Get started

Poundsterling

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 verylittle 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. Funding Characteristics As a low yielder (like JPY & CHF), the EUR has been a funding choice among carry trades, especially against high yielding EM. As more central banks start normalizing policy and rate differentials widen, the EUR’s use as a funding currency could add additional pressure in the med-term , but if rates start moving closer to 0% in line with rate expectations that could change some of that funding attractiveness. 4. CFTC Analysis It looks like the sentiment for the EUR has not only changed for large speculators or asset managers (both hold net-longs), but the past week’s data has also showed a reduction in net-short for leveraged funds as well. We think there is more room for the EUR to gain if the ECB makes a policy pivot in March, until then we’re patient. 5. The Week Ahead Very quiet week on the data side for the EUR with Markit Flash PMI’s on Monday the only real highlight. It’s been a while since PMI data has been market-moving for the EUR, but after the ECB’s Feb meeting and the focus on a possible policy recalibration at the March meeting the incoming data will carry more weight. The bigger focus will of course be on the incoming HICP print on March 2nd. Turing to the PMI’s, it might not be enough to fully convince markets of what decision the ECB will take at their March meeting, but a very solid beat across the board can be enough to spark some short-term upside in the EUR after the ECB’s recent comments as well as ongoing Russia/Ukraine tensions have weighed on the single currency. With so many negatives priced into the EUR over the past couple of months, we still hold to the view that the EUR could perform well relative to the USD and GBP if the ECB tilts more hawkish as we’ve arguably been getting very close to a state of peak hawkishness for the Fed and BoE. So, a solid beat in both German and French flash PMI’s might be worth a potential short-term trade in the EUR, but as always lets wait for the data to confirm. The other factor to watch is the ongoing tensions between Russia and Ukraine, where the idea of possible military conflict on the doorstep has seen some risk premium built into the EUR this past week, and further escalation or de-escalation will be in focus for the EUR (escalation expected to pressure the EUR and deescalation expected to be supportive). GBP FUNDAMENTAL BIAS: WEAK BULLISH 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 Even though growth estimates for the UK remain on solid footing, not everyone shares that optimism (Refinitiv polling data). With inflation the main reason for the BoE’s recent rate hikes, there is a concern that the UK economy faces a risk of stagflation, with inflation staying 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 and inflation data stay high or even accelerate from here. 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 With the most recent CFTC data is seems like leveraged funds have once again added to their net-longs for the Pound, and this is also the 2nd week where asset managers have reduced net-shorts, and large speculators are in positive territory. It seems sentiment is improving based on the recent positioning data alone. 5. The Week Ahead Very quiet data week scheduled for the GBP. The one event to watch though, and one that we think carries some downside risks to it is the Monetary Policy Report Hearings coming up on Wednesday. During these hearings the Governor and members of the MPC testify before the Treasury Committee. The Fed’s tone after the Feb policy decision means there is some downside risk to Sterling going into the hearing. Recall that Sterling struggled to maintain upside following the decision, despite seeing 4 of the 9 members voting for a 50bsp hike and despite big upgrades to the inflation outlook. The reason for this was the clear dovish tone exhibit by the Governor and Deputy Governor during the press conference, where they clearly tried to downplay the hawkish elements and stressed that their decision to hike rates was not based on the economy doing really well but rather because they think action was required to push inflation lower. With STIR markets pricing in close to 6 hikes for the BoE for the rest of the year, any further dovish push back from the bank during the hearing can see some of that froth priced out and can weigh on Sterling and gilt yields. We’ll be looking for any specific mention and push back against the current market implied rate path, and also for any potential clarity regarding the balance sheet with Chief Economist Pill recently saying the option to start selling gilts outright (QT) is not a done deal and is still a point of consideration. Thus, given the tone used at the presser as well as recent comments from the likes of Pill means there is downside risk for GBP going into the hearing.
by thunderpips
1
GBPCAD on Bullish Bias GBPCAD has been held by the resistance of 0.382 Fibonacci extension and somehow looks on bullish, but definitely broken the resistance that now it seems to be retesting it again. My bias now is that the pair is still bullish and I am putting my eyes on this if the pair is able to retest the broken resistance and able to get out of the fibo level, I will take my shot to long this pair. Otherwise, I will not recommend traders to go against the trend that it has been going all these days!! Have a nice weekend and happy trading guys!! What do you think of this?
