Poundsterling
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.
GBPUSD IDEAI want to see GU fall towards our 4 hour level. I believe we will see a wick to wipe out the previous buyers before a move back up towards the highs.
I have tried to illustrate the pathway with the arrows. Please comment and like if you agree.
And I know.... another colour way lol, i have no clue what colour looks best. If you have any suggestions please help below.
Hope you all have a great month!
:)
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.
head and shouldersgbp is way oversold, and aud is way overbought, possible long term reversal, this is my second entry after getting stopped out
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.
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.
GBP JPY - FUNDAMENTAL DRIVERSGBP
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.
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 our medterm bias for the JPY, it does means that 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 weigh it up alongside underlying risk sentiment and price action in other safe havens.
4. CFTC Analysis
Even though the JPY’s med-term outlook remains bearish , the big net-shorts for both large specs and leveraged funds and asset managers always increases odds of punchy mean reversion when risk sentiment deteriorates. Thus, equities, US10Y and oil will remain very important drivers for the JPY in the weeks ahead.
GBP USD - FUNDAMENTAL DRIVERSGBP
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.
5. The Week Ahead
In the week ahead the main focus for Sterling will be incoming PMI data, the UK annual budget release and geopolitics. On the data side, with stagflation risks continuing to grow, markets will be keenly watching the PMI data to see how fast growth sentiment has deteriorated after recent geopolitical tensions. Keep in mind that the BoE has been concerned about the slowing growth environment from before the war, and a bigger than expected drop could add to those fears. Remember that PMIs are diffusion indexes based on the subjective inputs from purchasing managers. It’s basically asking businesses whether they think the outlook is better or worse than it was the previous month and given the war in Ukraine we should not be surprised by a bigger than expected miss. On the geopolitical front any key developments will be especially important for the GBP and EUR given their proximity and the impact of sanctions. On the budget side, markets will want to see whether Chancellor Sunak is able to ease some of the growth concerns by alleviating some of the pressure on consumers where real incomes have been a concern given rising food and energy prices. Given the one-side downside in Sterling recently, the GBP will arguably be more sensitive to positive news compare to negative.
USD
FUNDAMENTAL BIAS: BULLISH
1. Monetary Policy
At their March meeting the Fed delivered on a 25bsp hike as expected with Fed’s Bullard the only dissenter voting for a 50bsp hike. The Dot Plot saw a big upgrade from 3 hikes (Dec) to 7 hikes for 2022, with the FFR seen reaching 2.75%-3.0% in 2023 before falling in 2024. The Fed did however lower their neutral rate from 2.5% to 2.4% which were a bit of a negative. Inflation forecasts for 2022 were raised to 4.1% (previous 2.7%) but med-term inflation saw less aggressive upgrades. Even though the overall message and projections were definitely hawkish, the fact that GDP estimates were lowered to 2.8% from 4.0% shows a Fed that expects their actions to impact demand and could also be incorporating some of the recent geopolitical uncertainties. The Fed didn’t provide any new details on QT but did note that the decision to start selling assets will be made at a coming meeting (markets consensus sees a July start as likely) but did add that the FOMC made good progress in their QT discussion with a May announcement very likely. During the presser the Chair expressed his view that the economy is doing really well and, in his view, will be more than able to withstand the incoming rate hikes (a very similar situation like we had in 4Q18). When asked whether 50bsp hikes could be on the table, the chair explained that the FOMC has not made decision to front-load hikes and will keep an eye on incoming inflation data to determine their policy actions going forward, but of course added that every incoming meeting was live. Overall, the Fed was
hawkish, but due to very strong pre-positioning and close to peak hawkishness priced for STIR markets the meeting saw a ‘sell-the-fact’ reaction across major asset classes.
2. Global & Domestic Economy
As the reserve currency, the USD’s global usage means it’s usually inversely correlated to the global economy and global trade. The USD usually appreciates when growth & inflation slow (disinflation) and depreciates when growth & inflation accelerates (reflation). Thus, current expectations of a cyclical slowdown (and possible stagflation) are good for the Dollar. Incoming data will be watched in relation to the ‘Fed Put’ as there are many similarities between now and 4Q18, where the Fed were also tightening into a slowdown. If growth data slows and the Fed stays hawkish it’s a positive for the USD, once the Fed pivots dovish that’ll be a negative for the USD.
3. CFTC Analysis
Overall net-long positioning was a risk for the USD going into the FOMC, where due to very strong performance in recent weeks, it was a very high bar for a hawkish Fed to see a sustained move higher in the USD before seeing a bit of a correction. Leveraged funds now hold a net-short in the USD, but unless geopolitics offer meaningful safe haven inflows or stagflation fears jump higher, some short-term downside is possible.
4. The Week Ahead
The week ahead will be one the quietest ones we’ve had in a while on the economic data side. The main highlights will be incoming Fed speak after last week’s hawkish FOMC policy decision, with focus on whether we get any additional insights and opinions on the rate path, inflation and of course QT. With a lack of key data to give further insights into how fast growth is slowing, the stagflation narrative will probably get most of its cues from commodity prices. Keep in mind that the Dollar has an inverse correlation to global growth and usually has a positive expected return during periods of disinflation and stagflation. We’ll also be keeping an eye on further geopolitical developments, where the USD’s safe haven status will play a role in possible short-term directional moves as well. However, if we don’t see any major trending moves in commodities , and we don’t have any major geopolitical developments, the USD is still close to cycle highs and means it remains vulnerable to some profit taking and additional short-term corrective price action. Watching key support at 97.70 will be key as a break and close below that support arguably opens up room for a dive towards 97.00. Just keep in mind that the bias for the USD remains bullish in the med-term , so any moves lower are expected to be more tactical in nature, unless driven by specific catalysts of course.
GBP JPY - FUNDAMENTAL DRIVERSGBP
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.
5. The Week Ahead
In the week ahead the main focus for Sterling will be incoming PMI data, the UK annual budget release and geopolitics. On the data side, with stagflation risks continuing to grow, markets will be keenly watching the PMI data to see how fast growth sentiment has deteriorated after recent geopolitical tensions. Keep in mind that the BoE has been concerned about the slowing growth environment from before the war, and a bigger than expected drop could add to those fears. Remember that PMIs are diffusion indexes based on the subjective inputs from purchasing managers. It’s basically asking businesses whether they think the outlook is better or worse than it was the previous month and given the war in Ukraine we should not be surprised by a bigger than expected miss. On the geopolitical front any key developments will be especially important for the GBP and EUR given their proximity and the impact of sanctions. On the budget side, markets will want to see whether Chancellor Sunak is able to ease some of the growth concerns by alleviating some of the pressure on consumers where real incomes have been a concern given rising food and energy prices. Given the one-side downside in Sterling recently, the GBP will arguably be more sensitive to positive news compare to negative.
