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EUR GBP - FUNDAMENTAL DRIVERSEUR FUNDAMENTAL BIAS: NEUTRAL 1. Monetary Policy The ECB used the April meeting as a place holder meeting for the most part by not announcing any additional policy tweaks. The plans to phase out the APP into Q3 remained intact by reducing purchases from 40bln to 30bln in May and then down to 20bln in June. Markets were leaning towards a slightly more hawkish take from the bank (given recent inflation pressures), but the lack of conviction to remove the conditionality regarding the APP removal was seen as dovish. President Lagarde added to this dovish tone by explaining that Q3 has three months and IF the bank stops the APP, it could happen July, August or September. This was an important statement as the difference between a July and September end could mean the difference between a Q3 or Q4 rate hike. The president also added to the dovish tone by stressing that risks for the economic outlook are tilted to the downside and have recently intensified with geopolitical and virus-related challenges. When asked about policy normalization, the president made a strange comment by saying it is premature to think about monpol normalisation. As the bank is currently embarking on normalization this comment seemed out of place and reaffirmed the overall dovish take from the meeting. There were the usual sources releases after the presser which said policymakers see a July hike as still possible after Thursday's meeting, which provided some reprieve. With inflation >7% and growth slowing, the June meeting which accompanies staff economic projections will be critical for markets to solidify whether expectations of 1 or 2 hikes this year is correct or not. 2. Economic & Health Developments Growth differentials still favour the US over EU capital flows, but differentials have turned positive against the UK. Given growing stagflation fears the ECB is in a tough spot, being forced to normalize policy to try and combat inflation but could as a result damage growth. Ongoing EU fiscal discussions to possibly allow ‘green bonds’ NOT to count against budget deficits remains in focus, alongside debt issuance for energy purchases. If approved, it will offer a flood of fiscal support which would be positive for the EUR and EU equities. Geopolitics The EUR pushed lower aggressively after initial geopolitical scares but have been trying to carve out a base. Proximity to the war and the impact of sanctions remains a risk if the situation deteriorates. With lots of negatives already priced, chasing lows on bad news is not as attractive as chasing the EUR higher on good news. 3. CFTC Analysis After chunky increase in long exposure with the previous CFTC report, Friday’s data showed the exact opposite with a chunky drop for Large Specs and Leveraged Funds. Even though aggregate positioning is close to 1 standard deviation above the mean, the price action in recent weeks does not reflect that view right now. 4. The Week Ahead One of the weekend risks for the EUR was the French elections, which ended up as expected with a victory for current President Macron. This is a positive for the EUR, but since this was the expected outcome and since the EUR got a bit of a shot in the arm from last week’s hawkish ECB remarks, we are note expecting anything special from the French election outcome. The main econ highlights this week will be EU Flash HICP data coming up on Friday. After last month’s big jump in YY HICP from 5.9% to 7.4% the upcoming print is expected to be less dramatic with consensus looking for a move to 7.5%. However, some firms suggest that food prices and utility costs (which is seeing in renegotiations) still puts upside risks to the print. After last week’s hawkish ECB comments, the HICP will be watched closely as a miss could ease up some of last week’s rates pressures, while a solid beat should just reinforce expectations of a possibly 25bsp hike as early as July. Geopolitics will also be in focus, where Finland and Sweden’s attempts to join NATO could spark aggressive reactions from Russia (any threats from Russia could see markets pricing in a bigger risk premium for the EUR). We also need to keep energy in mind where the possibility of energy embargos on Russian oil and gas will be key to watch as well. GBP FUNDAMENTAL BIAS: NEUTRAL 1. Monetary Policy In March the BoE hiked rates by 25bsp as expected but delivered a bearish hike with BoE’s Cunliffe dissenting by voting to leave rates unchanged. This was a stark change from February where 4 members voted for a 50bsp hike. Cunliffe noted the negative impacts of higher commodity prices on real household incomes and economic activity as the main reason for his dissention, while remaining members thought a 25bsp hike was appropriate given the tight labour market and risks of second round effects. Even though inflation forecasts were upgraded to 8% in Q2 (previous 7.25%), the negative view that GDP was expected to slow to subdued rates showed growing concern of stagflation. The most bearish element of the statement was a change in language regarding incoming rates where the bank said they judge that some further modest tightening MIGHT be appropriate where previous guidance said more tightening was ‘LIKELY TO BE’ appropriate (a clear push against overly aggressive rate expectations). They further pushed back by noting the current implied rate path would see inflation would be below target in 3 years’ time, in other words saying they won’t hike as much, and confirms our estimates that policy reached peak hawkishness in February. The 100% odds of a 25bsp in May drifted to just above 80% on Friday, and markets will pay close attention to incoming BoE speak, where further push back against rates could be enough to see markets pricing out some of the >5 hikes still priced for 2022. As a result of the clear dovish tilt, we have adjusted our assessment of the bank’s policy stance to NEUTRAL. 2. Economic & Health Developments With inflation the main reason for the BoE’s recent rate hikes, there is a concern that the UK economy faces stagflation risk, as price pressures stay sticky while growth decelerates. That also means that current market expectations for rates continues to look too aggressive even after the BoE’s recent push back. This means downside risks for GBP if growth data push lower and/or the BoE continue to push their recent dovish tone. 3. Political Developments Political uncertainty is usually GBP negative, so the PM’s future remains a risk. If distrust grows question remains on whether a no-confidence vote can happen (if so, short-term downside is likely), and whether he can survive the vote (a win should be GBP positive and a loss GBP negative). The Northern Ireland protocol remains a focus, with previous UK threats to trigger Article 16 and EU threats to terminate the Brexit deal if they do. Markets have rightly ignored this as posturing, but any actual escalation can see sharp GBP downside. 4. CFTC Analysis CFTC data a mostly bearish signal last week as Large Specs increased shorts and Leveraged Funds decreased longs (both by a big amount). Our preference remains to look for GBP shorts against the EUR in the med-term, and after the push lower in EURGBP post the previous ECB meeting the coast looks clearer than a week ago. 5. The Week Ahead Despite hawkish comments from BoE’s Mann last week (which tried to place more emphasis on the inflation side of the economy), the dismal Consumer Confidence, Retail Sales and S&P Global Flash PMI’s brought the slowing growth concerns right back into focus (and rightly so). The timing of these prints was fairly bad for the GBP as this week has a very light calendar schedule, which means there won’t be any major growth data points that could ease some of Friday’s concerns.