Long
by sirkamal
EUR GBP - FUNDAMENTAL DRIVERSEUR FUNDAMENTAL BIAS: NEUTRAL 1. Monetary Policy Hawkish! This sums up the Feb ECB policy meeting. The initial statement was in line with Dec guidance and offered very little surprises (which was initially seen as dovish). However, during the press conference President Lagarde explained that the upside surprises in CPI in Dec and Jan saw unanimous concern around the GC in the near-term and surprised markets by not repeating Dec language which said a 2022 rate hike was unlikely (which immediately saw STIR markets price in a 10bsp hike as soon as June). The president also made the March meeting live, by stating that they’ll use the March meeting to decide what the APP will look like for the rest of 2022 (which markets took as a signal that the APP could conclude somewhere in 2H22. After the meeting we had the customary sources comments which stated that the ECB is preparing for a potential policy recalibration in March (with some members wanting to change policy at today’s meeting already) and added that it is sensible not to exclude a 2022 hike as a possibility and also stated that the ECB is considering possibly ending the APP at the end of Q3 (which would put a Q4 hike in play). Furthermore, sources stated that if inflation does not ease, they’ll consider adjusting policy in March (which means incoming inflation data will be critical). The shift is stance and tone were significant for us to change the bank’s overall policy stance to neutral and to adjust the EUR’s fundamental bias from dovish to neutral as well. Incoming inflation data will be key from here. 2. Economic & Health Developments 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. Funding Characteristics As a low yielder (like JPY & CHF), the EUR has been a funding choice among carry trades, especially against high yielding EM. As more central banks start normalizing policy and rate differentials widen, the EUR’s use as a funding currency could add additional pressure in the med-term, but if rates start moving closer to 0% in line with rate expectations that could change some of that funding attractiveness. 4. CFTC Analysis The big gain in large speculator net-longs was mostly belated upside from the Feb ECB meeting as the reference weeks was only included in Friday’s update. Even though we think the number of negatives priced for the EUR can still see some upside, the corroborated comments from various ECB members to push back against the market’s hawkish take did take us out of our remaining EURGBP long and means we are staying patient with the EUR until we get more clarity on the data front or additional hawkish comments from the ECB. 5. The Week Ahead Very quiet week ahead on the data front for the Eurozone with German ZEW data the only data point of note. After the ECB’s Feb meeting, we’ve had both President Lagarde and ECB’s Villeroy trying to reign in some of the aggressive moves in European bond yields. Even though their push back against the market’s hawkish interpretation of the Feb press conference, we can see STIR markets are still comfortable in pricing in 50bsp of tightening for the ECB by year-end. Thus, even though the EUR caught some downside as a result of the push back, as long as market expectations for rate hikes and a possible March policy recalibration remains intact, that should put a short-term floor under the EUR, at least until we get the next batch of HICP data on the 2nd of March. This also means that incoming ECB speak in the week ahead will probably be the most important driver, with further hawkish comments arguably being able to see outsized moves in the EUR as opposed to dovish comments. GBP FUNDAMENTAL BIAS: WEAK BULLISH 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 Even though growth estimates for the UK remain on solid footing, not everyone shares that optimism (Refinitiv polling data). With inflation the main reason for the BoE’s recent rate hikes, there is a concern that the UK economy faces a risk of stagflation, with inflation staying 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 and inflation data stay high or even accelerate from here. 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 The confusion from last week’s COT data for Sterling has not been resolved with the recent print, showing a very sizeable increase in net-longs just as the GBP saw quite a jolt lower. With the recent ups and downs in CFTC data for Sterling it might be best not to make too much of the swings until they form a steady trend. 5. The Week Ahead In the UK we have an important batch of Jan data with jobs, CPI and retail sales. For jobs, the focus will fall predominantly on wages with the BoE voicing concerns that domestic cost pressures have been driven by a tight labour market. Thus, a big miss or beat in earnings can create short-term volatility for Sterling. For CPI , consensus expects the MM measures to contract while YY headline is expected flat and a slight increase for YY Core. It’s important to keep in mind that the BoE have projected a CPI peak of 7.25% in April and a print around 6% for Feb and March, which means it would take a number north of 6% to spark more concerns from the BoE. For Retail Sales, consensus expects a bounce in Jan of 0.6%, up from the dismal Dec print of -3.7%. Analysts point to a ‘post-Black Friday’ pullback and Omicron as the main culprits for the miss in Dec, which means a bounce in Jan should make sense if that was the case. With growing ‘stagflation’ concerns for the UK among market participants, a further miss would not bode well for the growth outlook.