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 our medterm bias for the JPY, it does means that 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 weigh it up alongside underlying risk sentiment and price action in other safe havens.
4. CFTC Analysis
Even though the JPY’s med-term outlook remains bearish, the big net-shorts for both large specs and leveraged funds and asset managers always increases odds of punchy mean reversion when risk sentiment deteriorates. Thus, equities, US10Y and oil will remain very important drivers for the JPY in the weeks ahead.
5. The Week Ahead
In the week ahead, we once again expect one of the biggest influences for the JPY to be on geopolitics and US10Y. Further escalations in tensions between Russia and Ukraine expects to see safe haven inflows while deescalations are expected to see outflows. Apart from risk sentiment, US10Y and oil prices remain a key focus. Despite last week’s recovery in risk assets, the overall sentiment remains jittery with geopolitical risks, cyclical slowdowns and tighter policy all to blame. With rising stagflation risks we still expect long-end yields like US10Y to push lower in the weeks ahead which should be supportive for the JPY, but bearish momentum is firmly in control right now. On the energy front, it’s important to keep in mind that Japan imports more than 90% of all their energy consumption, which means oil prices explains why the JPY has not exactly been benefitting from its usual safe haven attractiveness during bouts of strong risk off moves and means oil prices will be an important asset to watch. 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).
GBP USD - FUNDAMENTAL DRIVERSGBP
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.
5. The Week Ahead
In the week ahead the main focus for Sterling will be incoming PMI data, the UK annual budget release and geopolitics. On the data side, with stagflation risks continuing to grow, markets will be keenly watching the PMI data to see how fast growth sentiment has deteriorated after recent geopolitical tensions. Keep in mind that the BoE has been concerned about the slowing growth environment from before the war, and a bigger than expected drop could add to those fears. Remember that PMIs are diffusion indexes based on the subjective inputs from purchasing managers. It’s basically asking businesses whether they think the outlook is better or worse than it was the previous month and given the war in Ukraine we should not be surprised by a bigger than expected miss. On the geopolitical front any key developments will be especially important for the GBP and EUR given their proximity and the impact of sanctions. On the budget side, markets will want to see whether Chancellor Sunak is able to ease some of the growth concerns by alleviating some of the pressure on consumers where real incomes have been a concern given rising food and energy prices. Given the one-side downside in Sterling recently, the GBP will arguably be more sensitive to positive news compare to negative.
USD
FUNDAMENTAL BIAS: BULLISH
1. Monetary Policy
At their March meeting the Fed delivered on a 25bsp hike as expected with Fed’s Bullard the only dissenter voting for a 50bsp hike. The Dot Plot saw a big upgrade from 3 hikes (Dec) to 7 hikes for 2022, with the FFR seen reaching 2.75%-3.0% in 2023 before falling in 2024. The Fed did however lower their neutral rate from 2.5% to 2.4% which were a bit of a negative. Inflation forecasts for 2022 were raised to 4.1% (previous 2.7%) but med-term inflation saw less aggressive upgrades. Even though the overall message and projections were definitely hawkish, the fact that GDP estimates were lowered to 2.8% from 4.0% shows a Fed that expects their actions to impact demand and could also be incorporating some of the recent geopolitical uncertainties. The Fed didn’t provide any new details on QT but did note that the decision to start selling assets will be made at a coming meeting (markets consensus sees a July start as likely) but did add that the FOMC made good progress in their QT discussion with a May announcement very likely. During the presser the Chair expressed his view that the economy is doing really well and, in his view, will be more than able to withstand the incoming rate hikes (a very similar situation like we had in 4Q18). When asked whether 50bsp hikes could be on the table, the chair explained that the FOMC has not made decision to front-load hikes and will keep an eye on incoming inflation data to determine their policy actions going forward, but of course added that every incoming meeting was live. Overall, the Fed was
hawkish, but due to very strong pre-positioning and close to peak hawkishness priced for STIR markets the meeting saw a ‘sell-the-fact’ reaction across major asset classes.
2. Global & Domestic Economy
As the reserve currency, the USD’s global usage means it’s usually inversely correlated to the global economy and global trade. The USD usually appreciates when growth & inflation slow (disinflation) and depreciates when growth & inflation accelerates (reflation). Thus, current expectations of a cyclical slowdown (and possible stagflation) are good for the Dollar. Incoming data will be watched in relation to the ‘Fed Put’ as there are many similarities between now and 4Q18, where the Fed were also tightening into a slowdown. If growth data slows and the Fed stays hawkish it’s a positive for the USD, once the Fed pivots dovish that’ll be a negative for the USD.
3. CFTC Analysis
Overall net-long positioning was a risk for the USD going into the FOMC, where due to very strong performance in recent weeks, it was a very high bar for a hawkish Fed to see a sustained move higher in the USD before seeing a bit of a correction. Leveraged funds now hold a net-short in the USD, but unless geopolitics offer meaningful safe haven inflows or stagflation fears jump higher, some short-term downside is possible.
4. The Week Ahead
The week ahead will be one the quietest ones we’ve had in a while on the economic data side. The main highlights will be incoming Fed speak after last week’s hawkish FOMC policy decision, with focus on whether we get any additional insights and opinions on the rate path, inflation and of course QT. With a lack of key data to give further insights into how fast growth is slowing, the stagflation narrative will probably get most of its cues from commodity prices. Keep in mind that the Dollar has an inverse correlation to global growth and usually has a positive expected return during periods of disinflation and stagflation. We’ll also be keeping an eye on further geopolitical developments, where the USD’s safe haven status will play a role in possible short-term directional moves as well. However, if we don’t see any major trending moves in commodities , and we don’t have any major geopolitical developments, the USD is still close to cycle highs and means it remains vulnerable to some profit taking and additional short-term corrective price action. Watching key support at 97.70 will be key as a break and close below that support arguably opens up room for a dive towards 97.00. Just keep in mind that the bias for the USD remains bullish in the med-term , so any moves lower are expected to be more tactical in nature, unless driven by specific catalysts of course.
Today’s Notable Sentiment ShiftsGBP – The pound dropped on Thursday after the Bank of England raised interest rates but sounded less certain about the pace of further tightening to combat soaring inflation.
Summarising the meeting, Aviva noted that “In contrast to both the US Federal Reserve and the European Central Bank, the Bank of England delivered a relatively dovish message to investors today… there was more of a focus on slower growth and its impact on households going forward”.
AUD – The Aussie rebounded on Thursday as strong employment data pushed bond yields higher and triggered calls for a more aggressive stance form the RBA.
Speaking after the employment report, CBA stated that there was now a clear risk the RBA would drop its commitment to being “patient” on rates at the next board meeting in April. Concluding that they “anticipate the RBA will move to an explicit hiking bias at the May Board meeting, and to commence normalizing the cash rate in June.”
