GBPUSD SHORT: BOE/ FOMC POLICY EXPECTATIONS INCREASINGLY BEARISH
Updated
Following today's Service/ Manufacturing PMI miss (worst contraction in 88 months - since 2009) the Sterling market has come under significant pressure as BOE rate cut expectations increase with OIS rates markets pricing a 94% chance of a 4th Aug cut vs 85% before the PMI's were released.
Further, the PMI misses has attracted attention from UK Politicians e.g. Chancellor Hammond - which puts further qualitative pressure on the BOE to cut, rather than just quantitative data prints - Political pressure combined with data pressure is the best us GBP sellers can ask for when looking for a BOE rate cut.
I have to say this is a breath of fresh air for GBPUSD shorts that i am holding (cable trades down to 1.30xx) - given that the start of the week was the complete opposite, with strong CPI/ Employment and Hawkish comments from MPC members Weale and Forbes; all of which reducing the pressure on the BOE to cut and thus the sterling market.
Below also, following the PMIs we see Aug 4th BOE expectations from BoAML/ JPM - which call for a 25bps cut and 50bn addition to QE (with increased near-term pressure to do so/ act post-PMI) - in which imo will send GBP$ to 1.25, if not through - these expectations are encouraging for shorts thougb it should be remembered the cut was expected in July also but didnt materialise (though the minutes from the meeting did state "most members expect to ease in August". Further we see fresh recession concerns emerge as from Barclays below - once again putting downside pressure on GBP through poor GDP and increased BOE cut likihoods.
Further, on the USD side of the trade, in this risk recovery we continue to view FOMC rate hike expectations rising - aiding dollar topside (and gbp$ downside) - as Fed Funds Futures Opt Implied probs now trade at 19.5% for Sept, 20.8% Nov and 40% for Dec, up from yesterday at 18.8, 20 an 39.8 - the risk-on bias already started today will likely see these probabilities continue to strengthen through the end of the day.
Trading Strategy:
1. So from here after holding shorts at 1.3400 average, given this fresh and extreme impetus for downside - I will continue to hold my cable lower to the 1.285 target (unload 50%) and save 25-50% (depending if i unload 25% at the 1.305 level) for the Aug meeting itself where 1.25 is likely - where before today holding cable seemed more risky as the risks looked skewed to a hawkish BOE, which now has flipped. Unlikely, but any rallies to 1.33-35 level i will be reshorting - cable downside is a function of time imo.
- I like holding short because BOJ are likely to ease, whilst the FOMC stay neutral/ Hawkish, this in turn puts more pressure on the BOE to ease/ GBP - in order to prevent GBP appreciating vs JPY (disinflationairy) BOE must ease too & hawkish FED stance puts pressure on GBPUSD lower.
- Risks to the view continue to be if 1) New/ Weale/ Forbes continue to reiterate their hawkish/ no easing stance and perhaps less impactful; 2) Next weeks UK GDP reading - will not contain much Post brexit data so any upside is unlikely to give GBP strength, though downside is welcomed and could cause further selling (Low pre-Brexit GDP gives BOE more reason to cut)
GBP OIS PRICING A 94% CHANCE OF A 25BPS CUT FROM THE BOE IN AUGUST (85% PRE PMI)
- UK CHANCELLOR HAMMOND: Must restore uncertainty after July PMI
- UK CHANCELLOR HAMMOND: BOE will use monetary policy tools at its disposal
- UK CHANCELLOR HAMMOND: BOE have tools to respond to market turbulence in the short-term
BoAML ON BOE:
- We look for the BoE to cut rates 25bp and increase QE by £50bn in August, split between Gilts and private sector assets.
- BoE inaction so far and heightened policy uncertainty leaves risk-reward unattractive in the front end in our view.
- We prefer to position for potential BoE Gilt purchases, reiterating our 5s20s Gilt flattener as attractive in a QE-scenario.
JP MORGAN ON BOE:
- Current market pricing of a 25bps rate
Further, the PMI misses has attracted attention from UK Politicians e.g. Chancellor Hammond - which puts further qualitative pressure on the BOE to cut, rather than just quantitative data prints - Political pressure combined with data pressure is the best us GBP sellers can ask for when looking for a BOE rate cut.