by thunderpips
4
GBP USD - FUNDAMENTAL DRIVERSGBP FUNDAMENTAL BIAS: WEAK BULLISH 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 Even though growth estimates for the UK remain on solid footing, not everyone shares that optimism (Refinitiv polling data). With inflation the main reason for the BoE’s recent rate hikes, there is a concern that the UK economy faces a risk of stagflation, with inflation staying 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 and inflation data stay high or even accelerate from here. 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 The confusion from last week’s COT data for Sterling has not been resolved with the recent print, showing a very sizeable increase in net-longs just as the GBP saw quite a jolt lower. With the recent ups and downs in CFTC data for Sterling it might be best not to make too much of the swings until they form a steady trend. 5. The Week Ahead In the UK we have an important batch of Jan data with jobs, CPI and retail sales. For jobs, the focus will fall predominantly on wages with the BoE voicing concerns that domestic cost pressures have been driven by a tight labour market. Thus, a big miss or beat in earnings can create short-term volatility for Sterling. For CPI, consensus expects the MM measures to contract while YY headline is expected flat and a slight increase for YY Core. It’s important to keep in mind that the BoE have projected a CPI peak of 7.25% in April and a print around 6% for Feb and March, which means it would take a number north of 6% to spark more concerns from the BoE. For Retail Sales, consensus expects a bounce in Jan of 0.6%, up from the dismal Dec print of -3.7%. Analysts point to a ‘post-Black Friday’ pullback and Omicron as the main culprits for the miss in Dec, which means a bounce in Jan should make sense if that was the case. With growing ‘stagflation’ concerns for the UK among market participants, a further miss would not bode well for the growth outlook. USD FUNDAMENTAL BIAS: BULLISH 1. Monetary Policy The Jan FOMC decision was hawkish on multiple fronts. The statement signalled a March hike as expected, but Chair Powell portrayed a very hawkish tone. Even though Powell said they can’t predict the rate path with certainty, he stressed the economy is in much better shape compared to the 2015 cycle and that will have implications for the pace of hikes (more and faster). Furthermore, he explained that there is ‘quite a bit of room’ to raise rates without damaging employment, which suggests upside risks to the rate path. A big question going into the meeting was how concerned the Fed was about recent equity market volatility. But the Chair explained that markets and financial conditions are reflecting policy changes in advance and that in aggregate the measures they look at isn’t showing red lights. Thus, any ‘Fed Put’ is much further away and inflation is the Fed’s biggest concern right now. The Chair also didn’t rule out the possibility of a 50bsp hike in March or possibly hiking at every meeting this year, which was hawkish as it means the Fed wants optionality to move more aggressive if they need to. We didn’t get new info on the balance sheet and Powell reiterated that they’re contemplating a start of QT after hiking has begun and they’ll discuss this in coming meetings. Overall, the tone and language was 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 Despite the hawkish pivot from the ECB two weeks ago and despite the strong push higher in the EUR and lower in the USD, positioning has yet to reflect any meaningful reduction in net-longs. Thus, with the number of rates priced in for the Fed already it does make the USD vulnerable to squeezes so worth keeping in mind. 4. The Week Ahead On the data front markets will keep close tabs on producer prices after the Jan CPI print, keeping in mind that PPI has a greater influence on PCE (the Fed’s preferred measure of inflation). Markets expect a slowdown in PPI, and since the Fed has tunnel vision for price pressures a bigger-than-expected miss could add pressure to the USD as a lot of Fed hikes have already been priced. On the growth side we have Retail Sales and Industrial Production, where both are expected to recover from the Dec drop, which participants said was mainly due to seasonal adjustments and purchases being brought forward. However, in light of other recent growth data there are doubts. In terms of USD