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GBP CAD - FUNDAMENTAL DRIVERSGBP FUNDAMENTAL OUTLOOK: WEAK BEARISH BASELINE The negative outlook for the UK economy has been a key source of Pound weakness. Stagflation risks remain high with CPI > 10% and recession expected in 4Q22 (lasting 5 quarters). It has kept pressure on Sterling despite ongoing BoE rate hikes. However, the new PM announced a much bigger than expected fiscal plan which will keep energy prices capped for 2 years for households and will also offer support for businesses. According to some estimates, that should keep inflation capped (as the main driver has been energy), and also means that the recession could be less severe than previously thought. Thus, even though the bias for the GBP remains bearish as a recession still seems likely, the fiscal news is a positive development for Sterling on balance, and with a lot of bad news already priced in we are expecting some reprieve for Sterling with asymmetric risk to incoming data (good news expected to have a bigger upside impact compared to the impact from bad news). That also means this week’s upcoming BoE meeting will be very interesting. After the dismal economic outlook delivered in the Aug MPR and the recent policy hearings, there could be some upside risk for GBP if the bank’s verdict of the new PM’s fiscal plan means lower price pressures and a less severe recession outlook. POSSIBLE BULLISH SURPRISES With recession the base assumption, any incoming data that surprises meaningfully higher could trigger relief for the GBP. With focus on stagflation, any downside surprises in CPI or factors that decrease inflation pressures are expected to support the GBP and not pressure it. The fiscal announcements last week were a welcome change, and any further support measures announced by the new PM should continue to ease stagflation fears. Given STIR pricing, a 50bsp could trigger initial GBP downside, but we could see upside if the bank sounds slightly more optimistic about the economy with the proposed fiscal plan. POSSIBLE BEARISH SURPRISES With recession the base assumption, any material downside surprises in growth data can still trigger short-term pressure. With focus on stagflation, any upside surprises in CPI or factors that increase more inflation pressures are expected to weigh on the GBP and not support it. The fiscal announcements last week were a welcome change, and any potential walk back from the new PM on the plans laid out last week would increase stagflation fears once again. Given STIR pricing, a 50bsp could trigger initial downside, but we could see further downside if the bank explains the medterm debt risk of the new fiscal plan outweighs the benefits. BIGGER PICTURE The fundamentals for Sterling remain bearish , especially after the BoE’s recent forecasts of a 5-quarter recession in the UK. Furthermore, given the risks to growth, there is growing speculation that the BoE might not be too far away from pausing their current hiking cycle. Anything that exacerbates stagflation fears is expected to weigh on the Pound and anything that alleviates some pressure could see some reprieve. Since Sterling is trading at fresh new cycle lows, the risk to reward for chasing it lower looks unattractive, and we could see asymmetric reactions skewed to the upside on positive data & news. Furthermore, we think the new PM’s proposed fiscal plan has not received the bullish attention it deserves. What the BoE have to say about the proposed fiscal spending and how it’s likely to impact growth and inflation will be important this week. CAD FUNDAMENTAL OUTLOOK: NEUTRAL BASELINE The CAD has enjoyed far more upside in the past few weeks than we anticipated. We’ve been cautious on the currency given Canada’s dependency on the US (>70% of exports) where the clear signs of a faster than expected slowdown and possible recession should deteriorate the growth outlook for Canada. Apart from that, the risks to the Canadian housing market can negatively impact consumer spending as interest rates rise higher at aggressive speed. Potentially damaging the wealth effect created by the rapid rise in house prices since covid. Despite markets still pricing in a favourable growth outlook for Canada, the recent jobs report saw the third consecutive contraction in employment, which is something the bank should start to take notice of. The market’s reaction after the 75bsp was fairly muted as the bank didn’t provide any important additional info in their statement that markets didn’t already know. With their frontloading, the bank is now just one 50bsp or two 25bsp hikes away from hitting terminal rate expectations, which means any upside from policy differentials should begin to fade. Either way, we remain cautious on the CAD and favour short-term catalysts that provide us with shorting opportunities. After the recent jobs report miss, a much bigger than expected miss in CPI could offer some great shorting opportunities. POSSIBLE BULLISH SURPRISES As an oil exporter, oil prices are important for CAD. Catalysts that see further upside in Oil (deteriorating supply outlook, ease in demand fears) could trigger bullish CAD reactions. The correlation has been hit and miss in recent weeks though. As a risk sensitive currency, and catalyst that causes big bouts of risk on sentiment could trigger bullish reactions in the CAD. After the bank’s frontloading, there is a very high bar to surprise on the hawkish side for the BoC, but if the bank were to say they think STIR market pricing for the terminal rate is too low that can provide upside for the CAD. An upside surprise in CPI is unlikely to change the bigger picture but could ease some of the post-job report downside. POSSIBLE BEARISH SURPRISES As an oil exporter, oil prices are important for CAD. Any catalyst that triggers meaningful downside in oil (deteriorating demand outlook, ease in supply shortage, less supply constraints) could be a negative catalyst for the CAD as well. As a risk sensitive currency, and catalyst that causes big bouts of risk off sentiment could trigger bearish reactions in the CAD. With the bank just 50bsp away from terminal rate expectations, it won’t take much to surprise on the dovish side, and any signals or comments from the BoC that they’ll pause hikes should be a negative for the CAD. A big enough CPI miss could see markets pricing in a sooner pause from the BoC, especially after the recent jobs report. BIGGER PICTURE The bigger picture outlook for the CAD remains neutral for now. Given the clear risks to the growth outlook due to the slowdown in the US, as well as rising risks to the consumer and the housing market, and potential negative impact for commodities like oil, we remain cautious on the currency (even though it’s moved much higher than we anticipated from the start of the year). With a lot of good news priced in, and the BoC close to terminal, and the recent miss in the jobs data, our preferred way of trading the CAD is lower on clear short-term negative catalysts. Incoming CPI data could give the markets an excuse to start contemplating a sooner pause by the bank since they are very close to terminal rate expectations.
by thunderpips
3
GBP USD - FUNDAMENTAL DRIVERSGBP FUNDAMENTAL OUTLOOK: WEAK BEARISH BASELINE The negative outlook for the UK economy has been a key source of Pound weakness. Stagflation risks remain high with CPI > 10% and recession expected in 4Q22 (lasting 5 quarters). It has kept pressure on Sterling despite ongoing BoE rate hikes. However, the new PM announced a much bigger than expected fiscal plan which will keep energy prices capped for 2 years for households and will also offer support for businesses. According to some estimates, that should keep inflation capped (as the main driver has been energy), and also means that the recession could be less severe than previously thought. Thus, even though the bias for the GBP remains bearish as a recession still seems likely, the fiscal news is a positive development for Sterling on balance, and with a lot of bad news already priced in we are expecting some reprieve for Sterling with asymmetric risk to incoming data (good news expected to have a bigger upside impact compared to the impact from bad news). That also means this week’s upcoming BoE meeting will be very interesting. After the dismal economic outlook delivered in the Aug MPR and the recent policy hearings, there could be some upside risk for GBP if the bank’s verdict of the new PM’s fiscal plan means lower price pressures and a less severe recession outlook. POSSIBLE BULLISH SURPRISES With recession the base assumption, any incoming data that surprises meaningfully higher could trigger relief for the GBP. With focus on stagflation, any downside surprises in CPI or factors that decrease inflation pressures are expected to support the GBP and not pressure it. The fiscal announcements last week were a welcome change, and any further support measures announced by the new PM should continue to ease stagflation fears. Given STIR pricing, a 50bsp could trigger initial GBP downside, but we could see upside if the bank sounds slightly more optimistic about the economy with the proposed fiscal plan. POSSIBLE BEARISH SURPRISES With recession the base assumption, any material downside surprises in growth data can still trigger short-term pressure. With focus on stagflation, any upside surprises in CPI or factors that increase more inflation pressures are expected to weigh on the GBP and not support it. The fiscal announcements last week were a welcome change, and any potential walk back from the new PM on the plans laid out last week would increase stagflation fears once again. Given STIR pricing, a 50bsp could trigger initial downside, but we could see further downside if the bank explains the medterm debt risk of the new fiscal plan outweighs the benefits. BIGGER PICTURE The fundamentals for Sterling remain bearish, especially after the BoE’s recent forecasts of a 5-quarter recession in the UK. Furthermore, given the risks to growth, there is growing speculation that the BoE might not be too far away from pausing their current hiking cycle. Anything that exacerbates stagflation fears is expected to weigh on the Pound and anything that alleviates some pressure could see some reprieve. Since Sterling is trading at fresh new cycle lows, the risk to reward for chasing it lower looks unattractive, and we could see asymmetric reactions skewed to the upside on positive data & news. Furthermore, we think the new PM’s proposed fiscal plan has not received the bullish attention it deserves. What the BoE have to say about the proposed fiscal spending and how it’s likely to impact growth