by thunderpips
GBPAUD is more likely to continue decliningGBPAUD is set to continue declining. The pair is in a strong bearish momentum. Bears defended the previous low at 1.77 and it seems to me that the pair will continue to struggle and the downward move is more likely. It also broken the rising trendline to the bottom on 3 hours timeframe. I predict price to fall at least to 1.71. Left Frame: 3 Hours timeframe Right Frame: Daily Timeframe Traders please support this idea with likes if you find this helpful. Thanks
Short
by Forexintelligence_NA
EUR GBP - FUNDAMENTAL DRIVERSEUR FUNDAMENTAL BIAS: NEUTRAL 1. Monetary Policy The ECB used the April meeting as a place holder meeting for the most part by not announcing any additional policy tweaks. The plans to phase out the APP into Q3 remained intact by reducing purchases from 40bln to 30bln in May and then down to 20bln in June. Markets were leaning towards a slightly more hawkish take from the bank (given recent inflation pressures), but the lack of conviction to remove the conditionality regarding the APP removal was seen as dovish. President Lagarde added to this dovish tone by explaining that Q3 has three months and IF the bank stops the APP, it could happen July, August or September. This was an important statement as the difference between a July and September end could mean the difference between a Q3 or Q4 rate hike. The president also added to the dovish tone by stressing that risks for the economic outlook are tilted to the downside and have recently intensified with geopolitical and virus-related challenges. When asked about policy normalization, the president made a strange comment by saying it is premature to think about monpol normalisation. As the bank is currently embarking on normalization this comment seemed out of place and reaffirmed the overall dovish take from the meeting. There were the usual sources releases after the presser which said policymakers see a July hike as still possible after Thursday's meeting, which provided some reprieve. With inflation >7% and growth slowing, the June meeting which accompanies staff economic projections will be critical for markets to solidify whether expectations of 1 or 2 hikes this year is correct or not. 2. Economic & Health Developments Growth differentials still favour the US over EU capital flows, but differentials have turned positive against the UK. Given growing stagflation fears the ECB is in a tough spot, being forced to normalize policy to try and combat inflation but could as a result damage growth. Ongoing EU fiscal discussions to possibly allow ‘green bonds’ NOT to count against budget deficits remains in focus, alongside debt issuance for energy purchases. If approved, it will offer a flood of fiscal support which would be positive for the EUR and EU equities. Geopolitics The EUR pushed lower aggressively after initial geopolitical scares but have been trying to carve out a base. Proximity to the war and the impact of sanctions remains a risk if the situation deteriorates. With lots of negatives already priced, chasing lows on bad news is not as attractive as chasing the EUR higher on good news. 3. CFTC Analysis Quite a chunky increase in long exposure from Large Specs and Leveraged Funds while Asset Managers reduced long exposure. With aggregate positioning close to 1 standard deviation above the mean positioning might look stretched, but relative to where we were coming from positioning is more bullish than bearish right now. 4. The Week Ahead Even though the EUR saw some downside after the ECB last week, there was not much change in STIR pricing for 2 hikes this year. Thus, we would still prefer chasing the EUR higher on good news as opposed to chasing it lower on bad news with a lot of bad news already priced. That means in the week ahead the main events to watch would be the incoming S&P Global Flash PMI data, ECB speak and geopolitical developments. With the current stagflation fears any bigger-than-expected bounce or miss in the data will be important for short-term volatility, but it might not be enough to change the market’s mind about the ECB until we get the June policy meeting out of the way. Thus, even though PMIs could provide short-term directional moves it might not be enough to create sustainable moves going into the June meeting. Geopolitics will also be in focus, where Finland and Sweden’s attempts to join NATO could spark aggressive reactions from Russia (any threats from Russia could see markets pricing in a bigger risk premium for the EUR). We also need to keep energy in mind where the possibility of energy embargos on Russian oil and gas will be key to watch as well. GBP FUNDAMENTAL BIAS: NEUTRAL 1. Monetary Policy In March the BoE hiked rates by 25bsp as expected but delivered a bearish hike with BoE’s Cunliffe dissenting by voting to leave rates unchanged. This was a stark change from February where 4 members voted for a 50bsp hike. Cunliffe noted the negative impacts of higher commodity prices on real household incomes and economic activity as the main reason for his dissention, while remaining members thought a 25bsp hike was appropriate given the tight labour market and risks of second round effects. Even though inflation forecasts were upgraded to 8% in Q2 (previous 7.25%), the negative view that GDP was expected to slow to subdued rates showed growing concern of stagflation. The most bearish element of the statement was a change in language regarding incoming rates where the bank said they judge that some further modest tightening MIGHT be appropriate where previous guidance said more tightening was ‘LIKELY TO BE’ appropriate (a clear push against overly aggressive rate expectations). They further pushed back by noting the current implied rate path would see inflation would be below target in 3 years’ time, in other words saying they won’t hike as much, and confirms our estimates that policy reached peak hawkishness in February. The 100% odds of a 25bsp in May drifted to just above 80% on Friday, and markets will pay close attention to incoming BoE speak, where further push back against rates could be enough to see markets pricing out some of the >5 hikes still priced for 2022. As a result of the clear dovish tilt, we have adjusted our assessment of the bank’s policy stance to NEUTRAL. 2. Economic & Health Developments With inflation the main reason for the BoE’s recent rate hikes, there is a concern that the UK economy faces stagflation risk, as price pressures stay sticky while growth decelerates. That also means that current market expectations for rates continues to look too aggressive even after the BoE’s recent push back. This means downside risks for GBP if growth data push lower and/or the BoE continue to push their recent dovish tone. 3. Political Developments Political uncertainty is usually GBP negative, so the PM’s future remains a risk. If distrust grows question remains on whether a no-confidence vote can happen (if so, short-term downside is likely), and whether he can survive the vote (a win should be GBP positive and a loss GBP negative). The Northern Ireland protocol remains a focus, with previous UK threats to trigger Article 16 and EU threats to terminate the Brexit deal if they do. Markets have rightly ignored this as posturing, but any actual escalation can see sharp GBP downside. 4. CFTC Analysis CFTC data had a bearish signal last week as all three participant categories saw increased short exposure for Sterling. Price action and positioning has been looking a bit stretched with Asset Managers and Large Spec netshort reaching bottom 20 percentile levels. Our preference remains to look for GBP shorts. 5. The Week Ahead Retail Sales and S&P Global Flash PMI’s will be the main data highlights for Sterling in the week ahead. The growing fears of stagflation in the UK means the incoming growth data will be very important. Thus, what markets will want to see from the incoming data is whether there are noticeable signs that growth is slowing faster than expected. Markets are already expecting Flash PMIs to slow from prior numbers but are expecting a stronger Retail Sales print. Any bigger-than-expected miss will further exacerbate the slowing growth fears and could see some of the upside bounce in Sterling fade, while a bigger-than-expected beat could see some further recovery for the GBP. In the current stagflation context, we would prefer to trade Sterling on the short side in the event of a miss as opposed to buying it on a beat.
by thunderpips
8
Possible BPC Pattern on GBPJPY ChartPrice recently broke above the 164.630 weekly horizontal resistance level. There has also been a pullback and we're probably witnessing a continuation of the upward trend as signalled by the bullish engulfing candlestick pattern slightly above the same resistance level. A good entry price is around 164.964; with stop loss at 164.484 (about 48.0 PIPS) and take profit at 166.465 (about 150.1 PIPS). These should give a reward-to-risk ratio of 3.13 or thereabouts. As always, look before you leap. Happy trading!