reaction, as both of these are growth measures, there is the chance that the USD sees a similar inverse reaction like we’ve seen with other growth measures in recent weeks. We’ll also need to keep Fed speak on the radar after the explosive comments from Fed’s Bullard a well as the subsequent ‘sources’ pieces in Bloomberg and CNBC trying to talk back his comments. Stern push back could be enough to pressure the USD, while comments confirming a 50bsp hike should be supportive. We’ll also get the FOMC meeting minutes for Jan, but with recent developments and Fed speak after the meeting it might be old news. The other big development to watch will be Russia\Ukraine tensions with the US media sparking renewed fears of an invasion. Any risk off flows from further fears of invasion or actual escalations should be supportive for the USD as the world’s reserve currency and a safe haven, while strong de-escalation is expected to be negative.
by thunderpips
4
Today’s Notable Sentiment ShiftsGBP – Sterling weakened on Wednesday, pressured by uncertainty surrounding the BoE’s monetary policy outlook. Reuters notes that “money markets are still pricing in a 25 bps rate increase in March and 125 bps by December 2022, but some analysts have warned about the risks of excessive expectations. They noted that Bank of England Governor Andrew Bailey said last week not to take for granted the BoE was embarking on a long series of rate hikes, while the BoE’s downward revision to inflation forecasts assumed interest rates at 1.5% by mid-2023.”
by thunderpips
4
GBP USD - FUNDAMENTAL DRIVERSGBP FUNDAMENTAL BIAS: WEAK BULLISH 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 also 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 There is a growing chorus of participants calling for a very tough road ahead for UK growth, and most recent Retail Sales data gave more confirmation to this expectation. Forecasts by the IMF/OECB still sees decent growth differentials, but not everyone shares that optimism (Refinitiv polling data). Even though the solid econ data going into Dec was enough to see the BoE hike, the overall rate expectations already priced in by markets are too ambitious. As long incoming data stay solid it should keep odds for additional tightening alive, but we should be mindful of repricing if the incoming data starts confirming a bleaker picture for growth. 3. Political Developments The political uncertainty surrounding PM Johnson mean a higher risk premium for GBP. The fallout from the heavily redacted Sue Gray report was limited but reports over the weekend show a growing distrust for the PM from within his own party. The question remains whether enough MPs opt for a vote of no-confidence (if so, that could see short-term downside), but after that the focus will be on whether the PM can survive an actual vote of no-confidence, where a win is expected to be GBP positive and negative for Sterling if he loses. The North Ireland protocol is still in focus in the background 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 political posturing, but of course any actual escalation could see sharp risk premium built into the GBP 4. CFTC Analysis The CFTC data for GBP was very surprising. Recall that the downside in the GBP only started later during last week, which means that the very big increase in net-short positioning occurred while Sterling was still flying high. The question here is whether this was some political risk premiums building up or part of a bigger change in sentiment as concerns over the UK’s growth outlook continues to surface. 5. The Week Ahead Just like the EUR, the biggest focus for the week ahead for Sterling will be on BoE talk. The bank tried really hard to get a dovish landing on Thursday, and any additional info and clarity from them will be keenly watched by market participants. With STIR markets pricing in an implied rate of 1.0% by May, one would have thought more upside is warranted for Sterling, but after the dovish undertones as well as the ongoing political challenges things are looking a bit messy for the GBP right now. If we see a similar divergence between ECB and BoE language like we saw at the press conferences that should put further upside pressure on EURGBP. USD FUNDAMENTAL BIAS: BULLISH 1. Monetary Policy The Jan FOMC decision was hawkish on multiple fronts. The statement signalled a March hike as expected, but Chair Powell portrayed