and inflation will be important this week. USD FUNDAMENTAL OUTLOOK: BULLISH BASELINE With headline CPI above 8%, the Fed is under pressure to continue hiking rates and ramping up QT to try and equalize supply and demand. They hiked rates 75bsp in July, and after the strong Aug CPI, another 75bsp hike is fully priced and question for the FOMC meeting this week is whether they hike 100bsp. Recent Fed communication pushed back against rate cuts in 2023 and stressed that rates could reach close to 4% in early 2023 and stay there throughout 2023. In July, the Fed announced a data-dependent (meeting-by-meeting) policy stance, explaining that the pace of hikes is likely to slow as rates get more restrictive and more data becomes available. This means incoming growth, inflation and jobs data remains key drivers for short-term USD price action where we expect a cyclical reaction to incoming data (good data being good for the USD and US10Y and bad data being bad for the USD and US10Y). The Aug CPI print saw markets pricing out the likelihood of a soft landing. This saw further downside in bonds and equities and upside in the USD. However, this narrative is still in focus for many market participants. So, if incoming data continues to suggest that a soft landing is possible, we expect that to pressure the USD. But we’ll let the data guide us. POSSIBLE BULLISH SURPRISES With the Fed signalling a data dependent policy stance, we expect a cyclical reaction from the USD with incoming US data. Thus, extremely good growth, inflation or jobs data is expected to trigger short-term bullish reactions in the USD. If the cyclical outlook continues to weaken, the USD’s safe haven status still matters. Any incoming data that exacerbates fears of a deep recession and triggers strong moves lower in risk assets & bonds can trigger safe haven flows into the USD. The Aug CPI saw markets price in a higher terminal rate for the current Fed cycle, which means a lot is already priced going into the FOMC decision. However, should the Fed bring out the big guns and the Dot Plot median for 2023 is closer to 5% or they hike 100bsp, that could trigger further USD upside. POSSIBLE BEARISH SURPRISES With the Fed signalling a data dependent policy stance, we expect a cyclical reaction from the USD with incoming US data. Thus, extremely bad growth, inflation or jobs data is expected to trigger short-term bearish reactions in the USD. With some growing expectations of a possible ‘soft landing’ for the US economy surfacing, further goldilocks data (higher growth & labour but lower inflation) could trigger safe haven outflows from the USD and into US equities. With a lot priced in for the Fed and the USD, it won’t take much to disappoint on the dovish side this week with their FOMC decision. If the dot plot does not exceed what is already priced for the curve or the Fed sticks to a 75bsp hike, it could trigger some sell-the-fact reactions to the downside for the USD. BIGGER PICTURE The fundamental outlook for the USD remains bullish as long as the Fed stays hawkish and cyclical concerns put pressure on risk assets. But the data dependent stance from the Fed means that short-term data surprises can pull the USD either way. The recent string of data has triggered some ‘soft landing’ expectations for the US economy, which is expected to weigh on the USD given all of the safe haven inflows based on recession fears. This makes incoming data even more important. Going into the FOMC, there is already a lot priced for the on the rate side and markets are preparing for a very hawkish message. That does increase the risk of a sell-the-fact reaction.
by thunderpips
5
GBP USD - FUNDAMENTAL DRIVERSGBP FUNDAMENTAL OUTLOOK: WEAK BEARISH BASELINE The negative outlook for the UK economy has been a key source of the Pound’s downside. Stagflation risks are high with CPI > 10% and recession expected in 4Q22 (lasting 5 quarters). It has kept pressure on Sterling despite ongoing BoE rate hikes. With the energy cap expected to rise again in October 2022 and April 2023, the new PM hit the ground running by announcing a much bigger than expected fiscal plan which will keep energy prices capped for 2 years for households and will also offer support for businesses. According to preliminary research, this means inflation most likely already peaked in the UK (as the main driver has been energy), and also means that the expected hit to the economy should be less severe than previously thought. Thus, even though the bias for the GBP remains bearish as a recession still seems likely, the fiscal news is a positive development for Sterling on balance, and with a lot of bad news already priced in we are expecting some reprieve for Sterling with asymmetric risk to incoming data (good news expected to have a bigger upside impact compared to the impact from bad news). POSSIBLE BULLISH SURPRISES With recession the base assumption, any incoming data that surprises meaningfully higher could trigger relief for the GBP. With focus on stagflation, any downside surprises in CPI or factors that decrease inflation pressures are expected to support the GBP and not pressure it. The fiscal announcements last week were a welcome change, and any further support measures announced by the new PM should continue to ease stagflation fears. With UK threats of triggering Article 16 and EU threats to terminate the Brexit deal if they do Brexit is in focus. For now, markets have rightly ignored this as posturing, but any major de-escalation can see some upside for Sterling. POSSIBLE BEARISH SURPRISES With recession the base assumption, any material downside surprises in growth data can still trigger short-term pressure. With focus on stagflation, any upside surprises in CPI or factors that increase more inflation pressures are expected to weigh on the GBP and not support it. The fiscal announcements last week were a welcome change, and any potential walk back from the new PM on the planslaid out last week would increase stagflation fears once again. With UK threats of triggering Article 16 and EU threats to terminate the Brexit deal if they do Brexit is in focus. For now, markets have rightly ignored this as posturing, but any actual escalation can see sharp GBP downside. BIGGER PICTURE The fundamentals for Sterling remain bearish , especially after the BoE’s recent forecasts of a 5-quarter recession in the UK. Furthermore, given the risks to growth, there is growing speculation that the BoE might not be too far away from pausing their current hiking cycle. Anything that exacerbates stagflation fears is expected to weigh on the Pound and anything that alleviates some pressure could see some reprieve. Since Sterling is trading at fresh new cycle lows, the risk to reward for chasing it lower looks unattractive, and we could see asymmetric reactions skewed to the upside on positive data & news. USD FUNDAMENTAL OUTLOOK: BULLISH BASELINE With headline CPI above 8%, the Fed is under pressure to continue hiking rates and ramping up QT this month to try and bring demand and supply back in balance. They hiked rates 75bsp in July, and whether they go 50bsp or 75bsp in September will come down to this week’s CPI . At the Jackson Hole the Fed took a hawkish turn by pushing back against rate cuts in 2023 and stressing they not only envision hiking rates to close to 4% by early 2023 but also expect to keep rates high throughout 2023. However, the Fed did announce a data-dependent (meeting-by-meeting) policy stance in July, explaining that the pace of hikes is likely to slow as rates get more restrictive and as more data becomes available. This means incoming growth, inflation and jobs data will be key drivers for short-term USD price action where we expect a cyclical reaction to incoming data (good data being good for the USD and US10Y and bad data being bad for the USD and US10Y ). Even though a resolute Fed can put further cyclically driven pressure on bonds and equities and support the USD, the most recent economic data has painted a bit of a goldilocks environment where most growth & labour data has surprised higher while inflation data has surprised lower. This has seen some ‘soft landing’ expectations surfacing which we would expect to support equities and bonds and to pressure the USD should the goldilocks pattern with incoming data continue. POSSIBLE BULLISH SURPRISES With the Fed signalling a data dependent policy stance, we expect a cyclical reaction from the USD with incoming US data. Thus, extremely good growth, inflation or jobs data is expected to trigger short-term bullish reactions in the USD. If the cyclical outlook continues to weaken, the USD’s safe haven status still matters. Any incoming data that exacerbates fears of a deep recession and triggers strong moves lower in risk assets & bonds can trigger safe haven flows into the USD. Various data is pointing to downward pressure on CPI , enough for 1-year inflation expectations to trade below the Fed’s 2% target. With the ‘peak inflation’ narrative back in full force, a huge upside surprise in CPI this week could disappoint risk buyers and see further upside pressure on the USD. POSSIBLE BEARISH SURPRISES With the Fed signalling a data dependent policy stance, we expect a cyclical reaction from the USD with incoming US data. Thus, extremely bad growth, inflation or jobs data is expected to trigger short-term bearish reactions in the USD. With some growing expectations of a possible ‘soft landing’ for the US economy surfacing, further goldilocks data (higher growth & labour but lower inflation ) could trigger safe haven outflows from the USD and into US equities. With a lot priced in for the Fed and the USD, it won’t take much to disappoint on the dovish side. With the Fed in their blackout period, all eyes will be on the incoming data. If inflation confirms new calls for peak inflation with another miss across the board that could trigger downside for the USD. BIGGER PICTURE The fundamental outlook for the USD remains bullish as long as the Fed stays hawkish and cyclical concerns put pressure on risk assets. But the data dependence stance from the Fed means that short-term data surprises can pull the USD either way. The recent string of data has triggered some ‘soft landing’ expectations for the US economy, which is expected to weigh on the USD given all of the safe haven inflows based on recession fears. In the short-term, with positioning in mind, and speculation of both ‘peak inflation’ and a ‘soft landing’, we would expect a softer USD in the week ahead running into the CPI print. A beat or a big miss can create equally big reactions in the short-term, but we would prefer shorting opportunities on a surprise CPI miss.
