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EUR GBP - FUNDAMENTAL ANALYSISCurrency Markets on UK Recession Watch - There has been high volatility in the Pound to Euro (GBP/EUR) exchange rate during the past week. GBP/EUR posted a fresh 9-month best conversion at 1.1735 early in the week before a slide to below 1.1600 after the Bank of England (BoE) policy decision. Weaker than-expected Euro-Zone data helped strengthen GBP/EUR to 1.1700 on Friday. Both the ECB and Bank of England will want to maintain a hawkish policy stance. Evidence on economic strength is likely to be a key element in the short term. Aggressive BoE Action to Fight Inflation The latest UK inflation data recorded an unchanged headline rate of 8.7% while the core rate increased to 7.1% from 6.8%. The Bank of England (BoE) increased interest rates by 50 basis points to 5.0% this week as it looks to bring inflation under control. The UK 2-year yield has increased to a fresh 15-year high of 5.15%. Following the BoE move, investment banks have raised their rate forecasts. JP Morgan, for example, now expects that rates will be increased to 5.75%. The bank added; “This new policy rate level in our forecast recognizes that there is a dynamic between wage and prices that needs to be stopped and assumes the BoE will need to hike further in order to trigger a significant weakening in the labour market.” High yields will provide an element of support to the Pound, especially with short-term yields comfortably above longer-term rates. According to ING; “From a currency perspective, a sharply inverted yield curve can work as a positive factor for a reserve currency like the pound (as opposed to growth-sensitive currencies). We suspect that a rebound to 0.88 in EUR/GBP(1.1360 for GBP/EUR) will need to be delayed on the back of that.” Commerzbank is still not confident that the BoE has got a grip on inflation. According to the bank; “So the impression remains of a central bank that was too slow in starting to hike its key rate and moved to smaller rate steps too early, even signalling a possible pause. The BoE seems to be chasing inflation developments rather than fighting them with an active monetary policy, which is damaging for Sterling. It added; “As we do not believe that the BoE will suddenly take a different approach, we remain sceptical for Sterling.” UK Economic Fears Liable to Increase The latest UK PMI business confidence data recorded a decline in the manufacturing index to a 6-month low of 46.2 for June from 47.1 previously and below consensus forecasts of 46.8. The services-sector index also retreated to a 3-month low of 53.7 from 55.2 and below expectations of 54.8. Chris Williamson, Chief Business Economist at S&P Global Market Intelligence commented; “while the June survey reveals the economy to be cooling as a result of higher interest rates, the stubbornly elevated price growth in the service sector suggests the Bank of England will consider its fight against inflation as still a work in progress. However, such rate hikes will clearly add further to the likelihood of a recession later in the year, which is looking increasingly inevitable as collateral damage in the fight against inflation.” According to TD Securities; “Rates are reaching a point where they will have a negative impact on growth, which is feeding back into a weaker currency.” The bank expects that the economy will suffer; “We now expect three more 25 bps hikes in Bank Rate, taking it to 5.75% in November. As policy tightening catches up to the real economy, a recession is likely to emerge this winter, with cuts coming in Bank Rate from February 2024.” It adds; “The 50 bps hike plays well into our EUR/GBP topside view, where we could see a push towards the top-end of the recent range back near 0.89 in the months ahead.” (1.1235 for GBP/EUR). Euro-Zone Unease Intensifies The latest Euro-Zone PMI business confidence data recorded a decline in the manufacturing index to a 37-month low of 43.6 for June from 44.8 the previous month and compared with an unchanged reading for the month. The services-sector index also retreated to a 5-month low of 52.4 for the month from 55.1 previously and well below expectations of 54.5. The data will reinforce near-term unease surrounding the Euro-Zone outlook. At this stage, the ECB has maintained a hawkish policy stance and is expecting to increase interest rates further at the July policy meeting. As Euro-Zone inflation declines, it is likely that the real interest rates will increase and potentially move into positive territory. If UK inflation is stubborn, real UK rates will remain low and potentially negative. In this context, Danske Bank notes; “On balance, we continue to see relative rates as a positive for EUR/GBP from here, which is one of several reasons behind our fundamental predisposition of buying EUR/GBP dips. We highlight that whether the aggressive BoE market pricing will subside or inflation continues to surprise, we see it as headwinds for GBP.” It has a 6-month GBP/EUR forecast of 1.1360. Berenberg still has an end-2023 GBP/EUR forecast of 1.1765.