a very hawkish tone. Even though Powell said they can’t predict the rate path with certainty, he stressed the economy is in much better shape compared to the 2015 cycle and that will have implications for the pace of hikes (more and faster). Furthermore, he explained that there is ‘quite a bit of room’ to raise rates without damaging employment, which suggests upside risks to the rate path. A big question going into the meeting was how concerned the Fed was about recent equity market volatility . But the Chair explained that markets and financial conditions are reflecting policy changes in advance and that in aggregate the measures they look at isn’t showing red lights. Thus, any ‘Fed Put’ is much further away and inflation is the Fed’s biggest concern right now. The Chair also didn’t rule out the possibility of a 50bsp hike in March or possibly hiking at every meeting this year, which was hawkish as it means the Fed wants optionality to move more aggressive if they need to. We didn’t get new info on the balance sheet and Powell reiterated that they’re contemplating a start of QT after hiking has begun and they’ll discuss this in coming meetings. Overall, the tone and language was lot more hawkish than the Dec meeting and more hawkish than consensus was expecting. 2. Global & Domestic Economy As the reserve currency, the USD’s global usage means it’s usually inversely correlated to the global economy and global trade. Thus, USD usually appreciates when growth & inflation slow (disinflation) and depreciates when growth & inflation accelerates (reflation). With expectations that growth and inflation will decelerate this year that should be a positive input for the USD. However, incoming data will also be important in relation to the ‘Fed Put’. There are many similarities between now and 4Q18, where the Fed were also tightening aggressively going into an economic slowdown. As long as growth data slows and the Fed stays aggressive that is a positive for the USD, but if it causes a dovish Fed pivot and lower rate repricing it would be a negative input for the USD. 3. CFTC Analysis The USD came under some pressure this week, mainly due to overdue mean reversion, recovery in risk assets and of course the surprise hawkish actions by the BoE and more specifically the ECB. Keep in mind that half of the USD’s drop this week occurred outside the CFTC reference period which would explain more limited unwinding in net-longs, and we would expect this number to be much bigger next week. With positioning still in net-long territory for leveraged funds and large specs, and with leveraged funds sitting on a sizeable net-short in the EUR the recent hawkish pivot from the ECB could see some further damage for the USD in the short-term. 4. The Week Ahead After last week’s much better than expected Average Hourly Earnings data out of the US, the main event for the USD as well as markets in general will be the January CPI print for the US scheduled for Wednesday. With another month of upside surprises for inflation data in other global economies, the markets will be watching the US CPI for Jan very closely. Right now, Fed policy has tunnel vision for inflation , and with the surprise beat in Friday’s NFP as well as the surprise punchy upward revisions, the labour market won’t deter the Fed from going all-in to fight inflation . The big dynamic to watch for is wages. Friday’s Average Hourly Earnings print of 5.7% was much higher than expected and saw an immediate jolt higher in US bond yields, with Fed Fund Futures now comfortably pricing in well over 5 hikes by the end of the year. Starting the new year, the biggest reason for expecting a deceleration in inflation was firstly due to base effects, secondly due to expectations that supply chain disruptions ease, and very importantly that commodity prices being cooling down. Out of these three, the last one has not happened yet with oil prices continuing their grind higher (which adds upside risks to headline numbers). Two important components to keep on the radar is wages and shelter prices, which for some means there is very little downside risk to this week’s CPI . How will the USD likely react? Recently the USD has reaction cyclically towards inflation data, which means a solid beat should be supportive, but at the same time a miss would be a far more attractive shorting opportunity, especially against the EUR after the ECB’s pivot .