I have to say this is a breath of fresh air for GBPUSD shorts that i am holding (cable trades down to 1.30xx) - given that the start of the week was the complete opposite, with strong CPI/ Employment and Hawkish comments from MPC members Weale and Forbes; all of which reducing the pressure on the BOE to cut and thus the sterling market.
Below also, following the PMIs we see Aug 4th BOE expectations from BoAML/ JPM - which call for a 25bps cut and 50bn addition to QE (with increased near-term pressure to do so/ act post-PMI) - in which imo will send GBP$ to 1.25, if not through - these expectations are encouraging for shorts thougb it should be remembered the cut was expected in July also but didnt materialise (though the minutes from the meeting did state "most members expect to ease in August". Further we see fresh recession concerns emerge as from Barclays below - once again putting downside pressure on GBP through poor GDP and increased BOE cut likihoods.
Further, on the USD side of the trade, in this risk recovery we continue to view FOMC rate hike expectations rising - aiding dollar topside (and gbp$ downside) - as Fed Funds Futures Opt Implied probs now trade at 19.5% for Sept, 20.8% Nov and 40% for Dec, up from yesterday at 18.8, 20 an 39.8 - the risk-on bias already started today will likely see these probabilities continue to strengthen through the end of the day.
Trading Strategy:
1. So from here after holding shorts at 1.3400 average, given this fresh and extreme impetus for downside - I will continue to hold my cable lower to the 1.285 target (unload 50%) and save 25-50% (depending if i unload 25% at the 1.305 level) for the Aug meeting itself where 1.25 is likely - where before today holding cable seemed more risky as the risks looked skewed to a hawkish BOE, which now has flipped. Unlikely, but any rallies to 1.33-35 level i will be reshorting - cable downside is a function of time imo.
- I like holding short because BOJ are likely to ease, whilst the FOMC stay neutral/ Hawkish, this in turn puts more pressure on the BOE to ease/ GBP - in order to prevent GBP appreciating vs JPY (disinflationairy) BOE must ease too & hawkish FED stance puts pressure on GBPUSD lower.
- Risks to the view continue to be if 1) New/ Weale/ Forbes continue to reiterate their hawkish/ no easing stance and perhaps less impactful; 2) Next weeks UK GDP reading - will not contain much Post brexit data so any upside is unlikely to give GBP strength, though downside is welcomed and could cause further selling (Low pre-Brexit GDP gives BOE more reason to cut)
GBP OIS PRICING A 94% CHANCE OF A 25BPS CUT FROM THE BOE IN AUGUST (85% PRE PMI)
- UK CHANCELLOR HAMMOND: Must restore uncertainty after July PMI
- UK CHANCELLOR HAMMOND: BOE will use monetary policy tools at its disposal
- UK CHANCELLOR HAMMOND: BOE have tools to respond to market turbulence in the short-term
BoAML ON BOE:
- We look for the BoE to cut rates 25bp and increase QE by £50bn in August, split between Gilts and private sector assets.
- BoE inaction so far and heightened policy uncertainty leaves risk-reward unattractive in the front end in our view.
- We prefer to position for potential BoE Gilt purchases, reiterating our 5s20s Gilt flattener as attractive in a QE-scenario.
JP MORGAN ON BOE:
- Current market pricing of a 25bps rate
Note
Barclays on UK Economy: Barclays: UK July flash PMIs consistent with an imminent UK recession
- "While output fell markedly across the board, even sharper drops in forward-looking components were recorded, such as new orders and business or business expectations, pointing to even more downside to come.
As the impact from the referendum result sets in, and already elevated levels of uncertainty spiral higher on a lack of clarity regarding the UKâs post-exit relationship with the EU and the rest of the world in the near term, confidence levels are likely to fall further in our view. This will force businesses to become even more cautious with regard to hiring, spending and investment decisions, worsening their ability to attract new business, thus confirming our cautious outlook on economic activity. This is partially underscored already by service business expectations which recorded its sharpest fall on record, to levels last seen during the financial crisis. Given this backdrop, we forecast that the UK is likely to enter a shallow and prolonged recession from Q3 16, contracting by on average -0.1% q/q until the end of our forecast horizon. In contrast, according to the IHS Markit PMI press release, todayâs figures would be consistent with a 0.4% contraction in Q3 16."
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