Long
by thunderpips
17
EUR GBP - FUNDAMENTAL ANALYSISCurrency Markets on UK Recession Watch - There has been high volatility in the Pound to Euro (GBP/EUR) exchange rate during the past week. GBP/EUR posted a fresh 9-month best conversion at 1.1735 early in the week before a slide to below 1.1600 after the Bank of England (BoE) policy decision. Weaker than-expected Euro-Zone data helped strengthen GBP/EUR to 1.1700 on Friday. Both the ECB and Bank of England will want to maintain a hawkish policy stance. Evidence on economic strength is likely to be a key element in the short term. Aggressive BoE Action to Fight Inflation The latest UK inflation data recorded an unchanged headline rate of 8.7% while the core rate increased to 7.1% from 6.8%. The Bank of England (BoE) increased interest rates by 50 basis points to 5.0% this week as it looks to bring inflation under control. The UK 2-year yield has increased to a fresh 15-year high of 5.15%. Following the BoE move, investment banks have raised their rate forecasts. JP Morgan, for example, now expects that rates will be increased to 5.75%. The bank added; “This new policy rate level in our forecast recognizes that there is a dynamic between wage and prices that needs to be stopped and assumes the BoE will need to hike further in order to trigger a significant weakening in the labour market.” High yields will provide an element of support to the Pound, especially with short-term yields comfortably above longer-term rates. According to ING; “From a currency perspective, a sharply inverted yield curve can work as a positive factor for a reserve currency like the pound (as opposed to growth-sensitive currencies). We suspect that a rebound to 0.88 in EUR/GBP(1.1360 for GBP/EUR) will need to be delayed on the back of that.” Commerzbank is still not confident that the BoE has got a grip on inflation. According to the bank; “So the impression remains of a central bank that was too slow in starting to hike its key rate and moved to smaller rate steps too early, even signalling a possible pause. The BoE seems to be chasing inflation developments rather than fighting them with an active monetary policy, which is damaging for Sterling. It added; “As we do not believe that the BoE will suddenly take a different approach, we remain sceptical for Sterling.” UK Economic Fears Liable to Increase The latest UK PMI business confidence data recorded a decline in the manufacturing index to a 6-month low of 46.2 for June from 47.1 previously and below consensus forecasts of 46.8. The services-sector index also retreated to a 3-month low of 53.7 from 55.2 and below expectations of 54.8. Chris Williamson, Chief Business Economist at S&P Global Market Intelligence commented; “while the June survey reveals the economy to be cooling as a result of higher interest rates, the stubbornly elevated price growth in the service sector suggests the Bank of England will consider its fight against inflation as still a work in progress. However, such rate hikes will clearly add further to the likelihood of a recession later in the year, which is looking increasingly inevitable as collateral damage in the fight against inflation.” According to TD Securities; “Rates are reaching a point where they will have a negative impact on growth, which is feeding back into a weaker currency.” The bank expects that the economy will suffer; “We now expect three more 25 bps hikes in Bank Rate, taking it to 5.75% in November. As policy tightening catches up to the real economy, a recession is likely to emerge this winter, with cuts coming in Bank Rate from February 2024.” It adds; “The 50 bps hike plays well into our EUR/GBP topside view, where we could see a push towards the top-end of the recent range back near 0.89 in the months ahead.” (1.1235 for GBP/EUR). Euro-Zone Unease Intensifies The latest Euro-Zone PMI business confidence data recorded a decline in the manufacturing index to a 37-month low of 43.6 for June from 44.8 the previous month and compared with an unchanged reading for the month. The services-sector index also retreated to a 5-month low of 52.4 for the month from 55.1 previously and well below expectations of 54.5. The data will reinforce near-term unease surrounding the Euro-Zone outlook. At this stage, the ECB has maintained a hawkish policy stance and is expecting to increase interest rates further at the July policy meeting. As Euro-Zone inflation declines, it is likely that the real interest rates will increase and potentially move into positive territory. If UK inflation is stubborn, real UK rates will remain low and potentially negative. In this context, Danske Bank notes; “On balance, we continue to see relative rates as a positive for EUR/GBP from here, which is one of several reasons behind our fundamental predisposition of buying EUR/GBP dips. We highlight that whether the aggressive BoE market pricing will subside or inflation continues to surprise, we see it as headwinds for GBP.” It has a 6-month GBP/EUR forecast of 1.1360. Berenberg still has an end-2023 GBP/EUR forecast of 1.1765.