Long
by charles-okoukoni
3
GBP/USD -14/4/2022-• Successful breakout below a 2 year trend line • Bears targeted the 1.30 figure and then re-tested the trend line turned resistance where sellers went in again and sold aggressively • Sellers' target on the second attempt was close to previous one with a slightly less level just few pips below (1.2980) • The pair is rebounding significantly from that level • I expect the bulls target to be around the previous support turned resistance level near 1.3160 • We are still in a trading range between 1.2980 and 1.3160-70 • I would rather wait for a sustained break below or above mentioned level • Since the previous ascending trend line was broken, it is normal for us to be in a consolidation phase, which is usually followed by a trend continuation (in this case downtrend)
by RamziAbouAbdallah-CMT
GBP JPY - FUNDAMENTAL DRIVERSGBP FUNDAMENTAL BIAS: NEUTRAL 1. Monetary Policy In March the BoE hiked rates by 25bsp as expected but delivered a bearish hike with BoE’s Cunliffe dissenting by voting to leave rates unchanged. This was a stark change from February where 4 members voted for a 50bsp hike. Cunliffe noted the negative impacts of higher commodity prices on real household incomes and economic activity as the main reason for his dissention, while remaining members thought a 25bsp hike was appropriate given the tight labour market and risks of second round effects. Even though inflation forecasts were upgraded to 8% in Q2 (previous 7.25%), the negative view that GDP was expected to slow to subdued rates showed growing concern of stagflation. The most bearish element of the statement was a change in language regarding incoming rates where the bank said they judge that some further modest tightening MIGHT be appropriate where previous guidance said more tightening was ‘LIKELY TO BE’ appropriate (a clear push against overly aggressive rate expectations). They further pushed back by noting the current implied rate path would see inflation would be below target in 3 years’ time, in other words saying they won’t hike as much, and confirms our estimates that policy reached peak hawkishness in February. The 100% odds of a 25bsp in May drifted to just above 80% on Friday, and markets will pay close attention to incoming BoE speak, where further push back against rates could be enough to see markets pricing out some of the >5 hikes still priced for 2022. As a result of the clear dovish tilt, we have adjusted our assessment of the bank’s policy stance to NEUTRAL. 2. Economic & Health Developments With inflation the main reason for the BoE’s recent rate hikes, there is a concern that the UK economy faces stagflation risk, as price pressures stay sticky while growth decelerates. That also means that current market expectations for rates continues to look way too aggressive even after the BoE’s recent push back. This means downside risks for GBP if growth data push lower and/or the BoE continue to push their recent dovish tone. 3. Political Developments Political uncertainty is usually GBP negative, so the PM’s future remains a risk. If distrust grows question remains on whether a no-confidence vote can happen (if so, short-term downside is likely), and whether he can survive the vote (a win should be GBP positive and a loss GBP negative). The Northern Ireland protocol remains a focus, with previous UK threats to trigger Article 16 and EU threats to terminate the Brexit deal if they do. Markets have rightly ignored this as posturing, but any actual escalation can see sharp GBP downside. 4. CFTC Analysis CFTC data for Sterling is very interesting with growing divergence between participant positioning as Large Specs and Asset Managers sit on sizeable (and growing) net shorts while Leveraged Funds continue to increase net longs. With fast money (Leveraged Funds) pushing higher and Asset Manager net-short reaching bottom 20 percentile levels (2007 used as base year) one of these two are on the wrong side. 5. The Week Ahead Labour and CPI data will be the main data highlights for the UK this week. For inflation our same concerns as the March data print are in focus where a higher-than-expected print might not necessarily be seen as a positive. Usually, higher inflation should be a positive for the currency as it means more chances of higher interest rates. However, the bank has been clear that there is a trade-off between inflation and growth and has explained their reluctance to deliver on STIR expectations for much higher rates. Thus, higher rates would not necessarily lead to higher rate expectations but instead could be seen as a negative with stagflation risks in view. For the labour print, it might be tricky to trade as the question will be on whether markets focus on real household incomes or second-round effects. The BoE has been very concerned with second-round effects which means higher-than-expected earnings ‘should’ increase inflation expectations which could be seen as a negative for Sterling as explained. However, if the focus is on real household incomes increasing as a result of much higher average earnings that could be seen as a positive. Recall that the main reason for Cunliffe’s dissent in March was due to inflation’s impact on real household incomes. That means labour data could be a tricky one to navigate for Sterling on Tuesday. JPY FUNDAMENTAL BIAS: BEARISH 1. Monetary Policy No surprises from the BoJ at their March meeting. As usual, the BoJ continued their three decade long easy policy with Governor Kuroda dismissing any chances of starting to debate an exit from the current policy stance. The language and tone were very similar to their prior meeting where the bank remained committed to provide any additional easing if necessary and noted that the current geopolitical situation increases the risks and uncertainty for Japan’s economy. The bank did note that they expect inflation to rise to close to 2% in Q2 as a result of the recent upside in oil prices, but the governor did explain that recent fears of stagflation in places like Japan, EU and US are overdone. Furthermore, Governor Kuroda explained that rates in Japan will remain low and the rate differential between Japan and other major economies are expected to lead to a weaker currency and higher domestic price pressures in the months ahead. 2. Safe-haven status and overall risk outlook As a safe-haven currency, the market's risk outlook is usually the primary driver. Economic data rarely proves market moving, and although monetary policy expectations can affect the JPY in the short-term, safe-haven flows are typically more dominant. Even though the market’s overall risk tone saw a huge recovery and risk-on frenzy from the middle of 2020 to the end of 2021, recent developments have increased risks. With central banks tightening policy into an economic slowdown, risk appetite is jittery. Even though that doesn’t change our med-term bias for the JPY, it does means we should expect more risk sentiment ebbs and flows this year, and the heightened volatility can create strong directional moves in the JPY, as long as yields play their part. 3. Low-yielding currency with inverse correlation to US10Y As a low yielding currency, the JPY usually shares a strong inverse correlation to moves in US yield differentials. Like most correlations, the strength of the inverse correlation between the JPY and US10Y isn’t perfect and will ebb and flow depending on the market environment from both a risk and cycle point of view. With the Fed tilting more aggressive, we think that opens up more room for curve flattening to take place. In this environment there could be mild upside risks for the JPY, but we should not look at the influence from yields in isolation and also weigh it up alongside underlying risk sentiment and price action in other safe havens. 4. CFTC Analysis Another increase in net-shorts for Large Specs & Leveraged Funds while Asset Managers trimmed some shorts, but net shorts for all three participant categories remain in the bottom 20% of lows going back to 2008. Even though the JPY’s med-term outlook remains bearish , the recent downside in price and increased net-shorts increases odds of punchy mean reversion with equities, US10Y and oil in focus. 5. The Week Ahead New Japan fiscal year, US yields and jawboning will be key focus points next week. After the big flush lower in the JPY in recent weeks, there is some question markets over how much part the Japanese fiscal year end played, and now that a new year has started whether that leads to some JPY repatriation. On the yield side, our med-term bias remains bearish on yields given the slowdown we’ve seen in growth data from the US, but with inflation expected to reach close to 9% the inflation story has been in the driver seat. That means, US CPI will be an important focus point for the JPY this week. After the big dip in the JPY, we’ve had numerous official chime in about the weakness, and even though they didn’t exactly push back against it, they’ve clearly taken notice. The bad attention does make any moves into the 130 for USDJPY both interesting and risky for bulls, so watching for further jawboning from Japanese officials will be on the radar as well. On the energy front, it’s important to keep in mind that Japan imports more than 90% of its energy consumption, and research from JP Morgan suggests that a WTI price of $150 could erode Japan’s current account surplus (which is one of the reasons the currency enjoys safe haven appeal), which means yields and oil remain very important drivers.