GBPUSD BUYSFX:GBPUSD
Pounds sterling has recovered massively from the bearish sentiment due to the war in ukraine and on the lower timeframe we have seen a massive change of character and the institutional traders aka big boys are in play to push price to the upside soon. Having this in mind we have also spotted out key demand zones we will be trading from, I'll not be looking for lower timeframe confirmation more due to time so I'll be trading of off these areas with good risk management. Cheers! happy trading guys!
GBP USD - FUNDAMENTAL DRIVERSGBP
FUNDAMENTAL BIAS: NEUTRAL
1. Monetary Policy
Hawkish surprise with a hint of dovish undertones sums up the Feb BoE decision. The bank announced the start of passive QT and hiked rates by 25bsp as expected, but the vote split was unanimous (9-0) but with a big hawkish surprise being 4 MPC members voting for a 50bsp hike. Inflation forecasts saw a big upward revision to a 7.25% peak by April ( prev . 6.0%) & 5.21% in 1-year ( prev . 3.40%). This initial hawkish statement saw immediate strength for GBP but during the press conference the BoE tried their best to get a dovish landing. Gov Bailey started his opening remarks by noting that the MPC’s decision to hike was not because the economy was strong but only because higher rates were necessary to return inflation to target, and even though he opened the door for further hikes he added that markets should not assume rates are on a long march higher. He also acknowledged the stagflation fears recently voiced by some market participants by saying that policy faces a trade-off between weakening growth and higher inflation . Despite the dovish nuances, STIR markets still price an implied cash rate of 1.0% by May which would mean a 25bsp in both March and May (1.0% is the level the BoE previously said they would being outright Gilt selling). Overall, the statement was hawkish, but
the clear dovish undertones from the BoE was a bit surprising and also a bit worrisome for the future outlook.
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 looks way too aggressive and means downside risks for GBP should growth data push lower, inflation stay sticky, or the BoE continue to push their recent dovish tone.
3. Political Developments
Domestic political uncertainty usually leads to higher risk premiumsfor GBP, so the fate of PM Johnson remains a focus. Fallout from the heavily redacted Sue Gray report was limited but with growing distrust from within his party the question remains whether a vote of no-confidence will happen (if so, that could see short-term downside), and then focus will be on whether the PM can survive an actual vote of no-confidence, where a win should be GBP positive and negative for GBP if he loses. The Northern Ireland protocol is still in 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
Friday’s most recent CFTC data showed GBP positioning deteriorated across market participants with big netshort increases for large specs and asset managers, while leveraged funds were more reserved in their reduction of their Sterling net-long (biggest amongst the majors). Who needs to capitulate among these? Given how stretched the recent downside has been, leveraged funds might be better positioned going into the BoE.
USD
FUNDAMENTAL BIAS: BULLISH
1. Monetary Policy
The Jan FOMC decision was hawkish on multiple fronts. The statement signalled a March hike as expected, but Chair Powell portrayed a very hawkish tone. Even though Powell said they can’t predict the rate path with certainty, he stressed the economy is in much better shape compared to the 2015 cycle and that will have implications for the pace of hikes (more and faster). Furthermore, he explained that there is ‘quite a bit of room’ to raise rates without damaging employment, which suggests upside risks to the rate path. A big question going into the meeting was how concerned the Fed was about recent equity market volatility . But the Chair explained that markets and financial conditions are reflecting policy changes in advance and that in aggregate the measures they look at isn’t showing red lights. Thus, any ‘Fed Put’ is much further away and inflation is the Fed’s biggest concern right now. The Chair also didn’t rule out the possibility of a 50bsp hike in March or possibly hiking at every meeting this year, which was hawkish as it means the Fed wants optionality to move more aggressive if they need to. We didn’t get new info on the balance sheet and Powell reiterated that they’re contemplating a start of QT after hiking has begun and they’ll discuss this in coming meetings. Overall, the tone and language were a lot more hawkish than the Dec meeting and more hawkish than consensus was expecting.
2. Global & Domestic Economy
As the reserve currency, the USD’s global usage means it’s usually inversely correlated to the global economy and global trade. The USD usually appreciates when growth & inflation slow (disinflation) and depreciates when growth & inflation accelerates (reflation). Thus, current expectations of a cyclical slowdown (and possible stagflation) are good for the Dollar. Incoming data will be watched in relation to the ‘Fed Put’ as there are many similarities between now and 4Q18, where the Fed were also tightening into a slowdown. If growth data slows and the Fed stays hawkish it’s a positive for the USD, once the Fed pivots dovish that’ll be a negative for the USD.
3. CFTC Analysis
The USD remains a net-long across major participants, but with price action looking stretched and with peak hawkishness for the Fed arguably close with >6 hikes priced, the risk to reward of chasing USD strength is not very attractive right now. Continued stagflation and geopolitical risks it mean that stretched positioning might not be as important as usual. JP Morgan also shared some stats that suggest the USD has a historical tendency to strengthen in the 6 months going into a first hike but then to weaken during the 6 months directly after a first hike. This is an interesting phenomenon which is worth keeping in mind given the USD’s recent performance.
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. 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
Friday’s CFTC data did not show what we expected. Despite the big falls in the EUR and a very big reduction in Asset Manager net-longs, leverage funds reduced net-shorts on the EUR. Unless they reduced shorts in anticipation of a bounced from stretched lows the update does not make much sense right now. Regardless of positioning though, the best way to trade the EUR from these levels is with a clear catalyst.
4. The Week Ahead
For the week ahead it’ll be very quiet on the data front, with all the focus for the EUR still on the geopolitical situation, where any escalation in tensions is expected to weigh on the EUR while de-escalations are expected to provide support. Apart from that, given the liquidity of the EURUSD and EURGBP currency pairs, as well as the EUR’s close to 60% weighting in the DXY , the upcoming FOMC and BoE policy decisions could end up being the biggest drivers for the EUR apart from geopolitics. The hurdle is quite high for the Fed to really surprise markets on the hawkish side (certainly possible for them to do so though), which means unless markets price in even more hikes for the Fed and unless the geopolitical situation deteriorates very drastically, the strong USD upside might run out of short-term steam which would be supportive for the EUR. When it comes to the BoE though, the recent amount of downside priced in for the GBP in such a short space of time and the recent dovish tones from the bank, means the bar is very low for a less dovish reaction from the GBP. Why is this important for the EUR? Given the liquidity of the EURGBP pair any major momentum in EURGBP can affect the EUR and GBP pairs in general so worth keeping on the radar.