by thunderpips
3
GBP USD - FUNDAMENTAL DRIVERSGBP FUNDAMENTAL OUTLOOK: WEAK BEARISH BASELINE The negative outlook for the UK economy has been a key source of the Pound’s downside. Stagflation risks are high with CPI > 10% and recession expected in 4Q22 (lasting 5 quarters). It has kept pressure on Sterling despite ongoing BoE rate hikes. With the energy cap expected to rise again in October 2022 and April 2023, the new PM hit the ground running by announcing a much bigger than expected fiscal plan which will keep energy prices capped for 2 years for households and will also offer support for businesses. According to preliminary research, this means inflation most likely already peaked in the UK (as the main driver has been energy), and also means that the expected hit to the economy should be less severe than previously thought. Thus, even though the bias for the GBP remains bearish as a recession still seems likely, the fiscal news is a positive development for Sterling on balance, and with a lot of bad news already priced in we are expecting some reprieve for Sterling with asymmetric risk to incoming data (good news expected to have a bigger upside impact compared to the impact from bad news). POSSIBLE BULLISH SURPRISES With recession the base assumption, any incoming data that surprises meaningfully higher could trigger relief for the GBP. With focus on stagflation, any downside surprises in CPI or factors that decrease inflation pressures are expected to support the GBP and not pressure it. The fiscal announcements last week were a welcome change, and any further support measures announced by the new PM should continue to ease stagflation fears. With UK threats of triggering Article 16 and EU threats to terminate the Brexit deal if they do Brexit is in focus. For now, markets have rightly ignored this as posturing, but any major de-escalation can see some upside for Sterling. POSSIBLE BEARISH SURPRISES With recession the base assumption, any material downside surprises in growth data can still trigger short-term pressure. With focus on stagflation, any upside surprises in CPI or factors that increase more inflation pressures are expected to weigh on the GBP and not support it. The fiscal announcements last week were a welcome change, and any potential walk back from the new PM on the planslaid out last week would increase stagflation fears once again. With UK threats of triggering Article 16 and EU threats to terminate the Brexit deal if they do Brexit is in focus. For now, markets have rightly ignored this as posturing, but any actual escalation can see sharp GBP downside. BIGGER PICTURE The fundamentals for Sterling remain bearish , especially after the BoE’s recent forecasts of a 5-quarter recession in the UK. Furthermore, given the risks to growth, there is growing speculation that the BoE might not be too far away from pausing their current hiking cycle. Anything that exacerbates stagflation fears is expected to weigh on the Pound and anything that alleviates some pressure could see some reprieve. Since Sterling is trading at fresh new cycle lows, the risk to reward for chasing it lower looks unattractive, and we could see asymmetric reactions skewed to the upside on positive data & news. USD FUNDAMENTAL OUTLOOK: BULLISH BASELINE With headline CPI above 8%, the Fed is under pressure to continue hiking rates and ramping up QT this month to try and bring demand and supply back in balance. They hiked rates 75bsp in July, and whether they go 50bsp or 75bsp in September will come down to this week’s CPI . At the Jackson Hole the Fed took a hawkish turn by pushing back against rate cuts in 2023 and stressing they not only envision hiking rates to close to 4% by early 2023 but also expect to keep rates high throughout 2023. However, the Fed did announce a data-dependent (meeting-by-meeting) policy stance in July, explaining that the pace of hikes is likely to slow as rates get more restrictive and as more data becomes available. This means incoming growth, inflation and jobs data will be key drivers for short-term USD price action where we expect a cyclical reaction to incoming data (good data being good for the USD and US10Y and bad data being bad for the USD and US10Y ). Even though a resolute Fed can put further cyclically driven pressure on bonds and equities and support the USD, the most recent economic data has painted a bit of a goldilocks environment where most growth & labour data has surprised higher while inflation data has surprised lower. This has seen some ‘soft landing’ expectations surfacing which we would expect to support equities and bonds and to pressure the USD should the goldilocks pattern with incoming data continue. POSSIBLE BULLISH SURPRISES With the Fed signalling a data dependent policy stance, we expect a cyclical reaction from the USD with incoming US data. Thus, extremely good growth, inflation or jobs data is expected to trigger short-term bullish reactions in the USD. If the cyclical outlook continues to weaken, the USD’s safe haven status still matters. Any incoming data that exacerbates fears of a deep recession and triggers strong moves lower in risk assets & bonds can trigger safe haven flows into the USD. Various data is pointing to downward pressure on CPI , enough for 1-year inflation expectations to trade below the Fed’s 2% target. With the ‘peak inflation’ narrative back in full force, a huge upside surprise in CPI this week could disappoint risk buyers and see further upside pressure on the USD. POSSIBLE BEARISH SURPRISES With the Fed signalling a data dependent policy stance, we expect a cyclical reaction from the USD with incoming US data. Thus, extremely bad growth, inflation or jobs data is expected to trigger short-term bearish reactions in the USD. With some growing expectations of a possible ‘soft landing’ for the US economy surfacing, further goldilocks data (higher growth & labour but lower inflation ) could trigger safe haven outflows from the USD and into US equities. With a lot priced in for the Fed and the USD, it won’t take much to disappoint on the dovish side. With the Fed in their blackout period, all eyes will be on the incoming data. If inflation confirms new calls for peak inflation with another miss across the board that could trigger downside for the USD. BIGGER PICTURE The fundamental outlook for the USD remains bullish as long as the Fed stays hawkish and cyclical concerns put pressure on risk assets. But the data dependence stance from the Fed means that short-term data surprises can pull the USD either way. The recent string of data has triggered some ‘soft landing’ expectations for the US economy, which is expected to weigh on the USD given all of the safe haven inflows based on recession fears. In the short-term, with positioning in mind, and speculation of both ‘peak inflation’ and a ‘soft landing’, we would expect a softer USD in the week ahead running into the CPI print. A beat or a big miss can create equally big reactions in the short-term, but we would prefer shorting opportunities on a surprise CPI miss.