by thunderpips
1
EUR GBP - FUNDAMENTAL DRIVERSEUR FUNDAMENTAL BIAS: NEUTRAL 1. Monetary Policy Hawkish! This sums up the Feb ECB policy meeting. The initial statement was in line with Dec guidance and offered very little surprises (which was initially seen as dovish). However, during the press conference President Lagarde explained that the upside surprises in CPI in Dec and Jan saw unanimous concern around the GC in the near-term and surprised markets by not repeating Dec language which said a 2022 rate hike was unlikely (which immediately saw STIR markets price in a 10bsp hike as soon as June). The president also made the March meeting live, by stating that they’ll use the March meeting to decide what the APP will look like for the rest of 2022 (which markets took as a signal that the APP could conclude somewhere in 2H22. After the meeting we had the customary sources comments which stated that the ECB is preparing for a potential policy recalibration in March (with some members wanting to change policy at today’s meeting already) and added that it is sensible not to exclude a 2022 hike as a possibility and also stated that the ECB is considering possibly ending the APP at the end of Q3 (which would put a Q4 hike in play). Furthermore, sources stated that if inflation does not ease, they’ll consider adjusting policy in March (which means incoming inflation data will be critical). The shift is stance and tone were significant for us to change the bank’s overall policy stance to neutral and to adjust the EUR’s fundamental bias from dovish to neutral as well. Incoming inflation data will be key from here. 2. Economic & Health Developments Even though the recent activity data suggests the hit to the economy from previous lockdowns weren’t as bad as feared, the additional lockdown measures across Europe has weighed on incoming data. Growth differentials still favour places like the US and UK above that of the EZ and alongside the clear monetary policy divergence means the bearish bias is firmly in place. On the fiscal front, attention is on ongoing discussions to potentially allow purchases of ‘green bonds’ NOT to count against budget deficits. If approved, this could drastically change the fiscal landscape for the EZ and would be seen as a big positive for the EUR and EU equities. 3. Funding Characteristics As a low yielder (like JPY & CHF), the EUR has been a funding choice among carry trades, especially during 2019 where it was a favourite against high yielding EM. As such, part of the EUR’s upside after the initial risk-off scare in March 2020 was attributed to a major unwind of large carry trades. As more central banks start normalizing policy and rate differentials widen, the EUR’s use as a funding currency could add additional pressure in the med-term , but keep in mind it could also spark risk off upside if some of those trades unwind. 4. CFTC Analysis Remember that the ECB meeting this past week took place on Thursday, that means that the most recent CFTC update will not include the big jolt higher in the EUR across the board. We would expect next week’s data to show a sizeable increase in large spec net-longs as well as a very big reduction in leveraged fund net-shorts. With so many negatives priced in for the EUR in recent weeks, the unwind could be punchy. 5. The Week Ahead In the week ahead we have a very light economic calendar coming up for the Eurozone, but we do have quite a few ECB speakers lined up and that will take centre stage for markets. Looking at the moves in both bund yields and the EUR, the ECB members will no doubt have quite a few questions they’ll need to answer and will want to give their own views and opinions. If the ECB thinks the markets overreacted to the message conveyed by President Lagarde, they will want to use this week to get on the wires as much as possible to correct any misplaced expectations. That means President Lagarde’s testimony before the EU Parliament Economic and Monetary Affairs Committee will be scrutinized for any additional details and info, especially with markets now pricing in over 50 basis points of tightening by year-end as well as a Q2 end to QE . Without any strong push back from the ECB in the week ahead will likely lead to a further unwind in short-positioning and should continue to be supportive for the EUR in the very short-term. GBP FUNDAMENTAL BIAS: WEAK BULLISH 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 also 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 There is a growing chorus of participants calling for a very tough road ahead for UK growth, and most recent Retail Sales data gave more confirmation to this expectation. Forecasts by the IMF/OECB still sees decent growth differentials, but not everyone shares that optimism (Refinitiv polling data). Even though the solid econ data going into Dec was enough to see the BoE hike, the overall rate expectations already priced in by markets are too ambitious. As long incoming data stay solid it should keep odds for additional tightening alive, but we should be mindful of repricing if the incoming data starts confirming a bleaker picture for growth. 