GBP
FUNDAMENTAL BIAS: NEUTRAL
1. Monetary Policy
Hawkish surprise with a hint of dovish undertones sums up the Feb BoE decision. The bank announced the start of passive QT and hiked rates by 25bsp as expected, but the vote split was unanimous (9-0) but with a big hawkish surprise being 4 MPC members voting for a 50bsp hike. Inflation forecasts saw a big upward revision to a 7.25% peak by April ( prev . 6.0%) & 5.21% in 1-year ( prev . 3.40%). This initial hawkish statement saw immediate strength for GBP but during the press conference the BoE tried their best to get a dovish landing. Gov Bailey started his opening remarks by noting that the MPC’s decision to hike was not because the economy was strong but only because higher rates were necessary to return inflation to target, and even though he opened the door for further hikes he added that markets should not assume rates are on a long march higher. He also acknowledged the stagflation fears recently voiced by some market participants by saying that policy faces a trade-off between weakening growth and higher inflation . Despite the dovish nuances, STIR markets still price an implied cash rate of 1.0% by May which would mean a 25bsp in both March and May (1.0% is the level the BoE previously said they would being outright Gilt selling). Overall, the statement was hawkish, but
the clear dovish undertones from the BoE was a bit surprising and also a bit worrisome for the future outlook.
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 looks way too aggressive and means downside risks for GBP should growth data push lower, inflation stay sticky, or the BoE continue to push their recent dovish tone.
3. Political Developments
Domestic political uncertainty usually leads to higher risk premiumsfor GBP, so the fate of PM Johnson remains a focus. Fallout from the heavily redacted Sue Gray report was limited but with growing distrust from within his party the question remains whether a vote of no-confidence will happen (if so, that could see short-term downside), and then focus will be on whether the PM can survive an actual vote of no-confidence, where a win should be GBP positive and negative for GBP if he loses. The Northern Ireland protocol is still in 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
Friday’s most recent CFTC data showed GBP positioning deteriorated across market participants with big netshort increases for large specs and asset managers, while leveraged funds were more reserved in their reduction of their Sterling net-long (biggest amongst the majors). Who needs to capitulate among these? Given how stretched the recent downside has been, leveraged funds might be better positioned going into the BoE.
5. The Week Ahead
For the week ahead the data focus will fall on the incoming labour report, with more focus on the wage component as opposed to the headline jobs print. The bank is concerned about second-round effects, so much so that Governor Bailey has in previous weeks said that workers should not demand exuberant increases. We also saw from the Bank’s Agents report suggesting there are signs of significant wage increases this year. Thus, goes without saying that wages will be important. Even though higher wages could see short-term GBP upside, what it means med-term is arguably more negative as it adds to further stagflation fears. For the BoE meeting, markets are fully pricing in a 25bsp hike which means all the focus will fall on the tone and language. The bank’s commitment to lower inflation will be in focus, especially as it relates to growth. Recall that at the Feb policy press conference and the MPC hearing, the bank was already concerned about what higher inflation and higher rates would mean for the growth outlook. That has now arguably been exacerbated by the Ukraine/Russia war. The one risk to the meeting is from the hawkish side, where the GBP’s drop is something, they would have noticed. As lower currency valuation feeds into higher inflation , they could sound less dovish, but at this stage that would seem like an unproductive way of easing inflationary pressures (but not something to completely reject as an option). Our baseline is for a continued dovish tone, but unless they come across even more dovish than before, the recent stretched downside in the GBP could offer some short-term relief higher.
GBP USD - FUNDAMENTAL DRIVERSGBP
FUNDAMENTAL BIAS: NEUTRAL
1. Monetary Policy
Hawkish surprise with a hint of dovish undertones sums up the Feb BoE decision. The bank announced the start of passive QT and hiked rates by 25bsp as expected, but the vote split was unanimous (9-0) but with a big hawkish surprise being 4 MPC members voting for a 50bsp hike. Inflation forecasts saw a big upward revision to a 7.25% peak by April ( prev . 6.0%) & 5.21% in 1-year ( prev . 3.40%). This initial hawkish statement saw immediate strength for GBP but during the press conference the BoE tried their best to get a dovish landing. Gov Bailey started his opening remarks by noting that the MPC’s decision to hike was not because the economy was strong but only because higher rates were necessary to return inflation to target, and even though he opened the door for further hikes he added that markets should not assume rates are on a long march higher. He also acknowledged the stagflation fears recently voiced by some market participants by saying that policy faces a trade-off between weakening growth and higher inflation . Despite the dovish nuances, STIR markets still price an implied cash rate of 1.0% by May which would mean a 25bsp in both March and May (1.0% is the level the BoE previously said they would being outright Gilt selling). Overall, the statement was hawkish, but
the clear dovish undertones from the BoE was a bit surprising and also a bit worrisome for the future outlook.
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 looks way too aggressive and means downside risks for GBP should growth data push lower, inflation stay sticky, or the BoE continue to push their recent dovish tone.
3. Political Developments
Domestic political uncertainty usually leads to higher risk premiumsfor GBP, so the fate of PM Johnson remains a focus. Fallout from the heavily redacted Sue Gray report was limited but with growing distrust from within his party the question remains whether a vote of no-confidence will happen (if so, that could see short-term downside), and then focus will be on whether the PM can survive an actual vote of no-confidence, where a win should be GBP positive and negative for GBP if he loses. The Northern Ireland protocol is still in 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
Friday’s most recent CFTC data showed GBP positioning deteriorated across market participants with big netshort increases for large specs and asset managers, while leveraged funds were more reserved in their reduction of their Sterling net-long (biggest amongst the majors). Who needs to capitulate among these? Given how stretched the recent downside has been, leveraged funds might be better positioned going into the BoE.
5. The Week Ahead
For the week ahead the data focus will fall on the incoming labour report, with more focus on the wage component as opposed to the headline jobs print. The bank is concerned about second-round effects, so much so that Governor Bailey has in previous weeks said that workers should not demand exuberant increases. We also saw from the Bank’s Agents report suggesting there are signs of significant wage increases this year. Thus, goes without saying that wages will be important. Even though higher wages could see short-term GBP upside, what it means med-term is arguably more negative as it adds to further stagflation fears. For the BoE meeting, markets are fully pricing in a 25bsp hike which means all the focus will fall on the tone and language. The bank’s commitment to lower inflation will be in focus, especially as it relates to growth. Recall that at the Feb policy press conference and the MPC hearing, the bank was already concerned about what higher inflation and higher rates would mean for the growth outlook. That has now arguably been exacerbated by the Ukraine/Russia war. The one risk to the meeting is from the hawkish side, where the GBP’s drop is something, they would have noticed. As lower currency valuation feeds into higher inflation , they could sound less dovish, but at this stage that would seem like an unproductive way of easing inflationary pressures (but not something to completely reject as an option). Our baseline is for a continued dovish tone, but unless they come across even more dovish than before, the recent stretched downside in the GBP could offer some short-term relief higher.