by thunderpips
3
GBP CAD - FUNDAMENTAL DRIVERSGBP FUNDAMENTAL OUTLOOK: WEAK BEARISH BASELINE The negative outlook for the UK economy has been a key source of the Pound’s downside. Stagflation risks are high with CPI > 10% and recession expected in 4Q22 (lasting 5 quarters). It has kept pressure on Sterling despite ongoing BoE rate hikes. With the energy cap expected to rise again in October 2022 and April 2023, the new PM hit the ground running by announcing a much bigger than expected fiscal plan which will keep energy prices capped for 2 years for households and will also offer support for businesses. According to preliminary research, this means inflation most likely already peaked in the UK (as the main driver has been energy), and also means that the expected hit to the economy should be less severe than previously thought. Thus, even though the bias for the GBP remains bearish as a recession still seems likely, the fiscal news is a positive development for Sterling on balance, and with a lot of bad news already priced in we are expecting some reprieve for Sterling with asymmetric risk to incoming data (good news expected to have a bigger upside impact compared to the impact from bad news). POSSIBLE BULLISH SURPRISES With recession the base assumption, any incoming data that surprises meaningfully higher could trigger relief for the GBP. With focus on stagflation, any downside surprises in CPI or factors that decrease inflation pressures are expected to support the GBP and not pressure it. The fiscal announcements last week were a welcome change, and any further support measures announced by the new PM should continue to ease stagflation fears. With UK threats of triggering Article 16 and EU threats to terminate the Brexit deal if they do Brexit is in focus. For now, markets have rightly ignored this as posturing, but any major de-escalation can see some upside for Sterling. POSSIBLE BEARISH SURPRISES With recession the base assumption, any material downside surprises in growth data can still trigger short-term pressure. With focus on stagflation, any upside surprises in CPI or factors that increase more inflation pressures are expected to weigh on the GBP and not support it. The fiscal announcements last week were a welcome change, and any potential walk back from the new PM on the planslaid out last week would increase stagflation fears once again. With UK threats of triggering Article 16 and EU threats to terminate the Brexit deal if they do Brexit is in focus. For now, markets have rightly ignored this as posturing, but any actual escalation can see sharp GBP downside. BIGGER PICTURE The fundamentals for Sterling remain bearish , especially after the BoE’s recent forecasts of a 5-quarter recession in the UK. Furthermore, given the risks to growth, there is growing speculation that the BoE might not be too far away from pausing their current hiking cycle. Anything that exacerbates stagflation fears is expected to weigh on the Pound and anything that alleviates some pressure could see some reprieve. Since Sterling is trading at fresh new cycle lows, the risk to reward for chasing it lower looks unattractive, and we could see asymmetric reactions skewed to the upside on positive data & news. CAD FUNDAMENTAL OUTLOOK: NEUTRAL BASELINE The CAD has enjoyed far more upside in the past few weeks than we anticipated. We’ve been cautious on the currency given Canada’s dependency on the US (>70% of exports) where the clear signs of a faster than expected slowdown and possible recession should deteriorate the growth outlook for Canada. Apart from that, the risks to the Canadian housing market can negatively impact consumer spending as interest rates rise higher at aggressive speed. Potentially damaging the wealth effect created by the rapid rise in house prices since covid. However, despite the risks to the economy and the outlook, markets still price in a strangely favourable growth environment for Canada, also supported by a big push higher in terms of trade due to the rise in commodity prices. The market’s reaction after the 75bsp was fairly muted as the bank didn’t provide any important additional info in their statement that markets didn’t already know. With their frontloading, the bank is now just one 50bsp or two 25bsp hikes away from hitting terminal rate expectations, which means any upside from policy differentials should being to fade. Either way, we remain cautious on the CAD and favour short-term catalysts that provide us with shorting opportunities. POSSIBLE BULLISH SURPRISES As an oil exporter, oil prices are important for CAD. Catalysts that see further upside in Oil (deteriorating supply outlook, ease in demand fears) could trigger bullish CAD reactions. The correlation has been hit and miss in recent weeks though. As a risk sensitive currency, and catalyst that causes big bouts of risk on sentiment could trigger bullish reactions in the CAD. After the bank’s frontloading, there is a very high bar to surprise on the hawkish side for the BoC, but if the bank were to say they think STIR market pricing for the terminal rate is too low that can provide upside for the CAD. POSSIBLE BEARISH SURPRISES As an oil exporter, oil prices are important for CAD. Any catalyst that triggers meaningful downside in oil (deteriorating demand outlook, ease in supply shortage, less supply constraints) could be a negative catalyst for the CAD as well. As a risk sensitive currency, and catalyst that causes big bouts of risk off sentiment could trigger bearish reactions in the CAD. With the bank just 50bsp away from terminal rate expectations, it won’t take much to surprise on the dovish side, and any signals or comments from the BoC that they’ll pause hikes should be a negative for the CAD. BIGGER PICTURE The bigger picture outlook for the CAD remains neutral for now. Given the clear risks to the growth outlook due to the slowdown in the US, as well as rising risks to the consumer and the housing market, and potential negative impact for commodities like oil, we remain cautious on the currency (even though it’s moved much higher than we anticipated from the start of the year). With a lot of good news priced in, our preferred way of trading the CAD is lower on clear short-term negative catalysts. With the bank now very close to terminal rate expectations, markets will want to know whether the bank thinks the terminal rate currently priced is adequate or not, so watching for any BoC comments on this point will be important.
by thunderpips
1
GBP USD - FUNDAMENTAL DRIVERSGBP FUNDAMENTAL OUTLOOK: WEAK BEARISH BASELINE The negative outlook for the UK economy has been a key source of the Pound’s downside. Stagflation risks are high with CPI > 10% and recession expected in 4Q22 (lasting 5 quarters). It has kept pressure on Sterling despite ongoing BoE rate hikes. With the energy cap expected to rise again in October 2022 and April 2023, the new PM hit the ground running by announcing a much bigger than expected fiscal plan which will keep energy prices capped for 2 years for households and will also offer support for businesses. According to preliminary research, this means inflation most likely already peaked in the UK (as the main driver has been energy), and also means that the expected hit to the economy should be less severe than previously thought. Thus, even though the bias for the GBP remains bearish as a recession still seems likely, the fiscal news is a positive development for Sterling on balance, and with a lot of bad news already priced in we are expecting some reprieve for Sterling with asymmetric risk to incoming data (good news expected to have a bigger upside impact compared to the impact from bad news). POSSIBLE BULLISH SURPRISES With recession the base assumption, any incoming data that surprises meaningfully higher could trigger relief for the GBP. With focus on stagflation, any downside surprises in CPI or factors that decrease inflation pressures are expected to support the GBP and not pressure it. The fiscal announcements last week were a welcome change, and any further support measures announced by the new PM should continue to ease stagflation fears. With UK threats of triggering Article 16 and EU threats to terminate the Brexit deal if they do Brexit is in focus. For now, markets have rightly ignored this as posturing, but any major de-escalation can see some upside for Sterling. POSSIBLE BEARISH SURPRISES With recession the base assumption, any material downside surprises in growth data can still trigger short-term pressure. With focus on stagflation, any upside surprises in CPI or factors that increase more inflation pressures are expected to weigh on the GBP and not support it. The fiscal announcements last week were a welcome change, and any potential walk back from the new PM on the planslaid out last week would increase stagflation fears once again. With UK threats of triggering Article 16 and EU threats to terminate the Brexit deal if they do Brexit is in focus. For now, markets have rightly ignored this as posturing, but any actual escalation can see sharp GBP downside. BIGGER PICTURE The fundamentals for Sterling remain bearish, especially after the BoE’s recent forecasts of a 5-quarter recession in the UK. Furthermore, given the risks to growth, there is growing speculation that the BoE might not be too far away from pausing their current hiking cycle. Anything that exacerbates stagflation fears is expected to weigh on the Pound and anything that alleviates some pressure could see some reprieve. Since Sterling is trading at fresh new cycle lows, the risk to reward for chasing it lower looks unattractive, and we could see asymmetric reactions skewed to the upside on positive data & news. USD FUNDAMENTAL OUTLOOK: BULLISH BASELINE With headline CPI above 8%, the Fed is under pressure to continue hiking rates and ramping up QT this month to try and bring demand and supply back in balance. They hiked rates 75bsp in July, and whether they go 50bsp or 75bsp in September will come down to this week’s CPI. At the Jackson Hole the Fed took a hawkish turn by pushing back against rate cuts in 2023 and stressing they not only envision hiking rates to close to 4% by early 2023 but also expect to keep rates high throughout 2023. However, the Fed did announce a data-dependent (meeting-by-meeting) policy stance in July, explaining that the pace of hikes is likely to slow as rates get more restrictive and as more data becomes available. This means incoming growth, inflation and jobs data will be key drivers for short-term USD price action where we expect a cyclical reaction to incoming data (good data being good for the USD and US10Y and bad data being bad for the USD and US10Y). Even though a resolute Fed can put further cyclically driven pressure on bonds and equities and support the USD, the most recent economic data has painted a bit of a goldilocks environment where most growth & labour data has surprised higher while inflation data has surprised lower. This has seen some ‘soft landing’ expectations surfacing which we would expect to support equities and bonds and to pressure the USD should the goldilocks pattern with incoming data continue. POSSIBLE BULLISH SURPRISES With the Fed signalling a data dependent policy stance, we expect a cyclical reaction from the USD with incoming US data. Thus, extremely good growth, inflation or jobs data is expected to trigger short-term bullish reactions in the USD. If the cyclical outlook continues to weaken, the USD’s safe haven status still matters. Any incoming data that exacerbates fears of a deep recession and triggers strong moves lower in risk assets & bonds can trigger safe haven flows into the USD. Various data is pointing to downward pressure on CPI, enough for 1-year inflation expectations to trade below the Fed’s 2% target. With the ‘peak inflation’ narrative back in full force, a huge upside surprise in CPI this week could disappoint risk buyers and see further upside pressure on the USD. POSSIBLE BEARISH SURPRISES With the Fed signalling a data dependent policy stance, we expect a cyclical reaction from the USD with incoming US data. Thus, extremely bad growth, inflation or jobs data is expected to trigger short-term bearish reactions in the USD. With some growing expectations of a possible ‘soft landing’ for the US economy surfacing, further goldilocks data (higher growth & labour but lower inflation) could trigger safe haven outflows from the USD and into US equities. With a lot priced in for the Fed and the USD, it won’t take much to disappoint on the dovish side. With the Fed in their blackout period, all eyes will be on the incoming data. If inflation confirms new calls for peak inflation with another miss across the board that could trigger downside for the USD. BIGGER PICTURE The fundamental outlook for the USD remains bullish as long as the Fed stays hawkish and cyclical concerns put pressure on risk assets. But the data dependence stance from the Fed means that short-term data surprises can pull the USD either way. The recent string of data has triggered some ‘soft landing’ expectations for the US economy, which is expected to weigh on the USD given all of the safe haven inflows based on recession fears. In the short-term, with positioning in mind, and speculation of both ‘peak inflation’ and a ‘soft landing’, we would expect a softer USD in the week ahead running into the CPI print. A beat or a big miss can create equally big reactions in the short-term, but we would prefer shorting opportunities on a surprise CPI miss.