3. Political Developments The political uncertainty surrounding PM Johnson mean a higher risk premium for GBP. The fallout from the heavily redacted Sue Gray report was limited but reports over the weekend show a growing distrust for the PM from within his own party. The question remains whether enough MPs opt for a vote of no-confidence (if so, that could see short-term downside), but after that the focus will be on whether the PM can survive an actual vote of no-confidence, where a win is expected to be GBP positive and negative for Sterling if he loses. The North Ireland protocol is still in focus in the background 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 political posturing, but of course any actual escalation could see sharp risk premium built into the GBP 4. CFTC Analysis The CFTC data for GBP was very surprising. Recall that the downside in the GBP only started later during last week, which means that the very big increase in net-short positioning occurred while Sterling was still flying high. The question here is whether this was some political risk premiums building up or part of a bigger change in sentiment as concerns over the UK’s growth outlook continues to surface. 5. The Week Ahead Just like the EUR, the biggest focus for the week ahead for Sterling will be on BoE talk. The bank tried really hard to get a dovish landing on Thursday, and any additional info and clarity from them will be keenly watched by market participants. With STIR markets pricing in an implied rate of 1.0% by May, one would have thought more upside is warranted for Sterling, but after the dovish undertones as well as the ongoing political challenges things are looking a bit messy for the GBP right now. If we see a similar divergence between ECB and BoE language like we saw at the press conferences that should put further upside pressure on EURGBP.
by thunderpips
2
GBP USD - FUNDAMENTAL DRIVERSGBP FUNDAMENTAL BIAS: WEAK BULLISH 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 also 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 There is a growing chorus of participants calling for a very tough road ahead for UK growth, and most recent Retail Sales data gave more confirmation to this expectation. Forecasts by the IMF/OECB still sees decent growth differentials, but not everyone shares that optimism (Refinitiv polling data). Even though the solid econ data going into Dec was enough to see the BoE hike, the overall rate expectations already priced in by markets are too ambitious. As long incoming data stay solid it should keep odds for additional tightening alive, but we should be mindful of repricing if the incoming data starts confirming a bleaker picture for growth. 3. Political Developments The political uncertainty surrounding PM Johnson mean a higher risk premium for GBP. The fallout from the heavily redacted Sue Gray report was limited but reports over the weekend show a growing distrust for the PM from within his own party. The question remains whether enough MPs opt for a vote of no-confidence (if so, that could see short-term downside), but after that the focus will be on whether the PM can survive an actual vote of no-confidence, where a win is expected to be GBP positive and negative for Sterling if he loses. The North Ireland protocol is still in focus in the background 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 political posturing, but of course any actual escalation could see sharp risk premium built into the GBP 4. CFTC Analysis The CFTC data for GBP was very surprising. Recall that the downside in the GBP only started later during last week, which means that the very big increase in net-short positioning occurred while Sterling was still flying high. The question here is whether this was some political risk premiums building up or part of a bigger change in sentiment as concerns over the UK’s growth outlook continues to surface. 