tone regarding rates by reaffirming that rates are unlikely to rise in 2022. As usual, ECB sources provided more colour after the meeting by noting further disagreements among the GC, with hawks unhappy with extending PEPP reinvestments to 2024 and not setting an end-date to the APP, and of course argued that inflation risks as skewed higher. Overall, the ECB was less dovish than expected but the stark policy divergence with the Fed and BoE means the bias for the EUR remains tilted lower in the med-term. 2. Economic & Health Developments Even though the recent activity data suggests the hit to the economy from previous lockdowns weren’t as bad as feared, the additional lockdown measures across Europe has weighed on incoming data. Growth differentials still favour places like the US and UK above that of the EZ and alongside the clear monetary policy divergence means the bearish bias is firmly in place. On the fiscal front, attention is on ongoing discussions to potentially allow purchases of ‘green bonds’ NOT to count against budget deficits. If approved, this could drastically change the fiscal landscape for the EZ and would be seen as a big positive for the EUR and EU equities. 3. Funding Characteristics As a low yielder (like JPY & CHF), the EUR has been a funding choice among carry trades, especially during 2019 where it was a favourite against high yielding EM. As such, part of the EUR’s upside after the initial risk-off scare in March 2020 was attributed to a major unwind of large carry trades. As more central banks start normalizing policy and rate differentials widen, the EUR’s use as a funding currency could add additional pressure in the med-term, but keep in mind it could also spark risk off upside if some of those trades unwind. 4. CFTC Analysis Latest CFTC data showed a positioning change of +6976 with a net non-commercial position of +31560. The divergence between large specs and leveraged funds continue to grow as large specs added back longs in size, while leveraged funds still hold the biggest net-short among the majors. What does that mean, well it means be careful, because being on the wrong side of any of these can be painful. Thus, looking for clear short-term drivers apart from tactical positioning considerations might be the ‘safest’ way to trade the EUR right now. It seems like large specs chose the exact wrong moment to add back to EUR longs and could see some reduction in longs in the sessions ahead if the EURUSD does not manage to claim back key support at 1.1220-1.1240 5. The Week Ahead For the week ahead the main focus for the EUR would be flash CPI data on Wed and then the ECB meeting on Thursday. The bank surprised markets at the Dec meeting with a less dovish than expected tilt on the QE side with the APP beefing up from March as the PEPP phases out but then reducing APP purchases incrementally throughout the year. After that surprise, markets are not expecting much from the Jan meeting in terms of policy adjustments or announcements, which means all focus will fall on the assessing the tone and language towards the inflation outlook. After the Dec meeting, CPI has continued to surprise higher (YY CPI at 5.0% & Core YY at 2.7%). Some participants expect the ECB to gradually move away from a ‘transitory’ expectation for inflation, but any pivot away from that could risk an aggressive repricing in rate expectations, with money markets already pricing in 10bsp of tightening in Oct followed by 10bsp more in Dec (that’s 2 hikes). Thus, focus will be on how strongly the bank sticks to their med-term inflation outlook and how much room they leave for faster asset purchase reductions if the incoming data prove them wrong. The Q&A will likely bring up current Russia/Ukraine tensions and how that could impact the inflation outlook. USD FUNDAMENTAL BIAS: BULLISH 1. Monetary Policy The Jan FOMC decision was hawkish on multiple fronts. The statement signalled a March hike as expected, but the press conference from Chair Powell portrayed a very hawkish message. Even though Powell said they can’t predict the rate path with certainty, he stressed the economy is in much better shape compared to the 2015 cycle and that will have implications for the pace of hikes. Furthermore, the Chair explained that there is ‘quite a bit of room’ to raise rates without dampening employment, which suggests upside risks to the rate path, especially coming from Powell. A big question markets wanted an answer for was whether the Fed was concerned about recent equity market volatility. However, the Chair explained that markets and financial conditions are reflecting policy in advance and stressed that in aggregate their measures they look at is not showing red lights. This was a clear message to markets that any ‘Fed Put’ is much further away and that inflation is the biggest focus point for the Fed right now. The Chair also didn’t rule out the possibility of hiking 50bsp in March or possibly hiking at every meeting this year, which was seen as hawkish as it means the Fed is looking for optionality to move more aggressive if they need to. On the balance sheet, we didn’t really get new info and the Chair reiterated that they are contemplating a start of QT after the hiking cycle has begun but also reiterated that they will discuss this in coming meetings. Overall, the tone and language used by the Chair were a lot more hawkish than the Dec meeting and more hawkish than some were hoping for. 2. Global & Domestic Economy As the reserve currency, the USD’s usage around the world means it usually has an inverse correlation to the health of the global economy and global trade. The USD usually gains strength when growth & inflation both slow (disinflation) and loses ground when growth & inflation accelerates (reflation). Thus, with expectations that both growth and inflation will decelerate this year, both in the US and the globe, that should be a positive input for the USD in the med-term. However, incoming data will also be important in relation to the ‘Fed