by thunderpips
2
EUR GBP - FUNDAMENTAL DRIVERSEUR FUNDAMENTAL BIAS: NEUTRAL 1. Monetary Policy Accelerating policy normalization, but just don’t call it that. The March ECB meeting saw the ECB surprise markets by speeding up their normalization pace with the APP set to increase to EUR 40bln in April and then lowered to EUR 30bln in May and EUR 20bln in June, with an aim of ending APP in Q3. This was quite a shift, and alongside 2024 HICP expected at 1.9% it meant a hike for 2022 is still on the table. However, even though the statement was hawkish, the ECB tried very hard to come across as dovish as possible, no doubt trying to get a soft landing. The bank broke the link between APP and rates by saying hikes could take place ‘some time’ after purchases end (previously said ‘shortly’ after they end). President Lagarde also stressed that the Ukraine/Russia war introduced a material risk to activity and inflation (and it’s too early to know what the full impact of this will be). As a result, she stresses more than once that their actions with the APP should not be seen as accelerating but rather as normalizing (pretty sure going from open-ended QE to done in the next quarter is accelerating but maybe owls play by the different rules). To further add dovishness Lagarde also said that the war in Ukraine means risks are now again titled to the downside, compared to ‘broadly balanced’. After the meeting STIR markets and bund yields jumped to price in close to 2 hikes by year-end again, but the dovish push back from Lagarde saw the EUR come under pressure, failing to benefit from higher implied rates. 2. Economic & Health Developments Growth differentials still favour the US over EU capital flows, but differentials have turned positive against the UK. Given growing stagflation fears the ECB is in a tough spot, possibly being forced to normalize policy to try and combat inflation but could as a result damage growth. Ongoing EU fiscal discussions to possibly allow ‘green bonds’ NOT to count against budget deficits remains in focus, alongside debt issuance for energy purchases. If approved, it will offer a flood of fiscal support which would be positive for the EUR and EU equities. Geopolitics The EUR pushed lower aggressively after initial geopolitical scares but have been trying to carve out a base. Proximity to the war and the impact of sanctions remains a risk if the situation deteriorates. With the already priced, chasing the lows on bad news is not as attractive as chasing the EUR higher on good news. 3. CFTC Analysis CFTC data gave very little sentiment signals with mixed positioning changes as upside in Large Specs and Leveraged Funds was mostly offset by a hefty reduction in net longs from Asset Managers. 4. The Week Ahead Focus for the EUR will be on the outcome of Sunday’s 1st round of the French election and the ECB. For the election, there are 4 possible scenarios, Macron gets >50% to claim victory before 2nd round voting (EUR positive), Macron leads Le Pen with comfortable margin but not enough to claim victory (EUR positive but in line with consensus), Macron leads Le Pen with very tight margin (EUR negative), Le Pen leads Macron with any margin (expected to be very negative for EUR as is most unexpected outcome). For the ECB, after their more hawkish shift on QE in March where the bank accelerated their normalization path (but according to Pres Lagarde we’re not allowed to call it that ), markets are not expecting any new surprisesfor the April decision. However, the question is how the bank’s tone and language has evolved with HICP inflation jumping to 7.5% in March (and expected to possibly reach >10% before peaking). Will inflation be enough to urge more hawkish language from the hawks or will the risk of hiking into a possible stagflation slowdown cause enough angst from the doves to urge for a more patient stance. With the uncertainty on the geopolitical side and the wide range of possible outcomes, it seems unnecessary that the bank would anything right now. They are expected to reiterate their APP plans announced in March to reduction announced in March (increasing APP to €40bn in April, then reducing to €30bn in May, reducing down to €20bn in June and with a possible end in Q3). GBP FUNDAMENTAL BIAS: NEUTRAL 1. Monetary Policy In March the BoE hiked rates by 25bsp as expected but delivered a bearish hike with BoE’s Cunliffe dissenting by voting to leave rates unchanged. This was a stark change from February where 4 members voted for a 50bsp hike. Cunliffe noted the negative impacts of higher commodity prices on real household incomes and economic activity as the main reason for his dissention, while remaining members thought a 25bsp hike was appropriate given the tight labour market and risks of second round effects. Even though inflation forecasts were upgraded to 8% in Q2 (previous 7.25%), the negative view that GDP was expected to slow to subdued rates showed growing concern of stagflation. The most bearish element of the statement was a change in language regarding incoming rates where the bank said they judge that some further modest tightening MIGHT be appropriate where previous guidance said more tightening was ‘LIKELY TO BE’ appropriate (a clear push against overly aggressive rate expectations). They further pushed back by noting the current implied rate path would see inflation would be below target in 3 years’ time, in other words saying they won’t hike as much, and confirms our estimates that policy reached peak hawkishness in February. The 100% odds of a 25bsp in May drifted to just above 80% on Friday, and markets will pay close attention to incoming BoE speak, where further push back against rates could be enough to see markets pricing out some of the >5 hikes still priced for 2022. As a result of the clear dovish tilt, we have adjusted our assessment of the bank’s policy stance to NEUTRAL. 2. Economic & Health Developments With inflation the main reason for the BoE’s recent rate hikes, there is a concern that the UK economy faces stagflation risk, as price pressures stay sticky while growth decelerates. That also means that current market expectations for rates continues to look way too aggressive even after the BoE’s recent push back. This means downside risks for GBP if growth data push lower and/or the BoE continue to push their recent dovish tone. 3. Political Developments Political uncertainty is usually GBP negative, so the PM’s future remains a risk. If distrust grows question remains on whether a no-confidence vote can happen (if so, short-term downside is likely), and whether he can survive the vote (a win should be GBP positive and a loss GBP negative). The Northern Ireland protocol remains a focus, with previous UK threats to trigger Article 16 and EU threats to terminate the Brexit deal if they do. Markets have rightly ignored this as posturing, but any actual escalation can see sharp GBP downside. 4. CFTC Analysis CFTC data for Sterling is very interesting with growing divergence between participant positioning as Large Specs and Asset Managers sit on sizeable (and growing) net shorts while Leveraged Funds continue to increase net longs. With fast money (Leveraged Funds) pushing higher and Asset Manager net-short reaching bottom 20 percentile levels (2007 used as base year) one of these two are on the wrong side. 5. The Week Ahead Labour and CPI data will be the main data highlights for the UK this week. For inflation our same concerns as the March data print are in focus where a higher-than-expected print might not necessarily be seen as a positive. Usually, higher inflation should be a positive for the currency as it means more chances of higher interest rates. However, the bank has been clear that there is a trade-off between inflation and growth and has explained their reluctance to deliver on STIR expectations for much higher rates. Thus, higher rates would not necessarily lead to higher rate expectations but instead could be seen as a negative with stagflation risks in view. For the labour print, it might be tricky to trade as the question will be on whether markets focus on real household incomes or second-round effects. The BoE has been very concerned with second-round effects which means higher-than-expected earnings ‘should’ increase inflation expectations which could be seen as a negative for Sterling as explained. However, if the focus is on real household incomes increasing as a result of much higher average earnings that could be seen as a positive. Recall that the main reason for Cunliffe’s dissent in March was due to inflation’s impact on real household incomes. That means labour data could be a tricky one to navigate for Sterling on Tuesday.