by thunderpips
GBPJPY: Maybe overbought?GBPJPY Intraday - We look to Sell at 167.50 (stop at 168.20) Buying pressure from 164.31 resulted in prices rejecting the dip. Previous resistance level of 166.32 broken. The current move higher is expected to continue. We are trading at overbought extremes. A lower correction is expected. We look to sell rallies. Although the anticipated move lower is corrective, it does offer ample risk/reward today. Our profit targets will be 165.50 and 162.00 Resistance: 168.40 / 171.90 / 176.35 Support: 165.40 / 162.00 / 160.50 Please be advised that the information presented on TradingView is provided to Vantage (‘Vantage Global Limited’, ‘we’) by a third-party provider (‘Signal Centre’). Please be reminded that you are solely responsible for the trading decisions on your account. There is a very high degree of risk involved in trading. Any information and/or content is intended entirely for research, educational and informational purposes only and does not constitute investment or consultation advice or investment strategy. The information is not tailored to the investment needs of any specific person and therefore does not involve a consideration of any of the investment objectives, financial situation or needs of any viewer that may receive it. Kindly also note that past performance is not a reliable indicator of future results. Actual results may differ materially from those anticipated in forward-looking or past performance statements. We assume no liability as to the accuracy or completeness of any of the information and/or content provided herein and the Company cannot be held responsible for any omission, mistake nor for any loss or damage including without limitation to any loss of profit which may arise from reliance on any information supplied by Signal Centre.
Short
by VantageMarkets
2
GBPUSD 8th SEPTEMBER 2022The poundsterling fell nearly 1% to US$ 1.1403 which was the lowest level in March 1985, based on Refinitiv data. So far this year the pound sterling has fallen by 15%. Inflation in the UK which skyrocketed 10.1% year-on-year (yoy) in July triggered the poundstelring's decline. With the value of the pound sterling falling, there is a risk that inflation will get higher. The Bank of England (BoE) will certainly continue to aggressively raise interest rates. Currently, the BoE interest rate is 1.75%. Many analysts see that the interest rate will continue to be raised until it reaches 4% in the first half of 2023.
Short
by DNP-FX
GBP/USD weekly chart: falling wedge headed to 37-year support?The British pound ( GBP/USD ) hit an intraday low of 1.1406, temporarily breaking below Covid-20 lows and hitting the lowest level in 37 years, before recovering to 1.147 as of this writing. The GBPUSD weekly chart reveals intriguing long-term patterns: The major long-term trend is represented by a falling wedge, with the lower support line set by January 2009's and October 2016's lows and upper resistance line by November 2007's and May 2021's highs. The ultra-ten-year falling wedge contains two lateral ranges (May 2009-June 2016 and July 2016-September 2022), both characterised by a similar 20% width. The long-run falling wedge's direction collides with the all-time low and support level of 1.051 hit in February 1985. If 1.14 defines a new multi-year resistance level and a new 20% side range is established, the next long-term support could be as lows as 0.95. Idea written by Piero Cingari, forex and commodity analyst at Capital.com
by Capitalcom
1
GBP USD - FUNDAMENTAL DRIVERSGBP FUNDAMENTAL OUTLOOK: WEAK BEARISH BASELINE The outlook for the UK economy remains bleak, with CPI above 10% and recession expecting to hit in 4Q22 and last for 5 quarters, it has kept pressure on Sterling despite ongoing BoE rate hikes. Even though the bank followed through with a 50bsp hike in July, it wasn’t enough to offset the recession forecasts. With inflation expected to reach close to 20% by some IB estimates (due to the rapid rise in energy prices and expected rise in the energy price caps) the bank is stuck between a rock and a hard place as they are forced to keep hiking rates to try and fight inflation expectations going unanchored, but by doing so they also risk further damaging economic growth as a result. Right now, it seems like fiscal policy is the only way to avoid a much deeper recession. ING research suggests an additional £65 billion of support for households and more support for small businesses are required to offset the expected rise in energy costs. Even though the bias for the GBP remains bearish , a lot of bad news has been priced in for Sterling in a relatively short space of time. With CFTC positioning still giving bullish signals, chasing it lower seems too big of a risk right now. POSSIBLE BULLISH SURPRISES Stagflation fears remain high for the UK, and the BoE is now projecting 5 quarters of recession starting 4Q22. With a recession now the base assumption, any incoming data that surprises meaningfully higher could trigger some relief. With focus on stagflation, any downside surprises in CPI or factors that decrease inflation pressures are expected to support the GBP and not pressure it. The economy needs help, which means any help from the fiscal side will be a positive. Any major fiscal support measures from the incoming PM to help consumers (subsidies or tax cuts) could trigger bullish reactions for the Pound. With UK threats of triggering Article 16 and EU threats to terminate the Brexit deal if they do Brexit is in focus. For now, markets have rightly ignored this as posturing, but any major de-escalation can see some upside for Sterling. POSSIBLE BEARISH SURPRISES Stagflation fears remain high for the UK, and the BoE is now projecting 5 quarters of recession starting 4Q22. Even with recession now the base assumption, any material downside surprises in growth data can still trigger further pressure. With focus on stagflation, any upside surprises in CPI or factors that increase more inflation pressures are expected to weigh on the GBP and not support it. The economy needs help, which means any help from the fiscal side should be a positive, but any fiscal measures from the incoming PM that fails to address the expected impact on consumers and businesses could keep the GBP under pressure. With UK threats of triggering Article 16 and EU threats to terminate the Brexit deal if they do Brexit is in focus. For now, markets have rightly ignored this as posturing, but any actual escalation can see sharp GBP downside. BIGGER PICTURE The fundamentals for Sterling remain bearish , especially after the BoE’s recent forecasts of a 5-quarter recession in the UK. Furthermore, given the risks to growth, there is growing speculation that the BoE might not be too far away from pausing their current hiking cycle. Anything that exacerbates stagflation fears is expected to weigh on the Pound and anything that alleviates some pressure could see some reprieve. Since Sterling is trading at fresh new cycle lows, the risk to reward for chasing it lower looks unattractive, and we could see asymmetric reactions skewed to the upside on positive data & news. USD FUNDAMENTAL OUTLOOK: BULLISH BASELINE With headline CPI above 8%, the Fed is under pressure to continue hiking rates and ramping up QT in September to try and tame price pressures. They hiked rates by 75bsp in July, and odds between a 50bsp or 75bsp in September are too close to call. At the Jackson Hole Symposium they took a further hawkish shift by pushing back against the idea of rate cuts in 2023 by stressing that they not only envision hiking rates to close to 4% by early 2023 but also expect to keep rates high throughout 2023. However, the Fed did announce a data-dependent (meeting-by-meeting) stance at the July meeting, explaining that the pace of hikes is likely to slow as rates get more restrictive and as more data becomes available. This means the incoming growth, inflation and jobs data will be a key driver for short-term USD price action where we expect a cyclical reaction to incoming data (good data being good for the USD and US10Y and bad data being bad for the USD and US10Y). The USD’s safe haven status is important to keep in mind. Uncomfortably high inflation and a Fed that is resolute at pushing rates higher and keeping them high does put possible further downside pressure on long bonds, and if we see further cyclicalinspired downside in bonds and equities the USD is expected to gain in that environment on safe haven demand. POSSIBLE BULLISH SURPRISES With the Fed signalling a data dependent policy stance, we expect a cyclical reaction from the USD with incoming US data. Thus, extremely good growth, inflation or jobs data is expected to trigger short-term bullish reactions in the USD. As the cyclical outlook continues to weaken, the USD’s safe haven status still matters. Any incoming data that exacerbates fears of recession and triggers strong moves lower in risk assets & bonds can trigger safe haven flows into the USD. Any further outflows in US bonds means more USD safe haven appeal. So, watching key triggers for further upside in bond yields (commodity prices, inflation and inflation expectations, more aggressive hike rhetoric from Fed, very good growth data) could also trigger further USD bullish reactions. POSSIBLE BEARISH SURPRISES With the Fed signalling a data dependent policy stance, we expect a cyclical reaction from the USD with incoming US data. Thus, extremely bad growth, inflation or jobs data is expected to trigger short-term bearish reactions in the USD. The USD is trading close to cycle highs while aggregate CFTC positioning is close to levels that previously acted as local tops. Positioning does make the USD vulnerable to short-term corrections, especially with bad US data points. With a lot priced in for the Fed and the USD, it won’t take much to disappoint on the dovish side. Any FOMC comments that suggests more concern about growth than inflation could trigger bearish reactions in the USD, but with inflation so high any major dovish pivots seem still far away. BIGGER PICTURE The fundamental outlook for the USD remains bullish as long as the Fed stays hawkish and cyclical concerns put pressure on risk assets. The data dependence stance from the Fed means we do want to be mindful that lots has been priced for the USD, and as growth deteriorates (as is currently our expectation), it’s expected to impact the USD negatively in the short-term, even though current inflation suggests any dovish pivot is still far away. As the safe haven of choice, any further recession focused downside in risk assets and bonds (due to sticky inflation and an aggressive Fed) could continue to prove supportive for the USD. In the short-term, with positioning in mind, and a dual-growth narrative (one being good for the USD and the other being bad for the USD) we prefer short-term catalysts that offer short-term sentiment-based trades as opposed to med-term positions.