Put’. There are many similarities between now and 4Q18, where the Fed were also tightening aggressively going into an economic slowdown. So, incoming data will be crucial to watch. As long as growth data slows and the Fed stays aggressive that would be a positive environment for the USD, but if it causes the Fed to pivot more dovish and causes a rate repricing in money markets it would be seen as a negative input for the USD. 3. CFTC Analysis Latest CFTC data showed a positioning change of +427 with a net non-commercial position of +36861. The shortterm unwinding of stretched USD longs played out as expected at the start of the year but was also short-lived in the midst of the recent strong risk off sentiment in certain parts of the market and of course the continued hawkish stance from the Fed. 4. The Week Ahead In the week ahead the party starts all over again with a new month which means we’ll get new ISM PMI releases as well as the Jan NFP report. It’s important to keep the current economic climate in mind when looking at possible reaction functions for the USD. Usually, positive data should be USD positive and negative data USD negative when the Fed is busy with a hiking cycle, but right now there are growing fears that economic data has been slowing much faster than expected and means the Fed could be on its way to make the same mistake it did back in the end of 2018. As long as those fears persist, we might see the USD having two different reaction functions to growth and inflation data. Reacting inverse to growth data but acting correlated to inflation data. That makes this week’s incoming ISM data very interesting as the Dec data decelerated much faster than expected on the growth side, and a further miss might spark more fears about a faster slowdown. The tricky part for the USD in the week ahead is that both the ISM prints as well as the NFP report has inflation components with the ISM priced paid components and the Average Hourly Earnings on the NFP side. If growth data slows very fast that could be USD positive, but if inflation data starts decelerating much faster that could also be USD negative as it means less need for aggressive Fed policy. A tricky one for the week ahead.
by thunderpips
3
EURUSD 4 hour =buystop on today high possible if today high break again,it is buy signal and new + up trend will start alert , 30% possible = IF , IF , IF today low break in coming days, eurusd can crash to 1.08000 can today candel close as PINBAR ??? many traders waiting Pinbar on daily chart for pick buy ,see daily chart if you are in mobile ,tablet, for better view : from menu of your explorer(like chrome) enable DESKTOP VIEW then from bottom of chart , drag on it , then you can zoom in,zoom out , see better view good luck and dont pick big size , stand on very very low size and low levrage (increase your TP and wait time)
Long
by ramin_trader2006
Today’s Notable Sentiment ShiftsEUR – The single currency fell to a one-month low on Tuesday, pressured by concerns that rising tensions over Ukraine could prompt Russia to curb energy supplies to Europe. CAD – The Canadian dollar strengthened on Tuesday, supported by strength in oil prices as WTI reclaimed $85 per barrel and as BoC rate hike bets continued to rise. Commenting on this week’s BoC meeting, Reuters stated that “Canada’s central bank could raise interest rates at a policy announcement on Wednesday for the first time since October 2018, in an effort to tamp down inflation. Money markets see chances of a hike at about 65%.”
by thunderpips
1
EUR USD - FUNDAMENTAL DRIVERSEUR FUNDAMENTAL BIAS: BEARISH 1. Monetary Policy Less dovish than expected can sum up the ECB Dec decision. As expected, they announced that PEPP will discontinue from March 2022, but also announced a surprise decline in monthly purchases under the APP, which will see purchases increased to EUR 40bln from the current EUR 20bln from2Q22 and then subsequently lowered to EUR 30bln in 3Q22 and down to EUR 20bln in 4Q22. Markets were not expecting any reduced purchases under the PEPP, so expecting the APP amount to return to EUR 20 billion by end 2022 was less dovish than expected. On inflation there was no surprises with updated staff econ projections showing 2023 HICP at 1.8% which reiterated the bank’s view that inflation will return to below target in the med-term. President Lagarde struck a familiar tone regarding rates by reaffirming that rates are unlikely to rise in 2022. As usual, ECB sources provided more colour after the meeting by noting further disagreements among the GC , with hawks unhappy with extending PEPP reinvestments to 2024 and not setting an end-date to the APP, and of course argued that inflation risks as skewed higher. Overall, the ECB was less dovish than expected but the stark policy divergence with the Fed and BoE means the bias for the EUR remains tilted lower in the med-term. 2. Economic & Health Developments Even though the recent activity data suggests the hit to the economy from previous lockdowns weren’t as bad as feared, the massive climb in case numbers across Europe have seen more restrictive measures which will drag on growth. Further lockdown measures will probably see a further divergence in growth differentials between the EU and other major economies (and combined with ongoing central bank policy divergence) the fundamental outlook remains bearish. On the fiscal front, attention is still on ongoing discussions among EU states to potentially allow the purchase of green bonds NOT to count against budget deficits. Such a decision could drastically change the fiscal picture and we would expect it to be a big positive for the EUR and EU equities if that change should come to pass. 3. Funding Characteristics As a low yielder (like JPY & CHF), the EUR has been a funding choice among carry trades, especially during 2019 where it was a favourite against high yielding EM. As such, part of the EUR’s upside after the initial risk-off scare in March 2020 was attributed to a major unwind of large carry trades. As more central banks start normalizing policy and rate differentials widen, the EUR’s use as a funding currency could add additional pressure in the med-term, but keep in mind it could also spark risk off upside if some of those trades unwind. 