5. The Week Ahead Just like the EUR, the biggest focus for the week ahead for Sterling will be on BoE talk. The bank tried really hard to get a dovish landing on Thursday, and any additional info and clarity from them will be keenly watched by market participants. With STIR markets pricing in an implied rate of 1.0% by May, one would have thought more upside is warranted for Sterling, but after the dovish undertones as well as the ongoing political challenges things are looking a bit messy for the GBP right now. If we see a similar divergence between ECB and BoE language like we saw at the press conferences that should put further upside pressure on EURGBP. USD FUNDAMENTAL BIAS: BULLISH 1. Monetary Policy The Jan FOMC decision was hawkish on multiple fronts. The statement signalled a March hike as expected, but Chair Powell portrayed a very hawkish tone. Even though Powell said they can’t predict the rate path with certainty, he stressed the economy is in much better shape compared to the 2015 cycle and that will have implications for the pace of hikes (more and faster). Furthermore, he explained that there is ‘quite a bit of room’ to raise rates without damaging employment, which suggests upside risks to the rate path. A big question going into the meeting was how concerned the Fed was about recent equity market volatility . But the Chair explained that markets and financial conditions are reflecting policy changes in advance and that in aggregate the measures they look at isn’t showing red lights. Thus, any ‘Fed Put’ is much further away and inflation is the Fed’s biggest concern right now. The Chair also didn’t rule out the possibility of a 50bsp hike in March or possibly hiking at every meeting this year, which was hawkish as it means the Fed wants optionality to move more aggressive if they need to. We didn’t get new info on the balance sheet and Powell reiterated that they’re contemplating a start of QT after hiking has begun and they’ll discuss this in coming meetings. Overall, the tone and language was lot more hawkish than the Dec meeting and more hawkish than consensus was expecting. 2. Global & Domestic Economy As the reserve currency, the USD’s global usage means it’s usually inversely correlated to the global economy and global trade. Thus, USD usually appreciates when growth & inflation slow (disinflation) and depreciates when growth & inflation accelerates (reflation). With expectations that growth and inflation will decelerate this year that should be a positive input for the USD. However, incoming data will also be important in relation to the ‘Fed Put’. There are many similarities between now and 4Q18, where the Fed were also tightening aggressively going into an economic slowdown. As long as growth data slows and the Fed stays aggressive that is a positive for the USD, but if it causes a dovish Fed pivot and lower rate repricing it would be a negative input for the USD. 3. CFTC Analysis The USD came under some pressure this week, mainly due to overdue mean reversion, recovery in risk assets and of course the surprise hawkish actions by the BoE and more specifically the ECB. Keep in mind that half of the USD’s drop this week occurred outside the CFTC reference period which would explain more limited unwinding in net-longs, and we would expect this number to be much bigger next week. With positioning still in net-long territory for leveraged funds and large specs, and with leveraged funds sitting on a sizeable net-short in the EUR the recent hawkish pivot from the ECB could see some further damage for the USD in the short-term. 4. The Week Ahead After last week’s much better than expected Average Hourly Earnings data out of the US, the main event for the USD as well as markets in general will be the January CPI print for the US scheduled for Wednesday. With another month of upside surprises for inflation data in other global economies, the markets will be watching the US CPI for Jan very closely. Right now, Fed policy has tunnel vision for inflation , and with the surprise beat in Friday’s NFP as well as the surprise punchy upward revisions, the labour market won’t deter the Fed from going all-in to fight inflation . The big dynamic to watch for is wages. Friday’s Average Hourly Earnings print of 5.7% was much higher than expected and saw an immediate jolt higher in US bond yields, with Fed Fund Futures now comfortably pricing in well over 5 hikes by the end of the year. Starting the new year, the biggest reason for expecting a deceleration in inflation was firstly due to base effects, secondly due to expectations that supply chain disruptions ease, and very importantly that commodity prices being cooling down. Out of these three, the last one has not happened yet with oil prices continuing their grind higher (which adds upside risks to headline numbers). Two important components to keep on the radar is wages and shelter prices, which for some means there is very little downside risk to this week’s CPI . How will the USD likely react? Recently the USD has reaction cyclically towards inflation data, which means a solid beat should be supportive, but at the same time a miss would be a far more attractive shorting opportunity, especially against the EUR after the ECB’s pivot .
by thunderpips
1