by thunderpips
1
EUR GBP - FUNDAMENTAL DRIVERSEUR FUNDAMENTAL BIAS: NEUTRAL 1. Monetary Policy Accelerating policy normalization, but just don’t call it that. The March ECB meeting saw the ECB surprise markets by speeding up their normalization pace with the APP set to increase to EUR 40bln in April and then lowered to EUR 30bln in May and EUR 20bln in June, with an aim of ending APP in Q3. This was quite a shift, and alongside 2024 HICP expected at 1.9% it meant a hike for 2022 is still on the table. However, even though the statement was hawkish, the ECB tried very hard to come across as dovish as possible, no doubt trying to get a soft landing. The bank broke the link between APP and rates by saying hikes could take place ‘some time’ after purchases end (previously said ‘shortly’ after they end). President Lagarde also stressed that the Ukraine/Russia war introduced a material risk to activity and inflation (and it’s too early to know what the full impact of this will be). As a result, she stresses more than once that their actions with the APP should not be seen as accelerating but rather as normalizing (pretty sure going from open-ended QE to done in the next quarter is accelerating but maybe owls play by the different rules). To further add dovishness Lagarde also said that the war in Ukraine means risks are now again titled to the downside, compared to ‘broadly balanced’. After the meeting STIR markets and bund yields jumped to price in close to 2 hikes by year-end again, but the dovish push back from Lagarde saw the EUR come under pressure, failing to benefit from higher implied rates. 2. Economic & Health Developments Recent activity data suggests the hit from lockdowns weren’t as bad as feared, but Omicron restrictions weighed on growth. Differentials still favour the US but interestingly has turned positive against the UK. The big focus is on the incoming data to offer further clues of possible stagflation, where the ECB could be forced to act on rates due to higher inflation but would negatively impact demand and growth as a result. There’s also focus on the fiscal side with ongoing discussions to potentially allow purchases of ‘green bonds’ NOT to count against budget deficits, and the possibility of major new debt issuance to finance energy purchases. If approved, this can drastically change the fiscal landscape and would be a positive for the EUR and EU equities. Geopolitics Even though the EUR, through Western sanctions, have dodged potential weakness from the CBR selling the EUR to prop up the RUB, the single currency was not immune for long. It held up okay initially, but as proximity risk to the war and economic risk from supply constraints and sanctions grew, the risk premium ballooned, sending EUR risk reversals sharply lower and implied volatility higher. Even though further geopolitical developments will be important to watch, the EUR already saw very big moves lower, which means right now chasing the lows on bad news aren’t as attractive as chasing highs on good news. 3. CFTC Analysis Further bullish sentiment signals from last week’s positioning changes with Asset Managers and Leveraged Funds both adding a chunky number of net-longs. Still trading close to recent lows means speculative EUR longs versus the GBP and CAD looks interesting but doing so without catalysts at this stage is very risky. 4. The Week Ahead The week ahead will be a quiet one for the EUR. We have Final PMI data coming up which will be interesting to watch after the surprisingly solid numbers out of France and Germany (despite the geopolitical developments). However, since they are Final prints, they are not expected to be enough to create any major market reactions, unless we see a massive deviation between the Flash and Final data. Apart from that, geopolitical risks will still be in focus given the Eurozone’s proximity to the war, and their dependence on Russian oil and gas, where any major escalations (expected to be EUR negative) or de-escalations (expected to be EUR positive) will be on the radar. The pop higher in the EUR earlier last week on the back of positive negotiation developments showed us how overly sensitive the EUR is with positive news compared to negative news, which we think is mainly a case of short-term positioning. Our preferred way of expressing any positive EUR developments is through EURGBP longs and possibly EURCAD longs (with Friday’s incoming Canadian jobs report in focus). GBP FUNDAMENTAL BIAS: NEUTRAL 1. Monetary Policy In March the BoE hiked rates by 25bsp as expected but delivered a bearish hike with BoE’s Cunliffe dissenting by voting to leave rates unchanged. This was a stark change from February where 4 members voted for a 50bsp hike. Cunliffe noted the negative impacts of higher commodity prices on real household incomes and economic activity as the main reason for his dissention, while remaining members thought a 25bsp hike was appropriate given the tight labour market and risks of second round effects. Even though inflation forecasts were upgraded to 8% in Q2 (previous 7.25%), the negative view that GDP was expected to slow to subdued rates showed growing concern of stagflation. The most bearish element of the statement was a change in language regarding incoming rates where the bank said they judge that some further modest tightening MIGHT be appropriate where previous guidance said more tightening was ‘LIKELY TO BE’ appropriate (a clear push against overly aggressive rate expectations). They further pushed back by noting the current implied rate path would see inflation would be below target in 3 years’ time, in other words saying they won’t hike as much, and confirms our estimates that policy reached peak hawkishness in February. The 100% odds of a 25bsp in May drifted to just above 80% on Friday, and markets will pay close attention to incoming BoE speak, where further push back against rates could be enough to see markets pricing out some of the >5 hikes still priced for 2022. As a result of the clear dovish tilt, we have adjusted our assessment of the bank’s policy stance to NEUTRAL. 2. Economic & Health Developments With inflation the main reason for the BoE’s recent rate hikes, there is a concern that the UK economy faces stagflation risk, as price pressures stay sticky while growth decelerates. That also means that current market expectations for rates continues to look way too aggressive even after the BoE’s recent push back. This means downside risks for GBP if growth data push lower and/or the BoE continue to push their recent dovish tone. 3. Political Developments Political uncertainty is usually GBP negative, so PM Johnson’s the remains a question mark, even though fallout from the Sue Gray report was limited. If distrust grows the question remains whether a vote of no-confidence could happen (if so, short-term downside is likely). Focus will then be on whether the PM can survive a noconfidence vote (a win should be GBP ▲ and a loss GBP ▼). The Northern Ireland protocol remains a focus as well with previous UK threats to trigger Article 16 and EU threats to terminate the Brexit deal if they do. For now, markets have rightly ignored this as posturing, but any actual escalation can see sharp GBP downside. 4. CFTC Analysis Recent CFTC data showed a mixed bag for GBP positioning once again as large specs and asset managers increased net-short positioning while leveraged funds increased net-longs by a whopping 20K contracts. For now, positioning doesn’t provide much in the way of a directional bias. However, price action at the index level has been somewhat stretched to the downside recently so be mindful of that. 5. The Week Ahead Economic data will be very light for the UK with no major data points on the schedule. We do have BoE speak in the mix again with BoE’s Bailey, Cunliffe and Phil expected to speak. Bailey might not give us anything new on monetary policy after his speech this past week (which saw him sticking to recent dovish rhetoric), but Cunliffe and Phil could be interesting. Recall that it was Cunliffe who dissented at the March meeting and voted to keep rates unchanged given the risks to the consumer, so markets will be paying attention to what he has to say. Similarly, chief economist Phil’s comments will be viewed, but taking them with a pinch of salt would be a good idea since his communication and actual policy decision has been quite different from one another in recent months (not putting his vote where his comments is). Our bias for Sterling remains neutral with a skew towards bearish but prefer to express that view with EURGBP right now, which means we will use any bearish sentiment shifts for Sterling to use as opportunities for possible EURGBP longs.