USD
FUNDAMENTAL BIAS: BULLISH
1. Monetary Policy
The Jan FOMC decision was hawkish on multiple fronts. The statement signalled a March hike as expected, but Chair Powell portrayed a very hawkish tone. Even though Powell said they can’t predict the rate path with certainty, he stressed the economy is in much better shape compared to the 2015 cycle and that will have implications for the pace of hikes (more and faster). Furthermore, he explained that there is ‘quite a bit of room’ to raise rates without damaging employment, which suggests upside risks to the rate path. A big question going into the meeting was how concerned the Fed was about recent equity market volatility . But the Chair explained that markets and financial conditions are reflecting policy changes in advance and that in aggregate the measures they look at isn’t showing red lights. Thus, any ‘Fed Put’ is much further away and inflation is the Fed’s biggest concern right now. The Chair also didn’t rule out the possibility of a 50bsp hike in March or possibly hiking at every meeting this year, which was hawkish as it means the Fed wants optionality to move more aggressive if they need to. We didn’t get new info on the balance sheet and Powell reiterated that they’re contemplating a start of QT after hiking has begun and they’ll discuss this in coming meetings. Overall, the tone and language were a lot more hawkish than the Dec meeting and more hawkish than consensus was expecting.
2. Global & Domestic Economy
As the reserve currency, the USD’s global usage means it’s usually inversely correlated to the global economy and global trade. The USD usually appreciates when growth & inflation slow (disinflation) and depreciates when growth & inflation accelerates (reflation). Thus, current expectations of a cyclical slowdown (and possible stagflation) are good for the Dollar. Incoming data will be watched in relation to the ‘Fed Put’ as there are many similarities between now and 4Q18, where the Fed were also tightening into a slowdown. If growth data slows and the Fed stays hawkish it’s a positive for the USD, once the Fed pivots dovish that’ll be a negative for the USD.
3. CFTC Analysis
The USD remains a net-long across major participants, but with price action looking stretched and with peak hawkishness for the Fed arguably close with >6 hikes priced, the risk to reward of chasing USD strength is not very attractive right now. Continued stagflation and geopolitical risks it mean that stretched positioning might not be as important as usual. JP Morgan also shared some stats that suggest the USD has a historical tendency to strengthen in the 6 months going into a first hike but then to weaken during the 6 months directly after a first hike. This is an interesting phenomenon which is worth keeping in mind given the USD’s recent performance.
4. The Week Ahead
The week ahead for the USD will be dominated by ongoing geopolitical tensions as well as the incoming FOMC meeting. On the geopolitical front, escalation and de-escalation will affect safe haven flows which means it will remain an important driver for the USD, especially with rising commodity prices also stoking growing fears of stagflation. On the FOMC side, a 25bsp hike is fully priced, but markets still have a lot to think about as the March meeting will be accompanied by an updated Summary of Economic Projections, where the markets want to see how the dots have changed (previous meeting showed 3 hikes for 2022). STIR markets currently priced in close to 7 hikes, so anything below 5 ought to be seen as dovish. During his recent testimony, Powell said that markets have responded to their guidance with good transmission and have priced in a much higher tightening path, so
if their tone and comments alone have done so much heavy lifting there isn’t much reason for them to suddenly ease off on that. It’s true that the Ukraine/Russia war does add uncertainty, but with the US economy and financial sector far less exposed to Russia compared to Europe, the biggest ‘risk’ from the geopolitical situation is higher commodity prices that feeds into higher inflation expectations. Thus, even though the war adds uncertainty (and the Fed is likely going to say that it does) there is very little reason for them to ease off right now, especially with political pressures building going into the mid-terms. But won’t the Fed be concerned with asset markets by coming across even more hawkish? Despite growth concerns, a war in Europe, global sanctions, additional commodity supply shocks and expectations for 6 Fed hikes and QT, if the S&P is down less than 14% with all of that going on it means that any ‘Fed put’ is probably much further away and no need for the bank to change their tone just yet. How far a hawkish Fed can push long-end yields and the USD is up for debate though.
Today’s Notable Sentiment ShiftsGBP – Sterling strengthened on Tuesday, supported by strong employment data, which fueled market expectations for sooner Bank of England rate hikes.
Indeed, ING argues that “this morning’s UK jobs report continued to signal tightness in the labour market and accelerating wage-growth dynamics, which support the prospect of another hike by the Bank of England on Thursday.”
CAD – The Canadian dollar weakened on Tuesday, pressured by declining oil prices, with WTI falling as much as 8% due to a combination of easing supply concerns as Ukraine/Russia peace talks continued and less demand from China due to rising coronavirus cases.
GBPUSDGU has broke structure, we should be looking for a bullish move now. Heres the pathway I believe could happen. I have a buy limit at 1.3020. only risking 1% lets see what happens.
EURGBP: Important Decision Ahead! Your Plan 🇪🇺🇬🇧
Hey traders,
EURGBP is consolidating.
The pair is trading within a narrow horizontal trading range on 4H.
To catch a bearish move, wait for a bearish breakout of its lower boundary.
You need 4H candle close below 0.836 - 0.837 area to confirm the breakout.
Then the price will most likely drop to 0.831 / 0.8265
In case of a bullish breakout of the range though
the price can go higher.
❤️Please, support this idea with like and comment!❤️
GBP USD - FUNDAMENTAL DRIVERSGBP
FUNDAMENTAL BIAS: NEUTRAL
1. Monetary Policy
Hawkish surprise with a hint of dovish undertones sums up the Feb BoE decision. The bank announced the start of passive QT and hiked rates by 25bsp as expected, but the vote split was unanimous (9-0) but with a big hawkish surprise being 4 MPC members voting for a 50bsp hike. Inflation forecasts saw a big upward revision to a 7.25% peak by April (prev. 6.0%) & 5.21% in 1-year (prev. 3.40%). This initial hawkish statement saw immediate strength for GBP but during the press conference the BoE tried their best to get a dovish landing. Gov Bailey started his opening remarks by noting that the MPC’s decision to hike was not because the economy was strong but only because higher rates were necessary to return inflation to target, and even though he opened the door for further hikes he added that markets should not assume rates are on a long march higher. He also acknowledged the stagflation fears recently voiced by some market participants by saying that policy faces a trade-off between weakening growth and higher inflation. Despite the dovish nuances, STIR markets still price an implied cash rate of 1.0% by May which would mean a 25bsp in both March and May (1.0% is the level the BoE previously said they would being outright Gilt selling). Overall, the statement was hawkish, but
the clear dovish undertones from the BoE was a bit surprising and also a bit worrisome for the future outlook.
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 looks way too aggressive and means downside risks for GBP should growth data push lower, inflation stay sticky, or the BoE continue to push their recent dovish tone.
3. Political Developments
Domestic political uncertainty usually leads to higher risk premiumsfor GBP, so the fate of PM Johnson remains a focus. Fallout from the heavily redacted Sue Gray report was limited but with growing distrust from within his party the question remains whether a vote of no-confidence will happen (if so, that could see short-term downside), and then focus will be on whether the PM can survive an actual vote of no-confidence, where a win should be GBP positive and negative for GBP if he loses. The Northern Ireland protocol is still in 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
Friday’s most recent CFTC data showed GBP positioning deteriorated across market participants with big netshort increases for large specs and asset managers, while leveraged funds were more reserved in their reduction of their Sterling net-long (biggest amongst the majors). Who needs to capitulate among these? Given how stretched the recent downside has been, leveraged funds might be better positioned going into the BoE.