by thunderpips
2
Dominant Currency Sentiment - GBP Leads FX Majors Strength in GBP is largely the result of media reports that incoming UK Prime Minister Liz Truss could announce a freeze on energy bills which could otherwise increase by 80% for UK households in October. The European session also saw the release of UK Construction PMI. Despite indicating contraction for the industry at 49.2, the print still beat expectations of 48.0 and the prior release of 48.9. Looking ahead, today’s US session will see PMI data once again come into focus with the release of US ISM Services PMI and Markit’s Final Services PMI.
by thunderpips
1
EUR GBP - FUNDAMENTAL DRIVERSEUR FUNDAMENTAL OUTLOOK: WEAK BEARISH BASELINE Persistently high inflation has seen the ECB tilt more hawkish by hiking rates 50bsp in July. Additional pressure on inflation from gas supply shortages and drought-linked supply constraints has seen ECB members get more uneasy about price pressures, with recent comments suggesting growing support among the GC for a 75bsp hike at their September meeting. Going into this week’s policy decision, it’s worth remembering that the bank quelled hawkish excitement in July by saying that frontloading hikes are not a signal of a higher terminal rate. Even if the bank delivers on a 75bsp this week, unless they also revise up terminal rate expectations any hike will unlikely be enough to see support for the EUR due to bigger hikes. Spread fragmentation, even though largely moving into the background, is still a concern, with the ECB failing to ease concerns with their new Transmission Protection Instrument (TPI) as the eligibility criteria means countries like Italy and Spain that will need the support the most might have a tough time qualifying. Even though policy is important, the main driver for the EUR is the economic outlook. Recent data has continued to flag recession risks, and Friday’s Gazprom announcements of an indefinite suspension of the Nord Stream pipeline to Europe in retaliation to the planned energy price cap has opened up a whole new pressure point. POSSIBLE BULLISH SURPRISES De-escalation or cease fire in Ukraine would open up a lot of EUR upside. Stagflation risks remains, but with lots of bad news priced any materially better-than-expected data could spark some relief. Any TPI comments that convinces markets it can solve spread fragmentation issues should be supportive for the EUR. Energy supply is a problem. If Russia does re-open Nord Stream gas flows, it should be a positive catalyst for EUR upside. If gas storage levels, see Europe through winter that could ease some of the pressure so storage levels will be watched. With a 75bsp hike expected, it won’t be enough to trigger EUR upside, but if the bank also increases their terminal rate projections it could trigger upside in the EUR. POSSIBLE BEARISH SURPRISES Any escalation in the Ukraine war that risks including NATO would be big negative risks. Stagflation risks remains, even with lots of bad news priced any materially worse-than-expected data could see more pressure. If ECB fails to act on the TPI when we see big jolts higher in the BTP/ Bund spread could trigger bearish reactions in the EUR. Energy supply is a problem. If Russia keeps Nord Stream one shut, it should add downside risks to the EUR. If gas storage levels are not enough to see Europe through the winter that should increase energy supply concerns for the EUR. With a 75bsp hike expected, it won’t be enough to trigger EUR upside, and if the ECB does not increase their terminal rate projections it could trigger downside for the EUR. BIGGER PICTURE The fundamental outlook remains bearish with recent leading indicators pointing to a much faster economic slowdown than markets previously expected. The current bearish drivers (geopolitics, stagflation, spread fragmentation, energy supply concerns) far outweigh the positives from a hawkish ECB. Recession risks have opened up a narrative change for the EUR which have seen markets adjust forecasts to reflect higher recession probabilities which has continued to weigh on the EUR. With lots of bad news priced in there is risks in chasing the EUR lower, but the fundamental outlook remains bleak. GBP FUNDAMENTAL OUTLOOK: WEAK BEARISH BASELINE The outlook for the UK economy remains bleak, with CPI above 10% and recession expecting to hit in 4Q22 and last for 5 quarters, it has kept pressure on Sterling despite ongoing BoE rate hikes. Even though the bank followed through with a 50bsp hike in July, it wasn’t enough to offset the recession forecasts. With inflation expected to reach close to 20% by some IB estimates (due to the rapid rise in energy prices and expected rise in the energy price caps) the bank is stuck between a rock and a hard place as they are forced to keep hiking rates to try and fight inflation expectations going unanchored, but by doing so they also risk further damaging economic growth as a result. Right now, it seems like fiscal policy is the only way to avoid a much deeper recession. ING research suggests an additional £65 billion of support for households and more support for small businesses are required to offset the expected rise in energy costs. Even though the bias for the GBP remains bearish, a lot of bad news has been priced in for Sterling in a relatively short space of time. With CFTC positioning still giving bullish signals, chasing it lower seems too big of a risk right now. POSSIBLE BULLISH SURPRISES Stagflation fears remain high for the UK, and the BoE is now projecting 5 quarters of recession starting 4Q22. With a recession now the base assumption, any incoming data that surprises meaningfully higher could trigger some relief. With focus on stagflation, any downside surprises in CPI or factors that decrease inflation pressures are expected to support the GBP and not pressure it. The economy needs help, which means any help from the fiscal side will be a positive. Any major fiscal support measures from the incoming PM to help consumers (subsidies or tax cuts) could trigger bullish reactions for the Pound. With UK threats of triggering Article 16 and EU threats to terminate the Brexit deal if they do Brexit is in focus. For now, markets have rightly ignored this as posturing, but any major de-escalation can see some upside for Sterling. POSSIBLE BEARISH SURPRISES Stagflation fears remain high for the UK, and the BoE is now projecting 5 quarters of recession starting 4Q22. Even with recession now the base assumption, any material downside surprises in growth data can still trigger further pressure. With focus on stagflation, any upside surprises in CPI or factors that increase more inflation pressures are expected to weigh on the GBP and not support it. The economy needs help, which means any help from the fiscal side should be a positive, but any fiscal measures from the incoming PM that fails to address the expected impact on consumers and businesses could keep the GBP under pressure. With UK threats of triggering Article 16 and EU threats to terminate the Brexit deal if they do Brexit is in focus. For now, markets have rightly ignored this as posturing, but any actual escalation can see sharp GBP downside. BIGGER PICTURE The fundamentals for Sterling remain bearish, especially after the BoE’s recent forecasts of a 5-quarter recession in the UK. Furthermore, given the risks to growth, there is growing speculation that the BoE might not be too far away from pausing their current hiking cycle. Anything that exacerbates stagflation fears is expected to weigh on the Pound and anything that alleviates some pressure could see some reprieve. Since Sterling is trading at fresh new cycle lows, the risk to reward for chasing it lower looks unattractive, and we could see asymmetric reactions skewed to the upside on positive data & news.
