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Poundsterling

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!
Long
by Undercover_Trading
9
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.
by thunderpips
EUR GBP - FUNDAMENTAL DRIVERSEUR FUNDAMENTAL BIAS: NEUTRAL 1. Monetary Policy Accelerating policy normalization in deed, but just don’t call it that. The March ECB meeting saw the ECB surprise markets by speeding up their normalization pace with the APP set to increase to EUR 40bln in April and then lowered to EUR 30bln in May and EUR 20bln in June, with an aim of ending APP in Q3. This was quite a shift, and alongside 2024 HICP expected at 1.9% it meant a hike for 2022 is still on the table. However, even though the statement was hawkish, the ECB tried very hard to come across as dovish as possible, no doubt trying to get a soft landing. The bank broke the link between APP and rates by saying hikes could take place ‘some time’ after purchases end (previously said ‘shortly’ after they end). President Lagarde also stressed that the Ukraine/Russia war introduced a material risk to activity and inflation (and it’s too early to know what the full impact of this will be). As a result, she stresses more than once that their actions with the APP should not be seen as accelerating but rather as normalizing (pretty sure going from open-ended QE to done in the next quarter is accelerating but maybe owls play by the different rules). To further add dovishness Lagarde also said that the war in Ukraine means risks are now again titled to the downside, compared to ‘broadly balanced’. After the meeting STIR markets and bund yields jumped to price in close to 2 hikes by year-end again, but the dovish push back from Lagarde saw the EUR come under pressure, failing to benefit from higher implied rates. 2. Economic & Health Developments Recent activity data suggests the hit from lockdowns weren’t as bad as feared, 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.
by thunderpips
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.
by thunderpips
1
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.
by thunderpips
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!❤️
Long
by VasilyTrader
16
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.
by thunderpips
2
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.
by thunderpips
2
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.
by thunderpips
1
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.
by thunderpips
2
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.
by thunderpips
Today’s Notable Sentiment ShiftsEUR – The euro extended recent declines and hit its lowest since 2016 against GBP on Thursday as investors became increasingly concerned about the impact of rising oil prices following Russia’s invasion of Ukraine. Commenting on the rise in oil prices, Wester Union noted that “the Ukraine crisis has really lit a fire under oil, and we’re showing how that’s really becoming a source of significant weakness for the euro and a major source of strength for commodity currencies.”
by thunderpips
1
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 The Russian invasion of Ukraine opens up a lot of uncertainty for the EUR. On one hand, the decision to ban certain Russian banks from SWIFT was expected to impact the EU negatively, but the decision to freeze CBR assets means the expected FX reserve sales of Euros (to try and prop up the RUB) might not happen. The other consideration is energy, with the SWIFT bans, any restrictions on energy sales from Russia would put pressure on already high inflation and increases stagflation risks of higher inflation but falling growth. That does cloud the med-term outlook for the EUR and means we are happy to hold onto a neutral bias for now. 4. CFTC Analysis Participants are building into EUR longs. Large specs have seen 9/10 week of net increases in longs, asset managers have seen 10/12 weeks of net increase in longs and leveraged funds have reduced net shorts for 11 weeks in a row now. It’s safe to say that the sentiment for the EUR has improved given positioning data. However, the risk here is also that a lot of new bullish sentiment could have built up at the wrong time. 5. The Week Ahead It’ll be a difficult juggle for the EUR next week amid very important econ data and geopolitics. Monday’s open can be messy, as further sanctions on Russia over the weekend is a negative for the EUR but freezing assets from the CBR could mean less chance of dumping EUR reserves to prop up the RUB. Also keep USD liquidity squeezes in mind as a big drain on USD liquidity could see the Fed opening up swaps and could end up pressuring the USD & supporting the EUR. On the data side there will be a lot of focus on Wednesday’s HICP print. The upward surprise in Jan’s HICP was enough to see unanimous concern among the GC according to Pres Lagarde. This past week, ECB’s Lane said the Ukraine crisis presents a big risk to much higher inflation for 2022, and that comes amid already much steeper upwards projections to staff forecasts. Thus, an upward surprise to this week’s data would put more pressure on the ECB to go ahead with a possible policy recalibration at the upcoming March meeting and should be a positive input for the EUR (despite the geopolitical risks). Market implied rate expectations have dropped to just above 30bsp, which means an upside surprise in price pressures can spark some higher repricing. With so many negatives priced into the EUR over the past few 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. 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. 5. The Week Ahead The past week, our expectations for downside risks for Sterling materialized amid geopolitical risks but the bigger focus for us was the BoE’s hearing where the MPC struck a similar dovish tone like we saw during the press conference of the February policy decision. With close to 6 hikes already priced (possible peak hawkishness scenario), and growth expected to slow, and the BoE looking to stick to their recent dovish tones, that means the med-term risks for downside has become greater than that of further upside, and as a result we have decided to shift our currency bias to neutral from weak bullish . In the week ahead, there is very little important data on the schedule, but we do have speeches from BoE’s Saunders and Mann to watch out for. Apart from that, the ongoing geopolitical situation will be important to watch as last week’s sanctions saw outsized pressure on Sterling compared to the likes of the EUR. However, if the RUB sees enough downside and sparks deeper financial stability concerns then all European currencies are expected to be sensitive to the fallout and something to remember for the week ahead.