5. The Week Ahead
For the week ahead the data focus will fall on the incoming labour report, with more focus on the wage component as opposed to the headline jobs print. The bank is concerned about second-round effects, so much so that Governor Bailey has in previous weeks said that workers should not demand exuberant increases. We also saw from the Bank’s Agents report suggesting there are signs of significant wage increases this year. Thus, goes without saying that wages will be important. Even though higher wages could see short-term GBP upside, what it means med-term is arguably more negative as it adds to further stagflation fears. For the BoE meeting, markets are fully pricing in a 25bsp hike which means all the focus will fall on the tone and language. The bank’s commitment to lower inflation will be in focus, especially as it relates to growth. Recall that at the Feb policy press conference and the MPC hearing, the bank was already concerned about what higher inflation and higher rates would mean for the growth outlook. That has now arguably been exacerbated by the Ukraine/Russia war. The one risk to the meeting is from the hawkish side, where the GBP’s drop is something, they would have noticed. As lower currency valuation feeds into higher inflation, they could sound less dovish, but at this stage that would seem like an unproductive way of easing inflationary pressures (but not something to completely reject as an option). Our baseline is for a continued dovish tone, but unless they come across even more dovish than before, the recent stretched downside in the GBP could offer some short-term relief higher.
USD
FUNDAMENTAL BIAS: BULLISH
1. Monetary Policy
The Jan FOMC decision was hawkish on multiple fronts. The statement signalled a March hike as expected, but Chair Powell portrayed a very hawkish tone. Even though Powell said they can’t predict the rate path with certainty, he stressed the economy is in much better shape compared to the 2015 cycle and that will have implications for the pace of hikes (more and faster). Furthermore, he explained that there is ‘quite a bit of room’ to raise rates without damaging employment, which suggests upside risks to the rate path. A big question going into the meeting was how concerned the Fed was about recent equity market volatility . But the Chair explained that markets and financial conditions are reflecting policy changes in advance and that in aggregate the measures they look at isn’t showing red lights. Thus, any ‘Fed Put’ is much further away and inflation is the Fed’s biggest concern right now. The Chair also didn’t rule out the possibility of a 50bsp hike in March or possibly hiking at every meeting this year, which was hawkish as it means the Fed wants optionality to move more aggressive if they need to. We didn’t get new info on the balance sheet and Powell reiterated that they’re contemplating a start of QT after hiking has begun and they’ll discuss this in coming meetings. Overall, the tone and language were a lot more hawkish than the Dec meeting and more hawkish than consensus was expecting.
2. Global & Domestic Economy
As the reserve currency, the USD’s global usage means it’s usually inversely correlated to the global economy and global trade. The USD usually appreciates when growth & inflation slow (disinflation) and depreciates when growth & inflation accelerates (reflation). Thus, current expectations of a cyclical slowdown (and possible stagflation) are good for the Dollar. Incoming data will be watched in relation to the ‘Fed Put’ as there are many similarities between now and 4Q18, where the Fed were also tightening into a slowdown. If growth data slows and the Fed stays hawkish it’s a positive for the USD, once the Fed pivots dovish that’ll be a negative for the USD.
3. CFTC Analysis
The USD remains a net-long across major participants, but with price action looking stretched and with peak hawkishness for the Fed arguably close with >6 hikes priced, the risk to reward of chasing USD strength is not very attractive right now. Continued stagflation and geopolitical risks it mean that stretched positioning might not be as important as usual. JP Morgan also shared some stats that suggest the USD has a historical tendency to strengthen in the 6 months going into a first hike but then to weaken during the 6 months directly after a first hike. This is an interesting phenomenon which is worth keeping in mind given the USD’s recent performance.
4. The Week Ahead
The week ahead for the USD will be dominated by ongoing geopolitical tensions as well as the incoming FOMC meeting. On the geopolitical front, escalation and de-escalation will affect safe haven flows which means it will remain an important driver for the USD, especially with rising commodity prices also stoking growing fears of stagflation. On the FOMC side, a 25bsp hike is fully priced, but markets still have a lot to think about as the March meeting will be accompanied by an updated Summary of Economic Projections, where the markets want to see how the dots have changed (previous meeting showed 3 hikes for 2022). STIR markets currently priced in close to 7 hikes, so anything below 5 ought to be seen as dovish. During his recent testimony, Powell said that markets have responded to their guidance with good transmission and have priced in a much higher tightening path, so
if their tone and comments alone have done so much heavy lifting there isn’t much reason for them to suddenly ease off on that. It’s true that the Ukraine/Russia war does add uncertainty, but with the US economy and financial sector far less exposed to Russia compared to Europe, the biggest ‘risk’ from the geopolitical situation is higher commodity prices that feeds into higher inflation expectations. Thus, even though the war adds uncertainty (and the Fed is likely going to say that it does) there is very little reason for them to ease off right now, especially with political pressures building going into the mid-terms. But won’t the Fed be concerned with asset markets by coming across even more hawkish? Despite growth concerns, a war in Europe, global sanctions, additional commodity supply shocks and expectations for 6 Fed hikes and QT, if the S&P is down less than 14% with all of that going on it means that any ‘Fed put’ is probably much further away and no need for the bank to change their tone just yet. How far a hawkish Fed can push long-end yields and the USD is up for debate though.
GBP USD - FUNDAMENTAL DRIVERSGBP
FUNDAMENTAL BIAS: NEUTRAL
1. Monetary Policy
Hawkish surprise with a hint of dovish undertones sums up the Feb BoE decision. The bank announced the start of passive QT and hiked rates by 25bsp as expected, but the vote split was unanimous (9-0) but with a big hawkish surprise being 4 MPC members voting for a 50bsp hike. Inflation forecasts saw a big upward revision to a 7.25% peak by April ( prev . 6.0%) & 5.21% in 1-year ( prev . 3.40%). This initial hawkish statement saw immediate strength for GBP but during the press conference the BoE tried their best to get a dovish landing. Gov Bailey started his opening remarks by noting that the MPC’s decision to hike was not because the economy was strong but only because higher rates were necessary to return inflation to target, and even though he opened the door for further hikes he added that markets should not assume rates are on a long march higher. He also acknowledged the stagflation fears recently voiced by some market participants by saying that policy faces a trade-off between weakening growth and higher inflation . Despite the dovish nuances, STIR markets still price an implied cash rate of 1.0% by May which would mean a 25bsp in both March and May (1.0% is the level the BoE previously said they would being outright Gilt selling). Overall, the statement was hawkish, but
the clear dovish undertones from the BoE was a bit surprising and also a bit worrisome for the future outlook.