by thunderpips
3
EUR GBP - FUNDAMENTAL DRIVERSEUR FUNDAMENTAL OUTLOOK: WEAK BEARISH BASELINE Persistently high inflation has seen the ECB tilt more hawkish by hiking rates 50bsp in July. Additional pressure on inflation from gas supply shortages and drought-linked supply constraints has seen ECB members get more uneasy about price pressures, with comments last week suggesting that there is growing support for a 75bsp hike in September. This saw some initial upside in the EUR, but it’s important to remember that the bank quelled hawkish excitement at the July meeting by saying that frontloading hikes are not a signal of a higher terminal rate. Until that changes, higher rate expectations are likely only going to have short-lived upside potential for the Euro . Spread fragmentation, even though largely moving into the background, is still a concern, with the ECB failing to ease the market’s spread concerns with their new Transmission Protection Instrument (TPI) as the eligibility criteria means countries like Italy and Spain that will need the support the most might have a tough time qualifying. Even though policy is important, the main driver for the EUR is the economic outlook. Recent growth data has continued to flag recession risks and as energy concerns increase so too does the likelihood of stagflation. Even though the bias remains lower, a lot of negatives have been priced in from a tactical point of view so worth keeping that in mind. POSSIBLE BULLISH SURPRISES De-escalation or cease fire in Ukraine would open up a lot of EUR upside. Stagflation risks remains, but with lots of bad news priced any materially better-than-expected data could spark some relief. Spread fragmentation remains a concern, thus, any TPI comments that convinces markets it can solve fragmentation issues should be supportive for the EUR. Energy supply is a problem. If Russia does re-opens gas flows after the planned shutdown it should ease some pressure. Any good news on Rhine water levels and resumption of normal transport could be a bullish catalyst for the EUR. POSSIBLE BEARISH SURPRISES Any escalation in the Ukraine war that risks including NATO would be big negative risks. Stagflation risks remains, even with lots of bad news priced any materially worse-than-expected data could see more pressure. Spread fragmentation remains in focus, and if the ECB fails to act when we see big jolts higher in the BTP/ Bund spread could trigger bearish reactions in the EUR. Energy supply is a problem. If Russia does not re-open gas flows after the planned shutdown it should add downside risks. Any bad news on Rhine water levels and continued breakdown in transportation could be a bearish catalyst for the EUR. BIGGER PICTURE The fundamental outlook remains bearish with recent leading indicators pointing to a much faster economic slowdown than markets previously expected. The current bearish drivers (geopolitics, stagflation, spread fragmentation, energy supply concerns) far outweigh the positives from a hawkish ECB. Recession risks have opened up a narrative change for the EUR which have seen markets adjust forecasts to reflect higher recession probabilities which has continued to weigh on the EUR. With lots of bad news priced in there is risks in chasing the EUR lower, but the fundamental outlook remains bleak. GBP FUNDAMENTAL OUTLOOK: WEAK BEARISH BASELINE The outlook for the UK economy remains bleak, with CPI above 10% and recession expecting to hit in 4Q22 and last for 5 quarters, it has kept pressure on Sterling despite ongoing BoE rate hikes. Even though the bank followed through with a 50bsp hike in July, it wasn’t enough to offset the recession forecasts. With inflation expected to reach close to 13%, and some participants calling for as high as 18% by next year (due to the rapid rise in energy prices) the bank is stuck between a rock and a hard place as they are forced to keep hiking rates to try and fight inflation but by doing so, they risk further damaging economic growth as a result. The post-BoE price action in Sterling did not reflect a market that was pricing in a 5-quarter recession in the UK, and the price action we saw in the past two weeks made a lot of sense with Sterling catching up to the downside to reflect the growth situation. Even though the bias remains titled lower, a lot of bad news has once again been priced in for the Pound in a relatively short space of time, and with positioning continuing to give bullish signals, chasing lower seems like a bit of a risk right now. POSSIBLE BULLISH SURPRISES Stagflation fears remain high for the UK, and the BoE is now projecting 5 quarters of recession starting 4Q22. With a recession now the base assumption, any incoming data that surprises meaningfully higher could trigger some relief. With focus on stagflation, any downside surprises in CPI or factors that decrease inflation pressures are expected to support the GBP and not pressure it. The economy needs help, which means any help from the fiscal side will be a positive. Any major fiscal support measures from the incoming PM to help consumers (subsidies or tax cuts) could trigger bullish reactions for the Pound. With UK threats of triggering Article 16 and EU threats to terminate the Brexit deal if they do Brexit is in focus. For now, markets have rightly ignored this as posturing, but any major de-escalation can see some upside for Sterling. POSSIBLE BEARISH SURPRISES Stagflation fears remain high for the UK, and the BoE is now projecting 5 quarters of recession starting 4Q22. Even with recession now the base assumption, any material downside surprises in growth data can trigger further downside. With focus on stagflation, any upside surprises in CPI or factors that increase more inflation pressures are expected to weigh on the GBP and not support it. The economy needs help, which means any help from the fiscal side should be a positive, but any fiscal measures from the incoming PM that could exacerbate inflation pressures could trigger bearish reactions for the Pound. With UK threats of triggering Article 16 and EU threats to terminate the Brexit deal if they do Brexit is in focus. For now, markets have rightly ignored this as posturing, but any actual escalation can see sharp GBP downside. BIGGER PICTURE The fundamental outlook for the GBP remains bleak, especially after the BoE’s recent forecasts of a 5-quarter recession in the UK. Furthermore, given the risks to growth, there is growing speculation that the BoE might not be too far away from pausing their current hiking cycle. Anything that exacerbates stagflation fears is expected to weigh on the Pound and anything that alleviates some of that pressure could see some reprieve since the currency is trading at fresh new cycle lows. Even though the bias remains bleak, there is a lot of bad news priced for Sterling, so choose your trades carefully.
by thunderpips
Today’s Notable Sentiment ShiftsGBP – Sterling edged lower on Tuesday and was set for its biggest monthly fall against USD in 16 months as the UK’s energy crisis renewed recession fears in Britain. Commenting on GBP, Commerzbank explains that “the continued rise in gas prices entails the risk that the recession will be more pronounced and longer than previously expected. Strikes are already regularly paralyzing parts of public life due to the significant decline in real wages and the resulting loss of purchasing power. “The bank adds that other headwinds weighing on sterling included the shortage of labour because of Brexit, the leadership contest in the governing Conservative Party and the resulting uncertainties around the next prime minister’s fiscal policy on economic challenges.
by thunderpips
2
EUR GBP - FUNDAMENTAL DRIVERSEUR FUNDAMENTAL OUTLOOK: WEAK BEARISH BASELINE Persistently high inflation has seen the ECB tilt more hawkish by hiking rates 50bsp in July. Additional pressure on inflation from gas supply shortages and drought-linked supply constraints has seen ECB members get more uneasy about price pressures, with comments last week suggesting that there is growing support for a 75bsp hike in September. This saw some initial upside in the EUR, but it’s important to remember that the bank quelled hawkish excitement at the July meeting by saying that frontloading hikes are not a signal of a higher terminal rate. Until that changes, higher rate expectations are likely only going to have short-lived upside potential for the Euro. Spread fragmentation, even though largely moving into the background, is still a concern, with the ECB failing to ease the market’s spread concerns with their new Transmission Protection Instrument (TPI) as the eligibility criteria means countries like Italy and Spain that will need the support the most might have a tough time qualifying. Even though policy is important, the main driver for the EUR is the economic outlook. Recent growth data has continued to flag recession risks and as energy concerns increase so too does the likelihood of stagflation. Even though the bias remains lower, a lot of negatives have been priced in from a tactical point of view so worth keeping that in mind. POSSIBLE BULLISH SURPRISES De-escalation or cease fire in Ukraine would open up a lot of EUR upside. Stagflation risks remains, but with lots of bad news priced any materially better-than-expected data could spark some relief. Spread fragmentation remains a concern, thus, any TPI comments that convinces markets it can solve fragmentation issues should be supportive for the EUR. Energy supply is a problem. If Russia does re-opens gas flows after the planned shutdown it should ease some pressure. Any good news on Rhine water levels and resumption of normal transport could be a bullish catalyst for the EUR. POSSIBLE BEARISH SURPRISES Any escalation in the Ukraine war that risks including NATO would be big negative risks. Stagflation risks remains, even with lots of bad news priced any materially worse-than-expected data could see more pressure. Spread fragmentation remains in focus, and if the ECB fails to act when we see big jolts higher in the BTP/Bund spread could trigger bearish reactions in the EUR. Energy supply is a problem. If Russia does not re-open gas flows after the planned shutdown it should add downside risks. Any bad news on Rhine water levels and continued breakdown in transportation could be a bearish catalyst for the EUR. BIGGER PICTURE The fundamental outlook remains bearish with recent leading indicators pointing to a much faster economic slowdown than markets previously expected. The current bearish drivers (geopolitics, stagflation, spread fragmentation, energy supply concerns) far outweigh the positives from a hawkish ECB. Recession risks have opened up a narrative change for the EUR which have seen markets adjust forecasts to reflect higher recession probabilities which has continued to weigh on the EUR. With lots of bad news priced in there is risks in chasing the EUR lower, but the fundamental outlook remains bleak. GBP FUNDAMENTAL OUTLOOK: WEAK BEARISH BASELINE The outlook for the UK economy remains bleak, with CPI above 10% and recession expecting to hit in 4Q22 and last for 5 quarters, it has kept pressure on Sterling despite ongoing BoE rate hikes. Even though the bank followed through with a 50bsp hike in July, it wasn’t enough to offset the recession forecasts. With inflation expected to reach close to 13%, and some participants calling for as high as 18% by next year (due to the rapid rise in energy prices) the bank is stuck between a rock and a hard place as they are forced to keep hiking rates to try and fight inflation but by doing so, they risk further damaging economic growth as a result. The post-BoE price action in Sterling did not reflect a market that was pricing in a 5-quarter recession in the UK, and the price action we saw in the past two weeks made a lot of sense with Sterling catching up to the downside to reflect the growth situation. Even though the bias remains titled lower, a lot of bad news has once again been priced in for the Pound in a relatively short space of time, and with positioning continuing to give bullish signals, chasing lower seems like a bit of a risk right now. POSSIBLE BULLISH SURPRISES Stagflation fears remain high for the UK, and the BoE is now projecting 5 quarters of recession starting 4Q22. With a recession now the base assumption, any incoming data that surprises meaningfully higher could trigger some relief. With focus on stagflation, any downside surprises in CPI or factors that decrease inflation pressures are expected to support the GBP and not pressure it. The economy needs help, which means any help from the fiscal side will be a positive. Any major fiscal support measures from the incoming PM to help consumers (subsidies or tax cuts) could trigger bullish reactions for the Pound. With UK threats of triggering Article 16 and EU threats to terminate the Brexit deal if they do Brexit is in focus. For now, markets have rightly ignored this as posturing, but any major de-escalation can see some upside for Sterling. POSSIBLE BEARISH SURPRISES Stagflation fears remain high for the UK, and the BoE is now projecting 5 quarters of recession starting 4Q22. Even with recession now the base assumption, any material downside surprises in growth data can trigger further downside. With focus on stagflation, any upside surprises in CPI or factors that increase more inflation pressures are expected to weigh on the GBP and not support it. The economy needs help, which means any help from the fiscal side should be a positive, but any fiscal measures from the incoming PM that could exacerbate inflation pressures could trigger bearish reactions for the Pound. With UK threats of triggering Article 16 and EU threats to terminate the Brexit deal if they do Brexit is in focus. For now, markets have rightly ignored this as posturing, but any actual escalation can see sharp GBP downside. BIGGER PICTURE The fundamental outlook for the GBP remains bleak, especially after the BoE’s recent forecasts of a 5-quarter recession in the UK. Furthermore, given the risks to growth, there is growing speculation that the BoE might not be too far away from pausing their current hiking cycle. Anything that exacerbates stagflation fears is expected to weigh on the Pound and anything that alleviates some of that pressure could see some reprieve since the currency is trading at fresh new cycle lows. Even though the bias remains bleak, there is a lot of bad news priced for Sterling, so choose your trades carefully.