by thunderpips
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. 5. The Week Ahead The past week, our expectations for downside risks for Sterling materialized amid geopolitical risks but the bigger focus for us was the BoE’s hearing where the MPC struck a similar dovish tone like we saw during the press conference of the February policy decision. With close to 6 hikes already priced (possible peak hawkishness scenario), and growth expected to slow, and the BoE looking to stick to their recent dovish tones, that means the med-term risks for downside has become greater than that of further upside, and as a result we have decided to shift our currency bias to neutral from weak bullish. In the week ahead, there is very little important data on the schedule, but we do have speeches from BoE’s Saunders and Mann to watch out for. Apart from that, the ongoing geopolitical situation will be important to watch as last week’s sanctions saw outsized pressure on Sterling compared to the likes of the EUR. However, if the RUB sees enough downside and sparks deeper financial stability concerns then all European currencies are expected to be sensitive to the fallout and something to remember for the week ahead. 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. Even though the USD remains a net-long across large specs, leveraged funds and asset managers, it seems the EUR’s attractiveness has continued to grow and could mean more downside for the USD unless the Fed surprises even more hawkish, and the ECB stays dovish. Also keep safe haven flows in mind as the current geopolitical tensions does add another layer of complexity to the USD. 4. The Week Ahead Busy week ahead on the data front, with the ISM Manufacturing and Services, ADP national employment and of course the big one with NFP coming up on Friday. The recovery in recent data (Retail Sales & Industrial Prod) suggests a very similar covid bounce like we saw with Delta, and that point to a possible similar bounce in the ISM data this week. However, it’s important to keep in mind the growth trend is still tilted lower for the rest of 2022. Moving on to the jobs data, even though the headline ADP and NFP prints will as always garner attention, the bigger focus for the jobs data will arguably fall to the inflation prints like the Average Hourly earnings. The question is whether the data could beat enough to see markets pricing back a 50bsp hike, as probabilities for a 50bsp hike was sitting at just 26% on Friday. For now, it seems unlikely that a bigger than expected beat would seal the deal for a 50bsp move, especially given the recent uncertainty thrown into markets with Russia’s invasion of Ukraine. A lot can happen at the open given the weekend’s reports that the West has banned certain Russian banks from SWIFT and has also said they will freeze assets from the CBR. Given the volatility this could create in EM with the RUB. However, even though the geopolitical situation will be important for the safe haven USD, with the US and the Fed being more isolated, the data will still be important, with the bigger reaction expected on a miss as opposed to a beat, given the amount of hawkishness already priced for the Fed. Just be mindful that the ban on SWIFT could create a slowdown in USD availability which could see the Fed being forced to open up additional swap lines to ease demand, that was a negative when announced in 2020 and can be a trigger for lots of downside (with the EUR a possible big benefactor if that’s the case).
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GBP JPY - 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 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. JPY FUDNAMENTAL BIAS: BEARISH 1. Monetary Policy No surprises from the BoJ at their Jan meeting. Despite some source reports which surprisingly suggested that the bank was starting to debate how soon a rate increase can be signalled, Governor Kuroda put that speculation to rest by stressing that the BoJ is not considering any hikes or tweaks to the current policy easing. The bank noted that risks to the inflation outlook are roughly balanced but risks to growth outlook is skewed to the downside. The Governor didn’t comment on specific FX levels, but said the current weak JPY is not bad for the economy. He also explained that it is not appropriate to stop the temporary inflation increases they are seeing by using monetary policy and that it’s too early to debate an exit from their current policy stance. The bank said that Japan will continue its expansive monetary policy unlike other G7s, and they are actively monitoring the economic impact from COVID-19 and won’t hesitate to add easing if necessary. 2. Safe-haven status and overall risk outlook As a safe-haven currency, the market's risk outlook is the primary driver. Economic data rarely proves market moving, and although monetary policy expectations can be market-moving in the short-term, safe-haven flows are typically the more dominant factor. The market's overall risk tone has improved considerably following the pandemic with ongoing monetary and fiscal policy support paved the way for markets to expect a robust global economic recovery. However, as the Fed and other banks start to normalize, we do need to remember that it means those fiscal and monetary policy support are being reduced, which could mean a lot more volatility for markets in the weeks and months ahead. Even though that doesn’t mean our med-term bias for the JPY has changed, it simply means that we should expect more risk sentiment ebbs and flows this year, and the heightened volatility can create some fantastic 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 yield differentials, more specifically in strong moves in US10Y. However, 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 type of 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 with US02Y likely pushing higher while US10Y underperform. In this environment we do see some 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 the USD of course. 4. CFTC Analysis Even though the JPY’s med-term outlook remains bearish, the big net-shorts for both large specs and leveraged funds always increases odds of punchy mean reversion when risk sentiment deteriorates. Thus, equities & US10Y 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, with further escalations in tensions between Russia and Ukraine expected to see safe haven inflows into the JPY, and any de-escalations expected to see safe haven outflows from the JPY. Apart from risk sentiment, we’ll also be keeping a close eye on US10Y. With risk sentiment still shaky, and prospects of the economy being unscathed by the Fed’s hawkish plans looking slim right now, we still expect long-end yields to push lower in the weeks ahead, and if that happens it should prove supportive for the JPY (of course keeping equities in mind as well as downside in yields but upside in equities would see both a push and pull effect on the JPY).
by thunderpips
1
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