by thunderpips
4
EUR GBP - FUNDAMENTAL DRIVERSEUR FUNDAMENTAL BIAS: NEUTRAL 1. Monetary Policy Accelerating policy normalization, but just don’t call it that. The March ECB meeting saw the ECB surprise markets by speeding up their normalization pace with the APP set to increase to EUR 40bln in April and then lowered to EUR 30bln in May and EUR 20bln in June, with an aim of ending APP in Q3. This was quite a shift, and alongside 2024 HICP expected at 1.9% it meant a hike for 2022 is still on the table. However, even though the statement was hawkish, the ECB tried very hard to come across as dovish as possible, no doubt trying to get a soft landing. The bank broke the link between APP and rates by saying hikes could take place ‘some time’ after purchases end (previously said ‘shortly’ after they end). President Lagarde also stressed that the Ukraine/Russia war introduced a material risk to activity and inflation (and it’s too early to know what the full impact of this will be). As a result, she stresses more than once that their actions with the APP should not be seen as accelerating but rather as normalizing (pretty sure going from open-ended QE to done in the next quarter is accelerating but maybe owls play by the different rules). To further add dovishness Lagarde also said that the war in Ukraine means risks are now again titled to the downside, compared to ‘broadly balanced’. After the meeting STIR markets and bund yields jumped to price in close to 2 hikes by year-end again, but the dovish push back from Lagarde saw the EUR come under pressure, failing to benefit from higher implied rates. 2. Economic & Health Developments Recent activity data suggests the hit from lockdowns weren’t as bad as feared, but Omicron restrictions weighed on growth. Differentials still favour the US but interestingly has turned positive against the UK. The big focus is on the incoming data to offer further clues of possible stagflation, where the ECB could be forced to act on rates due to higher inflation but would negatively impact demand and growth as a result. There’s also focus on the fiscal side with ongoing discussions to potentially allow purchases of ‘green bonds’ NOT to count against budget deficits, and the possibility of major new debt issuance to finance energy purchases. If approved, this can drastically change the fiscal landscape and would be a positive for the EUR and EU equities. Geopolitics Even though the EUR, through Western sanctions, have dodged potential weakness from the CBR selling the EUR to prop up the RUB, the single currency was not immune for long. It held up okay initially, but as proximity risk to the war and economic risk from supply constraints and sanctions grew, the risk premium ballooned, sending EUR risk reversals sharply lower and implied volatility higher. Even though further geopolitical developments will be important to watch, the EUR already saw very big moves lower, which means right now chasing the lows on bad news aren’t as attractive as chasing highs on good news. 3. CFTC Analysis Further bullish sentiment signals from last week’s positioning changes with Asset Managers and Leveraged Funds both adding a chunky number of net-longs. Still trading close to recent lows means speculative EUR longs versus the GBP and CAD looks interesting but doing so without catalysts at this stage is very risky. 4. The Week Ahead The week ahead will be a quiet one for the EUR. We have Final PMI data coming up which will be interesting to watch after the surprisingly solid numbers out of France and Germany (despite the geopolitical developments). However, since they are Final prints, they are not expected to be enough to create any major market reactions, unless we see a massive deviation between the Flash and Final data. Apart from that, geopolitical risks will still be in focus given the Eurozone’s proximity to the war, and their dependence on Russian oil and gas, where any major escalations (expected to be EUR negative) or de-escalations (expected to be EUR positive) will be on the radar. The pop higher in the EUR earlier last week on the back of positive negotiation developments showed us how overly sensitive the EUR is with positive news compared to negative news, which we think is mainly a case of short-term positioning. Our preferred way of expressing any positive EUR developments is through EURGBP longs and possibly EURCAD longs (with Friday’s incoming Canadian jobs report in focus). GBP FUNDAMENTAL BIAS: NEUTRAL 1. Monetary Policy In March the BoE hiked rates by 25bsp as expected but delivered a bearish hike with BoE’s Cunliffe dissenting by voting to leave rates unchanged. This was a stark change from February where 4 members voted for a 50bsp hike. Cunliffe noted the negative impacts of higher commodity prices on real household incomes and economic activity as the main reason for his dissention, while remaining members thought a 25bsp hike was appropriate given the tight labour market and risks of second round effects. Even though inflation forecasts were upgraded to 8% in Q2 (previous 7.25%), the negative view that GDP was expected to slow to subdued rates showed growing concern of stagflation. The most bearish element of the statement was a change in language regarding incoming rates where the bank said they judge that some further modest tightening MIGHT be appropriate where previous guidance said more tightening was ‘LIKELY TO BE’ appropriate (a clear push against overly aggressive rate expectations). They further pushed back by noting the current implied rate path would see inflation would be below target in 3 years’ time, in other words saying they won’t hike as much, and confirms our estimates that policy reached peak hawkishness in February. The 100% odds of a 25bsp in May drifted to just above 80% on Friday, and markets will pay close attention to incoming BoE speak, where further push back against rates could be enough to see markets pricing out some of the >5 hikes still priced for 2022. As a result of the clear dovish tilt, we have adjusted our assessment of the bank’s policy stance to NEUTRAL. 2. Economic & Health Developments With inflation the main reason for the BoE’s recent rate hikes, there is a concern that the UK economy faces stagflation risk, as price pressures stay sticky while growth decelerates. That also means that current market expectations for rates continues to look way too aggressive even after the BoE’s recent push back. This means downside risks for GBP if growth data push lower and/or the BoE continue to push their recent dovish tone. 3. Political Developments Political uncertainty is usually GBP negative, so PM Johnson’s the remains a question mark, even though fallout from the Sue Gray report was limited. If distrust grows the question remains whether a vote of no-confidence could happen (if so, short-term downside is likely). Focus will then be on whether the PM can survive a noconfidence vote (a win should be GBP ▲ and a loss GBP ▼). The Northern Ireland protocol remains a focus as well with previous UK threats to trigger Article 16 and EU threats to terminate the Brexit deal if they do. For now, markets have rightly ignored this as posturing, but any actual escalation can see sharp GBP downside. 4. CFTC Analysis Recent CFTC data showed a mixed bag for GBP positioning once again as large specs and asset managers increased net-short positioning while leveraged funds increased net-longs by a whopping 20K contracts. For now, positioning doesn’t provide much in the way of a directional bias. However, price action at the index level has been somewhat stretched to the downside recently so be mindful of that. 5. The Week Ahead Economic data will be very light for the UK with no major data points on the schedule. We do have BoE speak in the mix again with BoE’s Bailey, Cunliffe and Phil expected to speak. Bailey might not give us anything new on monetary policy after his speech this past week (which saw him sticking to recent dovish rhetoric), but Cunliffe and Phil could be interesting. Recall that it was Cunliffe who dissented at the March meeting and voted to keep rates unchanged given the risks to the consumer, so markets will be paying attention to what he has to say. Similarly, chief economist Phil’s comments will be viewed, but taking them with a pinch of salt would be a good idea since his communication and actual policy decision has been quite different from one another in recent months (not putting his vote where his comments is). Our bias for Sterling remains neutral with a skew towards bearish but prefer to express that view with EURGBP right now, which means we will use any bearish sentiment shifts for Sterling to use as opportunities for possible EURGBP longs.
by thunderpips