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 looks way too aggressive and means downside risks for GBP should growth data push lower, inflation stay sticky, or the BoE continue to push their recent dovish tone.
3. Political Developments
Domestic political uncertainty usually leads to higher risk premiumsfor GBP, so the fate of PM Johnson remains a focus. Fallout from the heavily redacted Sue Gray report was limited but with growing distrust from within his party the question remains whether a vote of no-confidence will happen (if so, that could see short-term downside), and then focus will be on whether the PM can survive an actual vote of no-confidence, where a win should be GBP positive and negative for GBP if he loses. The Northern Ireland protocol is still in 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
Even though recent data started to look more constructive for Sterling from a sentiment point of view, the CFTC data remains a mix bag with no clear consensus view, and nothing really stretched by any means. Interestingly, it seems like Leveraged Funds chose the worse time to move GBP into the biggest net long as the currency took a really big knock last week alongside the EUR.
USD
FUNDAMENTAL BIAS: BULLISH
1. Monetary Policy
The Jan FOMC decision was hawkish on multiple fronts. The statement signalled a March hike as expected, but Chair Powell portrayed a very hawkish tone. Even though Powell said they can’t predict the rate path with certainty, he stressed the economy is in much better shape compared to the 2015 cycle and that will have implications for the pace of hikes (more and faster). Furthermore, he explained that there is ‘quite a bit of room’ to raise rates without damaging employment, which suggests upside risks to the rate path. A big question going into the meeting was how concerned the Fed was about recent equity market volatility . But the Chair explained that markets and financial conditions are reflecting policy changes in advance and that in aggregate the measures they look at isn’t showing red lights. Thus, any ‘Fed Put’ is much further away and inflation is the Fed’s biggest concern right now. The Chair also didn’t rule out the possibility of a 50bsp hike in March or possibly hiking at every meeting this year, which was hawkish as it means the Fed wants optionality to move more aggressive if they need to. We didn’t get new info on the balance sheet and Powell reiterated that they’re contemplating a start of QT after hiking has begun and they’ll discuss this in coming meetings. Overall, the tone and language were a lot more hawkish than the Dec meeting and more hawkish than consensus was expecting.
2. Global & Domestic Economy
As the reserve currency, the USD’s global usage means it’s usually inversely correlated to the global economy and global trade. Thus, USD usually appreciates when growth & inflation slow (disinflation) and depreciates when growth & inflation accelerates (reflation). With expectations that growth and inflation will decelerate this year that should be a positive input for the USD. However, incoming data will also be important in relation to the ‘Fed Put’. There are many similarities between now and 4Q18, where the Fed were also tightening aggressively going into an economic slowdown. As long as growth data slows and the Fed stays aggressive that is a positive for the USD, but if it causes a dovish Fed pivot and lower rate repricing it would be a negative input for the USD.
3. CFTC Analysis
With peak hawkishness for the Fed arguably close to baked in for the USD, it’s been interesting to view the positioning unfold in the past few weeks. The USD remains a net-long across large specs, leveraged funds and asset managers, but price action has been looking stretched. However, given growing stagflation and geopolitical risks it means stretched positioning might not be as important right now, but worth keeping in mind of course.
GBP USD - FUNDAMENTAL DRIVERSGBP
FUNDAMENTAL BIAS: NEUTRAL
1. Monetary Policy
Hawkish surprise with a hint of dovish undertones sums up the Feb BoE decision. The bank announced the start of passive QT and hiked rates by 25bsp as expected, but the vote split was unanimous (9-0) but with a big hawkish surprise being 4 MPC members voting for a 50bsp hike. Inflation forecasts saw a big upward revision to a 7.25% peak by April (prev. 6.0%) & 5.21% in 1-year (prev. 3.40%). This initial hawkish statement saw immediate strength for GBP but during the press conference the BoE tried their best to get a dovish landing. Gov Bailey started his opening remarks by noting that the MPC’s decision to hike was not because the economy was strong but only because higher rates were necessary to return inflation to target, and even though he opened the door for further hikes he added that markets should not assume rates are on a long march higher. He also acknowledged the stagflation fears recently voiced by some market participants by saying that policy faces a trade-off between weakening growth and higher inflation. Despite the dovish nuances, STIR markets still price an implied cash rate of 1.0% by May which would mean a 25bsp in both March and May (1.0% is the level the BoE previously said they would being outright Gilt selling). Overall, the statement was hawkish, but
the clear dovish undertones from the BoE was a bit surprising and also a bit worrisome for the future outlook.
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 looks way too aggressive and means downside risks for GBP should growth data push lower, inflation stay sticky, or the BoE continue to push their recent dovish tone.
3. Political Developments
Domestic political uncertainty usually leads to higher risk premiumsfor GBP, so the fate of PM Johnson remains a focus. Fallout from the heavily redacted Sue Gray report was limited but with growing distrust from within his party the question remains whether a vote of no-confidence will happen (if so, that could see short-term downside), and then focus will be on whether the PM can survive an actual vote of no-confidence, where a win should be GBP positive and negative for GBP if he loses. The Northern Ireland protocol is still in 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
Even though recent data started to look more constructive for Sterling from a sentiment point of view, the CFTC data remains a mix bag with no clear consensus view, and nothing really stretched by any means. Interestingly, it seems like Leveraged Funds chose the worse time to move GBP into the biggest net long as the currency took a really big knock last week alongside the EUR.
USD
FUNDAMENTAL BIAS: BULLISH
1. Monetary Policy
The Jan FOMC decision was hawkish on multiple fronts. The statement signalled a March hike as expected, but Chair Powell portrayed a very hawkish tone. Even though Powell said they can’t predict the rate path with certainty, he stressed the economy is in much better shape compared to the 2015 cycle and that will have implications for the pace of hikes (more and faster). Furthermore, he explained that there is ‘quite a bit of room’ to raise rates without damaging employment, which suggests upside risks to the rate path. A big question going into the meeting was how concerned the Fed was about recent equity market volatility . But the Chair explained that markets and financial conditions are reflecting policy changes in advance and that in aggregate the measures they look at isn’t showing red lights. Thus, any ‘Fed Put’ is much further away and inflation is the Fed’s biggest concern right now. The Chair also didn’t rule out the possibility of a 50bsp hike in March or possibly hiking at every meeting this year, which was hawkish as it means the Fed wants optionality to move more aggressive if they need to. We didn’t get new info on the balance sheet and Powell reiterated that they’re contemplating a start of QT after hiking has begun and they’ll discuss this in coming meetings. Overall, the tone and language were a lot more hawkish than the Dec meeting and more hawkish than consensus was expecting.