by thunderpips
GBP JPY - FUNDAMENTAL DRIVERSGBP FUNDAMENTAL OUTLOOK: WEAK BEARISH BASELINE The outlook for the UK economy remains bleak, with CPI above 10% and recession expecting to hit in 4Q22 and last for 5 quarters, it has kept pressure on Sterling despite ongoing BoE rate hikes. Even though the bank followed through with a 50bsp hike in July, it wasn’t enough to offset the recession forecasts. With inflation expected to reach close to 13%, and some participants calling for as high as 18% by next year (due to the rapid rise in energy prices) the bank is stuck between a rock and a hard place as they are forced to keep hiking rates to try and fight inflation but by doing so, they risk further damaging economic growth as a result. The post-BoE price action in Sterling did not reflect a market that was pricing in a 5-quarter recession in the UK, and the price action we saw in the past two weeks made a lot of sense with Sterling catching up to the downside to reflect the growth situation. Even though the bias remains titled lower, a lot of bad news has once again been priced in for the Pound in a relatively short space of time, and with positioning continuing to give bullish signals, chasing lower seems like a bit of a risk right now. POSSIBLE BULLISH SURPRISES Stagflation fears remain high for the UK, and the BoE is now projecting 5 quarters of recession starting 4Q22. With a recession now the base assumption, any incoming data that surprises meaningfully higher could trigger some relief. With focus on stagflation, any downside surprises in CPI or factors that decrease inflation pressures are expected to support the GBP and not pressure it. The economy needs help, which means any help from the fiscal side will be a positive. Any major fiscal support measures from the incoming PM to help consumers (subsidies or tax cuts) could trigger bullish reactions for the Pound. With UK threats of triggering Article 16 and EU threats to terminate the Brexit deal if they do Brexit is in focus. For now, markets have rightly ignored this as posturing, but any major de-escalation can see some upside for Sterling. POSSIBLE BEARISH SURPRISES Stagflation fears remain high for the UK, and the BoE is now projecting 5 quarters of recession starting 4Q22. Even with recession now the base assumption, any material downside surprises in growth data can trigger further downside. With focus on stagflation, any upside surprises in CPI or factors that increase more inflation pressures are expected to weigh on the GBP and not support it. The economy needs help, which means any help from the fiscal side should be a positive, but any fiscal measures from the incoming PM that could exacerbate inflation pressures could trigger bearish reactions for the Pound. With UK threats of triggering Article 16 and EU threats to terminate the Brexit deal if they do Brexit is in focus. For now, markets have rightly ignored this as posturing, but any actual escalation can see sharp GBP downside. BIGGER PICTURE The fundamental outlook for the GBP remains bleak, especially after the BoE’s recent forecasts of a 5-quarter recession in the UK. Furthermore, given the risks to growth, there is growing speculation that the BoE might not be too far away from pausing their current hiking cycle. Anything that exacerbates stagflation fears is expected to weigh on the Pound and anything that alleviates some of that pressure could see some reprieve since the currency is trading at fresh new cycle lows. Even though the bias remains bleak, there is a lot of bad news priced for Sterling, so choose your trades carefully. JPY FUNDAMENTAL OUTLOOK: BEARISH BASELINE In recent weeks, yield differentials have been the biggest negative driver for the JPY with the BoJ keeping 10-year JGB yields capped at 0.25% with yield curve control while other central banks are hiking rates aggressively. Thus, the BoJ’s reluctance to shift on policy even with inflation starting to push higher remains a negative driver for the JPY. Even though the JPY is considered a safe haven, inflows has been limited in the current bear market compared to other cycles. The reason is Japan’s current account surplus (a main reason for safe haven appeal) has deteriorated due to the rise in commodity prices. Japan imports the bulk of their commodities, so very high energy prices has added to downside. The BoJ and MoF’s reluctance to intervene to stop the rapid depreciation in the JPY in recent weeks has been noticeable. As long as they just voice their dislike but fail to act, the market will keep testing them. Having said that, US10Y and commodities have been reacting more and more negative to the current negative cyclical growth outlook, and as a result has seen big players trim their massive JPY shorts. But this past week’s push higher in yields was a friendly reminder that inflation and yield differentials remain a major downside risk for the JPY, despite the negative cyclical outlook. POSSIBLE BULLISH SURPRISES Catalyst that triggers speculation that the BoJ could drop YCC or hike rates or both (big upside surprises in inflation) could trigger upside in JPY, which means inflation data will be important to keep on the radar. Catalysts that trigger meaningful corrections in US10Y (less hawkish Fed, faster deceleration in US inflation, faster deceleration in US growth) or meaningful bouts of risk off sentiment could trigger bullish reactions from the JPY. Any catalyst that triggers meaningful downside in key commodities like Oil (deteriorating demand outlook, ease in supply shortage) could trigger bullish JPY reactions. Any intervention from the BoJ or MoF to stop JPY depreciation (buying the JPY or giving firm and clear lines in the sand for USDJPY) could offer decent reprieve for the JPY. POSSIBLE BEARISH SURPRISES With yield differentials playing such a huge role for the JPY, any catalysts that push US10Y higher (more aggressive Fed, further acceleration in US inflation, better-than-expected US growth data) could trigger further bearish price action for the JPY. Any catalyst that creates further upside in oil prices (further supply concerns, geopolitical tensions) poses downside risks for Japan’s current account surplus and could trigger further bearish reactions in the JPY. Further reluctance from the BoJ and MoF to address the concerning depreciation in the JPY, and further reluctance from the BoJ to pivot away from very dovish policy is a continued negative driver for the JPY to keep on the radar. If the BoJ pushes back against calls for a policy shift despite upside surprise in CPI could trigger further JPY downside. BIGGER PICTURE The fundamental outlook remains bearish for the JPY, especially after the BoJ once again stuck to the same overly dovish script at their July meeting. As long as US10Y remain elevated and the BoJ stays stubbornly dovish and no push back is made against the JPY weakness from the BoJ or MoF, the bias remainslower. But take note of positioning which means we don’t want to chase the JPY lower and bullish reactions can see outsized upside on big drops in US10Y & commodities (which means keeping cyclical developments in the US in mind as a key influence on US10Y and thus the JPY as well). It also means watching incoming CPI data closely as any huge upside surprises could trigger speculation of a possible policy shift.
by thunderpips
1
GBP/USD - AN UPDATE FROM MY SIGNAL YESTERDAYexited my trade when this candle appeared on H1. My indicator for a bullish exhaustion or also known as 'shooting star' RSI has also formed a bearish divergence on H1 indicating a lost of momentum to the upside. Looking at the structure, price has also formed a double top - bearish price structure Overall, this was a pretty solid trade that we took from yesterday's signal. If you have followed this you would have gotten 2.06RR (70pips) FOR REFERENCE: CLICK ON THE LINK TO RELATED IDEAS DOWN BELOW IF YOU WANT TO SEE THE TRADE SETUP FROM YESTERDAY HELLO, TRADERS! IF YOU LIKE THIS ANALYSIS, PLEASE LEAVE A LIKE AND FOLLOW MY CHANNEL AND LET ME KNOW YOUR THOUGHTS BY COMMENTING DOWN BELOW.
Long
by JuanCrlsTrades