4. CFTC Analysis Latest CFTC data showed a positioning change of +18579 with a net non-commercial position of +24584. The divergence between large speculators and leveraged funds continue to grow as large specs added back in size, while leveraged funds still hold the biggest net-short among the majors. What does that mean, well it means be careful, because being on the wrong side of any of these can be painful. Thus, looking for clear short-term drivers apart from tactical positioning considerations might be the ‘safest’ way to trade the EUR right now. 5. The Week Ahead In the week ahead, the majority of focus for the EUR will fall on the overall trajectory for the USD, with plenty of big events that can spark some meaningful short-term reaction in the Greenback. Thus, keeping track of the USD will be a very important driver for the EUR across the board. The currency’s low yielding characteristics does mean that further attention on the overall risk sentiment will be important in the week ahead as well. We also have a fresh round of flash PMI’s due for the Eurozone on Monday, which can often create some shortterm volatility for the single currency, and after the softer than expected forward-looking growth data out of the US in the past two weeks the EU PMI data is slightly more interesting. USD FUNDAMENTAL BIAS: BULLISH 1. Monetary Policy The Fed turned a lot more hawkish than expected in Dec. They doubled the pace of tapering to $30 billion per month which will see QE concluded by March 2022 as was widely expected. Surprisingly though the Summary of Econ Projections showed the median dot plot pencilled in 3 hikes for 2022 (up from the previous 1), confirming Fed Fund Future expectations. Fed Chair Powell explained they hadn’t decided whether to pause between the end of tapering and a first hike but reiterated that rates will likely only rise when QE has concluded. Another positive shift was Powell’s comments that they could raise rates before full employment has been met due to high inflation , and stated that with inflation above target, they cannot wait too long to get to maximum employment as current inflation levels is seen as a threat to max employment. The hawkish tilt went further to note that the bank started discussing the balance sheet but said no decisions were made on when QT might commence. Even though the dots projected 3 hikes for 2022, the updated rate trajectory only showed 1 additional hike over the forecast horizon, which combined with a lower terminal rate was less hawkish than some had feared. Nonetheless, the meeting marked a material hawkish shift from the Fed, putting it on par with the likes of the RBNZ. The meeting minutes also revealed that the QT discussion saw majority of members thinking it appropriate to start QT soon after rate lift off and another more hawkish tilt than expected from the Fed. 2. Global Risk Outlook The growth & inflation outlook for the US and the globe will be key for the USD. The USD is often inversely correlated to global growth & inflation , doing bad during reflationary environments (growth and inflation accelerating), while the USD usually does well in disinflationary environments (growth and inflation decelerating). Thus, with expectations that both growth and inflation will decelerate this year, both in the US and the globe, that should be a positive input for the USD in the med-term . However, incoming data will also be important to see how the Fed responds to it, where a worsening outlook that deteriorates much faster than expected could see a dovish pivot from the Fed which could mean downside for the USD if money markets start pricing out hikes (especially with markets now expected just over 4 hikes for 2022). 3. CFTC Analysis Latest CFTC data showed a positioning change of -1458 with a net non-commercial position of +36434. The shortterm unwinding of stretched USD longs played out exactly as expected but was also short-lived in the midst of the recent strong risk off moves in certain parts of the market. Surprisingly, the big flush lower in the USD has not showed up in the CFTC data as expected with very little change to the overall positioning. In the current context, the stretched long positioning makes the USD vulnerable in the event that the Fed does not deliver the very hawkish tone expected of them in this week’s upcoming FOMC meeting. 4. The Week Ahead For the USD the big focus this week will be overall risk sentiment and the first FOMC meeting for 2022 on Wednesday, followed by Friday’s Core PCE and Employment Cost index prints. The latter will of course be important given the inflation outlook with more emphasis recently on the odds of a possible wage spiral affect. However, the main event will be the FOMC, where the meeting is expected to serve as a signalling meeting to pave the way for a 25bsp hike in March and to provide more clarity on the bank’s balance sheet plans. With a March hike sitting close to a 90% probability, and markets already fully pricing in 4 hikes this year, the bar has been set quite high for a hawkish surprise. However, there are also some participants that think the recent econ data ( CPI YY >7% and Unemployment <4%) justifies an early end to the Fed’s QE program instead of allowing tapering to run it’s planned course until March. That would certainly give a more hawkish feel to the meeting and could see markets pricing in an even earlier and faster pace of QT if confirmed. But, if the Fed does not deliver on an early end to QE , and does not offer a strong enough signal that the 4 hikes priced by the market is justified, we could be in store for some moderation in the rise in yields and the USD and could also prove to be supportive for equities which ended last week in quite bad shape.
by thunderpips
10