EUR GBP - FUNDAMENTAL DRIVERSEUR FUNDAMENTAL BIAS: NEUTRAL 1. Monetary Policy Accelerating policy normalization in deed, but just don’t call it that. The March ECB meeting saw the ECB surprise markets by speeding up their normalization pace with the APP set to increase to EUR 40bln in April and then lowered to EUR 30bln in May and EUR 20bln in June, with an aim of ending APP in Q3. This was quite a shift, and alongside 2024 HICP expected at 1.9% it meant a hike for 2022 is still on the table. However, even though the statement was hawkish, the ECB tried very hard to come across as dovish as possible, no doubt trying to get a soft landing. The bank broke the link between APP and rates by saying hikes could take place ‘some time’ after purchases end (previously said ‘shortly’ after they end). President Lagarde also stressed that the Ukraine/Russia war introduced a material risk to activity and inflation (and it’s too early to know what the full impact of this will be). As a result, she stresses more than once that their actions with the APP should not be seen as accelerating but rather as normalizing (pretty sure going from open-ended QE to done in the next quarter is accelerating but maybe owls play by the different rules). To further add dovishness Lagarde also said that the war in Ukraine means risks are now again titled to the downside, compared to ‘broadly balanced’. After the meeting STIR markets and bund yields jumped to price in close to 2 hikes by year-end again, but the dovish push back from Lagarde saw the EUR come under pressure, failing to benefit from higher implied rates. 2. Economic & Health Developments Recent activity data suggests the hit from lockdowns weren’t as bad as feared, but Omicron restrictions weighed on growth. Differentials still favour the US but interestingly has turned positive against the UK. The big focus is on the incoming data to offer further clues of possible stagflation, where the ECB could be forced to act on rates due to higher inflation but would negatively impact demand and growth as a result. There’s also focus on the fiscal side with ongoing discussions to potentially allow purchases of ‘green bonds’ NOT to count against budget deficits, and the possibility of major new debt issuance to finance energy purchases. If approved, this can drastically change the fiscal landscape and would be a positive for the EUR and EU equities. Geopolitics Even though the EUR, through Western sanctions, have dodged potential weakness from the CBR selling the EUR to prop up the RUB, the single currency was not immune for long. It held up okay initially, but as proximity risk to the war and economic risk from supply constraints and sanctions grew, the risk premium ballooned, sending EUR risk reversals sharply lower and implied volatility higher. With very big moves lower already, chasing the lows aren’t very attractive, but picking bottoms is equally dangerous without clear catalysts. 3. CFTC Analysis Some bullish sentiment signals from last week’s positioning changes with Large Specs increasing longs while leveraged funds decreased shorts. Still trading close to recent lows means speculative EUR longs versus the GBP and CAD looks interesting but doing so without catalysts at this stage is very risky. GBP FUNDAMENTAL BIAS: NEUTRAL 1. Monetary Policy In March the BoE hiked rates by 25bsp as expected but delivered a bearish hike with BoE’s Cunliffe dissenting by voting to leave rates unchanged. This was a stark change from February where 4 members voted for a 50bsp hike. Cunliffe noted the negative impacts of higher commodity prices on real household incomes and economic activity as the main reason for his dissention, while remaining members thought a 25bsp hike was appropriate given the tight labour market and risks of second round effects. Even though inflation forecasts were upgraded to 8% in Q2 (previous 7.25%), the negative view that GDP was expected to slow to subdued rates showed growing concern of stagflation. The most bearish element of the statement was a change in language regarding incoming rates where the bank said they judge that some further modest tightening MIGHT be appropriate where previous guidance said more tightening was ‘LIKELY TO BE’ appropriate (a clear push against overly aggressive rate expectations). They further pushed back by noting the current implied rate path would see inflation would be below target in 3 years’ time, in other words saying they won’t hike as much, and confirms our estimates that policy reached peak hawkishness in February. The 100% odds of a 25bsp in May drifted to just above 80% on Friday, and markets will pay close attention to incoming BoE speak, where further push back against rates could be enough to see markets pricing out some of the >5 hikes still priced for 2022. As a result of the clear dovish tilt, we have adjusted our assessment of the bank’s policy stance to NEUTRAL. 2. Economic & Health Developments With inflation the main reason for the BoE’s recent rate hikes, there is a concern that the UK economy faces stagflation risk, as price pressures stay sticky while growth decelerates. That also means that current market expectations for rates continues to look way too aggressive even after the BoE’s recent push back. This means downside risks for GBP if growth data push lower and/or the BoE continue to push their recent dovish tone. 3. Political Developments Political uncertainty is usually GBP negative, so the fate of PM Johnson remains a focus. Fallout from the Sue Gray report was limited but as distrust grows the question remains whether a vote of no-confidence will happen (if so,short-term downside is likely). Focus will then be on whether the PM can survive a no-confidence vote (a win should be GBP positive and a loss GBP negative). The Northern Ireland protocol remains a focus with the UK threatening to trigger Article 16 and the EU threatening to terminate the Brexit deal if they do. For now, markets have rightly ignored this as posturing, but any actual escalation can see sharp downside for GBP. 4. CFTC Analysis Recent CFTC data showed a mixed bag for GBP positioning as large specs and asset managers increased netshort positioning while leveraged funds increased shorts. For now, positioning doesn’t provide much in the way of a directional bias. However, price action has been stretched to the downside so be mindful of that.
by thunderpips
3
EUR GBP - FUNDAMENTAL DRIVERSEUR FUNDAMENTAL BIAS: NEUTRAL 1. Monetary Policy Accelerating policy normalization in deed, but just don’t call it that. The March ECB meeting saw the ECB surprise markets by speeding up their normalization pace with the APP set to increase to EUR 40bln in April and then lowered to EUR 30bln in May and EUR 20bln in June, with an aim of ending APP in Q3. This was quite a shift, and alongside 2024 HICP expected at 1.9% it meant a hike for 2022 is still on the table. However, even though the statement was hawkish, the ECB tried very hard to come across as dovish as possible, no doubt trying to get a soft landing. The bank broke the link between APP and rates by saying hikes could take place ‘some time’ after purchases end (previously said ‘shortly’ after they end). President Lagarde also stressed that the Ukraine/Russia war introduced a material risk to activity and inflation (and it’s too early to know what the full impact of this will be). As a result, she stresses more than once that their actions with the APP should not be seen as accelerating but rather as normalizing (pretty sure going from open-ended QE to done in the next quarter is accelerating but maybe owls play by the different rules). To further add dovishness Lagarde also said that the war in Ukraine means risks are now again titled to the downside, compared to ‘broadly balanced’. After the meeting STIR markets and bund yields jumped to price in close to 2 hikes by year-end again, but the dovish push back from Lagarde saw the EUR come under pressure, failing to benefit from higher implied rates. 2. Economic & Health Developments Recent activity data suggests the hit from lockdowns weren’t as bad as feared, but Omicron restrictions weighed on growth. Differentials still favour the US but interestingly has turned positive against the UK. The big focus is on the incoming data to offer further clues of possible stagflation, where the ECB could be forced to act on rates due to higher inflation but would negatively impact demand and growth as a result. There’s also focus on the fiscal side with ongoing discussions to potentially allow purchases of ‘green bonds’ NOT to count against budget deficits, and the possibility of major new debt issuance to finance energy purchases. If approved, this can drastically change the fiscal landscape and would be a positive for the EUR and EU equities. Geopolitics Even though the EUR, through Western sanctions, have dodged potential weakness from the CBR selling the EUR to prop up the RUB, the single currency was not immune for long. It held up okay initially, but as proximity risk to the war and economic risk from supply constraints and sanctions grew, the risk premium ballooned, sending EUR risk reversals sharply lower and implied volatility higher. With very big moves lower already, chasing the lows aren’t very attractive, but picking bottoms is equally dangerous without clear catalysts. 3. CFTC Analysis Some bullish sentiment signals from last week’s positioning changes with Large Specs increasing longs while leveraged funds decreased shorts. Still trading close to recent lows means speculative EUR longs versus the GBP and CAD looks interesting but doing so without catalysts at this stage is very risky. 4. The Week Ahead It’s inflation week for the Eurozone with Flash CPI data for March due on Friday. Given the rapid rise across commodities as a result of the war in Ukraine, there is a very high probability that prices see another big jump, especially at the headline level. The challenge with continued higher inflation is that it could start to add even more upside pressure to inflation expectations, which in turn could increase the risk of second-round effects in terms of wage increases. That means apart from the print itself, the focus will be on how the higher print feeds into inflation expectations, as that will have important implications for monetary policy. Focus will also remain on geopolitics commodities with questions of a whether the EU goes ahead with embargos on Russian Oil and Gas, further increasing stagflation risks. On this front, the fiscal side will also be important, where joint issuance of debt or country-specific fiscal relief measures to lessen higher price burdens will be important for the EUR. Both the GBP and EUR has carried the brunt of the geopolitical fallout in recent weeks due to the war’s proximity and the implications of sanctions, but with the EUR close to recent lows, any major positive breakthroughs will arguably have a bigger impact compared to negative ones (unless the negative news involves things like chemical attacks or heightened risk of the war spilling over into the rest of Europe). Thus, chasing the EUR lower on negative news does not look as attractive as trading it higher on good news. GBP FUNDAMENTAL BIAS: NEUTRAL 1. Monetary Policy In March the BoE hiked rates by 25bsp as expected but delivered a bearish hike with BoE’s Cunliffe dissenting by voting to leave rates unchanged. This was a stark change from February where 4 members voted for a 50bsp hike. Cunliffe noted the negative impacts of higher commodity prices on real household incomes and economic activity as the main reason for his dissention, while remaining members thought a 25bsp hike was appropriate given the tight labour market and risks of second round effects. Even though inflation forecasts were upgraded to 8% in Q2 (previous 7.25%), the negative view that GDP was expected to slow to subdued rates showed growing concern of stagflation. The most bearish element of the statement was a change in language regarding incoming rates where the bank said they judge that some further modest tightening MIGHT be appropriate where previous guidance said more tightening was ‘LIKELY TO BE’ appropriate (a clear push against overly aggressive rate expectations). They further pushed back by noting the current implied rate path would see inflation would be below target in 3 years’ time, in other words saying they won’t hike as much, and confirms our estimates that policy reached peak hawkishness in February. The 100% odds of a 25bsp in May drifted to just above 80% on Friday, and markets will pay close attention to incoming BoE speak, where further push back against rates could be enough to see markets pricing out some of the >5 hikes still priced for 2022. As a result of the clear dovish tilt, we have adjusted our assessment of the bank’s policy stance to NEUTRAL. 