2. Global & Domestic Economy
As the reserve currency, the USD’s global usage means it’s usually inversely correlated to the global economy and global trade. Thus, USD usually appreciates when growth & inflation slow (disinflation) and depreciates when growth & inflation accelerates (reflation). With expectations that growth and inflation will decelerate this year that should be a positive input for the USD. However, incoming data will also be important in relation to the ‘Fed Put’. There are many similarities between now and 4Q18, where the Fed were also tightening aggressively going into an economic slowdown. As long as growth data slows and the Fed stays aggressive that is a positive for the USD, but if it causes a dovish Fed pivot and lower rate repricing it would be a negative input for the USD.
3. CFTC Analysis
With peak hawkishness for the Fed arguably close to baked in for the USD, it’s been interesting to view the positioning unfold in the past few weeks. The USD remains a net-long across large specs, leveraged funds and asset managers, but price action has been looking stretched. However, given growing stagflation and geopolitical risks it means stretched positioning might not be as important right now, but worth keeping in mind of course.
EUR GBP - FUNDAMENTAL DRIVERSEUR
FUNDAMENTAL BIAS: NEUTRAL
1. Monetary Policy
Hawkish sums up the ECB’s Feb decision. The initial statement was in line with Dec guidance and offered very little surprises (which was initially seen as dovish). However, during the press conference President Lagarde explained that the upside surprises in CPI in Dec and Jan saw unanimous concern around the GC in the nearterm and surprised markets by not repeating Dec language which said a 2022 rate hike was unlikely (which immediately saw STIR markets price in a 10bsp hike as soon as June). The president also made the March meeting live, by stating that they’ll use the March meeting to decide what the APP will look like for the rest of 2022 (which markets took as a signal that the APP could conclude somewhere in 2H22. After the meeting we had the customary sources comments which stated that the ECB is preparing for a potential policy recalibration in March (with some members wanting to change policy at today’s meeting already) and added that it is sensible not to exclude a 2022 hike as a possibility and also stated that the ECB is considering possibly ending the APP at the end of Q3 (which would put a Q4 hike in play). Furthermore, sources stated that if inflation does not ease, they’ll consider adjusting policy in March (which means incoming inflation data will be critical). The shift is stance and tone were significant for us to change the bank’s overall policy stance to neutral and to adjust the EUR’s fundamental bias from dovish to neutral as well. Incoming inflation data will be key from here.
2. Economic & Health Developments
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 on Monday and Tuesday, but as proximity risk to the war and economic risk as a result of sanctions grew, the risk premium ballooned, sending EUR risk reversals tanking lower while implied volatility jolted higher. With very big moves lower already, chasing the lows aren’t very attractive, but picking bottoms is equally dangerous.
4. CFTC Analysis
Last week we looked at the big amount of bullish sentiment built up for the EUR over the past 3 months, and we think a lot of those new bulls were caught with their pants down the past week, forcing huge capitulations as the EUR went into free fall across the board. Keep in mind the release date of the COT data means this week’s release won’t show the extent of unwinding until next week, so flying blind is an understatement here.
5. The Week Ahead
The ECB will be the main scheduled risk event for the EUR this week, alongside further unscheduled war news of course. For the ECB, there is not a lot of conviction that the bank will announce a policy recalibration at this week’s meeting. Even though the latest HICP saw yet another bigger-than-expected jolt higher, the geopolitical situation adds a lot of risk. With three separate ECB members (Stournaras, Centeno, Rehn) specifically mentioning stagflation as a growing risk, that shows us that the focus has shifted for some. However, the bank will have a really tough time this week as they will need to juggle between trying to downplay tightening financial conditions in the midst of a potentially big hit to the economy, while also trying to convince markets that they will sort out the current inflation challenge (with ECB’s Lane saying staff economic projections were revised in order to take the Russian invasion into account). On the Russia/Ukraine side, the market priced in a ton of risk premium last week, with EUR risk reversals falling off a cliff and reaching levels last seen during the Covid crash in 2020 and the EU sovereign debt crisis in 2012. With so much bad news priced in the EUR might struggle to continue its move lower without really substantial bad news, but at the same time with the big risk premium any good news could see exacerbated upside.
GBP
FUNDAMENTAL BIAS: NEUTRAL
1. Monetary Policy
Hawkish surprise with a hint of dovish undertones sums up the Feb BoE decision. The bank announced the start of passive QT and hiked rates by 25bsp as expected, but the vote split was unanimous (9-0) but with a big hawkish surprise being 4 MPC members voting for a 50bsp hike. Inflation forecasts saw a big upward revision to a 7.25% peak by April ( prev . 6.0%) & 5.21% in 1-year ( prev . 3.40%). This initial hawkish statement saw immediate strength for GBP but during the press conference the BoE tried their best to get a dovish landing. Gov Bailey started his opening remarks by noting that the MPC’s decision to hike was not because the economy was strong but only because higher rates were necessary to return inflation to target, and even though he opened the door for further hikes he added that markets should not assume rates are on a long march higher. He also acknowledged the stagflation fears recently voiced by some market participants by saying that policy faces a trade-off between weakening growth and higher inflation . Despite the dovish nuances, STIR markets still price an implied cash rate of 1.0% by May which would mean a 25bsp in both March and May (1.0% is the level the BoE previously said they would being outright Gilt selling). Overall, the statement was hawkish, but the clear dovish undertones from the BoE was a bit surprising and also a bit worrisome for the future outlook.
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 looks way too aggressive and means downside risks for GBP should growth data push lower, inflation stay sticky, or the BoE continue to push their recent dovish tone.
3. Political Developments
Domestic political uncertainty usually leads to higher risk premiumsfor GBP, so the fate of PM Johnson remains a focus. Fallout from the heavily redacted Sue Gray report was limited but with growing distrust from within his party the question remains whether a vote of no-confidence will happen (if so, that could see short-term downside), and then focus will be on whether the PM can survive an actual vote of no-confidence, where a win should be GBP positive and negative for GBP if he loses. The Northern Ireland protocol is still in 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
Even though recent data started to look more constructive for Sterling from a sentiment point of view, the CFTC data remains a mix bag with no clear consensus view, and nothing really stretched by any means. Interestingly, it seems like Leveraged Funds chose the worse time to move GBP into the biggest net long as the currency took a really big knock last week alongside the EUR.
5. The Week Ahead
It’s a very light week on the data front for Sterling with no major data points to watch out for. That means that the biggest focus for the Pound will fall to the ongoing geopolitical uncertainty. Given their proximity to the actual war front, as well as the direct impact of sanctions on their economies, the EUR and GBP saw some very sizeable downside last week. Comparing implied volatility across the G10, the moves higher in the EUR and GBP were worrisome spikes as risk premiums continued to build. This has added another layer of risk on to Sterling, with the BoE’s recent dovish tone already causing some downside risk before the geopolitical risks came into focus. As always, we need to keep price action in mind, and with the amount of downside priced into currencies like the GBP and EUR in such a short space of time, we do want to be mindful of some mean reversion at some stage.