2. Economic & Health Developments With inflation the main reason for the BoE’s recent rate hikes, there is a concern that the UK economy faces stagflation risk, as price pressures stay sticky while growth decelerates. That also means that current market expectations for rates continues to look way too aggressive even after the BoE’s recent push back. This means downside risks for GBP if growth data push lower and/or the BoE continue to push their recent dovish tone. 3. Political Developments Political uncertainty is usually GBP negative, so the fate of PM Johnson remains a focus. Fallout from the Sue Gray report was limited but as distrust grows the question remains whether a vote of no-confidence will happen (if so,short-term downside is likely). Focus will then be on whether the PM can survive a no-confidence vote (a win should be GBP positive and a loss GBP negative). The Northern Ireland protocol remains a focus with the UK threatening to trigger Article 16 and the EU threatening to terminate the Brexit deal if they do. For now, markets have rightly ignored this as posturing, but any actual escalation can see sharp downside for GBP. 4. CFTC Analysis Recent CFTC data showed a mixed bag for GBP positioning as large specs and asset managers increased netshort positioning while leveraged funds increased shorts. For now, positioning doesn’t provide much in the way of a directional bias. However, price action has been stretched to the downside so be mindful of that. 5. The Week Ahead Economic data will be very light for the UK with no major data points on the schedule. We do have Governor Bailey schedule to speak on Monday which will of course be important for the current rate outlook for the UK (see our Monetary Policy section above). Last week’s economic data didn’t provide much in the way of momentum for Sterling, with price action at the index level finishing very close to where we started the week. Similarly, the spring budget didn’t provide much more compared to what was already expected, which means no real change to growth expectations in the UK and also means our med-term outlook remains neutral, leaning towards bearish (taking the BoE’s dovish tones into consideration). For the week ahead, there will of course be continued focus on geopolitics and commodity prices where any de-escalation in the form of a ceasefire should be positive for Sterling, and any additional escalations which also leads to further upside in commodity prices should be a negative as it further increases stagflation risks and puts further pressure on consumer incomes (which after Friday’s Retail Sales have shown that BoE’s Cunliffe was right to be concerned about how higher commodity prices will impact household incomes and economic activity.
by thunderpips
1
EUR GBP - FUNDAMENTAL DRIVERSEUR FUNDAMENTAL BIAS: NEUTRAL 1. Monetary Policy Accelerating policy normalization in deed, but just don’t call it that. The March ECB meeting saw the ECB surprise markets by speeding up their normalization pace with the APP set to increase to EUR 40bln in April and then lowered to EUR 30bln in May and EUR 20bln in June, with an aim of ending APP in Q3. This was quite a shift, and alongside 2024 HICP expected at 1.9% it meant a hike for 2022 is still on the table. However, even though the statement was hawkish, the ECB tried very hard to come across as dovish as possible, no doubt trying to get a soft landing. The bank broke the link between APP and rates by saying hikes could take place ‘some time’ after purchases end (previously said ‘shortly’ after they end). President Lagarde also stressed that the Ukraine/Russia war introduced a material risk to activity and inflation (and it’s too early to know what the full impact of this will be). As a result, she stresses more than once that their actions with the APP should not be seen as accelerating but rather as normalizing (pretty sure going from open-ended QE to done in the next quarter is accelerating but maybe owls play by the different rules). To further add dovishness Lagarde also said that the war in Ukraine means risks are now again titled to the downside, compared to ‘broadly balanced’. After the meeting STIR markets and bund yields jumped to price in close to 2 hikes by year-end again, but the dovish push back from Lagarde saw the EUR come under pressure, failing to benefit from higher implied rates. 2. Economic & Health Developments Recent activity data suggests the hit from lockdowns weren’t as bad as feared, the Omicron restrictions weighed on growth. Differentials still favour the US and UK above the EZ. The big focus though is on the incoming inflation data after the ECB’s recent hawkish pivot at their Feb meeting. On the fiscal front, attention is on ongoing discussions to potentially allow purchases of ‘green bonds’ NOT to count against budget deficits. If approved, this can drastically change the fiscal landscape and would be a positive for the EUR and EU equities. 3. Geopolitics Even though the EUR, through Western sanctions, have dodged potential weakness from the CBR selling the EUR to prop up the RUB, the single currency was not immune for long. It held up okay initially, but as proximity risk to the war and economic risk from supply constraints and sanctions grew, the risk premium ballooned, sending EUR risk reversals sharply lower and implied volatility higher. With very big moves lower already, chasing the lows aren’t very attractive, but picking bottoms is equally dangerous without clear catalysts. 4. CFTC Analysis Large specs decreased longs (-40K) and leveraged funds (-19K) increased shorts, both exhibiting a strong bearish sentiment. But after the EUR’s strong bounce from recent lows, it seems additional shorts were added just at the wrong time. Regardless of positioning, trading the EUR with a clear catalyst is a must right now. GBP FUNDAMENTAL BIAS: NEUTRAL 1. Monetary Policy The BoE hiked rates by 25bsp as expected at their March meeting but delivered what was seen as a bearish hike as it was not a unanimous decision with BoE’s Cunliffe voting to leave rates unchanged. This was a very stark change from February where 4 members voted for a 50bsp hike. Cunliffe noted the negative impacts of higher commodity prices on real household incomes and economic activity as the main reason for his dissention, while the remaining members thought a 25bsp hike was appropriate given the tight labour market and risks of second round effects. Even though inflation forecasts were upgraded to 8% in Q2 (previous 7.25%), the negative view that GDP was expected to slow to subdued rates once again showed growing concern of stagflation risks. For us, the most bearish element of the statement was a change in language regarding incoming rates where the bank said they judge that some further modest tightening MIGHT be appropriate where previous guidance said more tightening was ‘likely to be’ appropriate, which was a very clear push back against the overly aggressive rate path that has been priced in for the bank. The bank further pushed back by noting that the current rate path implied by markets would mean inflation would be below their target in three years’ time, in other words saying they won’t hike as much, and confirms our estimates that policy reached peak hawkishness in February. The 100% odds of a 25bsp for May has drifted to just above 80% on Friday, and markets will pay very close attention to incoming BoE speak, where a further push back against higher rates could be enough to see markets pricing out some of the 4 hikes still priced for the rest of the year. 2. Economic & Health Developments With inflation the main reason for the BoE’s recent rate hikes, there is a concern that the UK economy faces stagflation risk, as price pressures stay sticky while growth decelerates. That also means that current market expectations for rates continues to look way too aggressive even after the BoE’s recent push back. This means downside risks for GBP if growth data push lower and/or the BoE continue to push their recent dovish tone. 3. Political Developments Political uncertainty is usually GBP negative, so the fate of PM Johnson remains a focus. Fallout from the Sue Gray report was limited but as distrust grows the question remains whether a vote of no-confidence will happen (if so,short-term downside is likely). Focus will then be on whether the PM can survive a no-confidence vote (a win should be GBP positive and a loss GBP negative). The Northern Ireland protocol remains a focus with the UK threatening to trigger Article 16 and the EU threatening to terminate the Brexit deal if they do. For now, markets have rightly ignored this as posturing, but any actual escalation can see sharp downside for GBP. 4. CFTC Analysis Recent CFTC data showed GBP positioning continues to deteriorate across market participants with net-short increases for large specs and net-long reductions for leveraged funds. After the more dovish than expected BoE last week (and since it took place Thursday) incoming CFTC data should see this trend continue.
by thunderpips
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