Long
by thunderpips
7
EUR GBP - FUNDAMENTAL ANALYSISBNP Paribas 2023-2024 Exchange Rate Forecasts Euro Can Secure Capital Inflows The bank maintains a broadly constructive stance towards the Euro. It expects that the ECB rate hikes and quantitative tightening will encourage foreign inflows and domestic repatriation. Although BNP expects that energy prices will strengthen, it does not expect a return to 2021 levels. Overall, the bank expects gradual EUR/USD gains over the medium term. Pound Vulnerable on Weak UK Fundamentals BNP expects that the Bank of England (BoE) will have to increase interest rates further, but does not consider that market expectations of rate hikes to 5.75% will be met which will sap currency support. It also considers that the BoE is in a no-win situation. Even if the central bank continues to raise rates, BNP also expects that market confidence in Sterling would suffer to the perception of a long-term inflation problem. It adds; “Both of these developments would be GBP-negative, in our view.” The bank also maintains a negative stance on UK fundamentals. It adds; “We expect GBP to remain structurally weak due to UK growth underperforming its peers, remaining below-trend, and its persistent current-account deficit that requires foreign funding.” Overall, BNP expects that the Euro to Pound (EUR/GBP) exchange rate will trade close to 0.88 during the forecast period.
Long
by thunderpips
3
GBPUSD Approaching the weekly trend ahead of CPI data.Dear Traders, I'd like to bring your attention to the current market conditions of GBPUSD. It is currently experiencing a downtrend but is undergoing a correction phase. The price is approaching a significant resistance zone at 1.26100, which coincides with the major trend. This area is worth monitoring closely. In addition, it's crucial to take into account the upcoming Consumer Price Index (CPI) release this week. This economic indicator is expected to have a substantial impact on the strength of the US dollar and may provide insights into the future actions of Fed Chair Powell. If the CPI figures are higher than anticipated, it suggests that the Fed may need to continue raising interest rates, which could strengthen the dollar further. On the other hand, if the CPI falls below expectations, it is more likely that the Fed will postpone any rate hikes in their next monetary policy decision. Remember to prioritize risk management and trade with caution. Best regards, Joe
Short
by JoeChampion
43
EUR GBP - FUNDAMENTAL ANALYSIS2023-2024 Exchange Rate Forecasts From MUFG Pound Sterling: BoE Forecasting Errors Increase GBP Risk Profile MUFG has significant reservations surrounding the Pound outlook. As far as inflation is concerned, it sees significant risks over the medium-term implications. It notes; “The sense that the UK has a bigger inflation problem is creating downside risks for the pound that may see a period of underperformance if the evidence continues to suggest this.” MUFG also notes problems with the bank’s model failure to forecast higher inflation. According to the bank; “BoE Governor Bailey stated that it was no longer following the information from the model which will only exacerbate risks of policy errors and the potential for a bigger inflation problem in the UK.” Overall, MUFG expects a mixed outlook for the Pound, especially as it expects UK yields will decline amid weak credit demand and evidence of weaker employment. It expects the downgrading of BoE rate expectations will hurt the Pound against the Euro with EUR/GBP forecast at 0.90 in 12 months.
Long
by thunderpips
6
GBP - 1.24 Lower Next?!GBP - 1.24 Next?! CME:6B1! FX:GBPUSD GBPUSD - 1.24 Next! We've had a great run, I'd still be buying longer term dips on GBP - However, for now I feel a pull back is due and this is great opportunity for us traders to take opportunities of the bull and bear side! Overall pattern, wedge - We've broken to down side the first area of interest to me is 1.24/ 1.23 high areas and the next would be 1.22 areas! If we are to close above 1.25 i'd be re thinking this plan... Trade Journal (Not Financial Advice)
CME:6B1!
by Trade_Journal
3
GBP USD - FUNDAMENTAL ANALYSISThe US dollar (USD) has staged a comeback against the Pound Sterling (GBP) and Euro (EUR) over the past few weeks, but foreign exchange analysts at MUFG still consider that medium-term depreciation is the most likely outcome. The bank considers that the US Dollar exchange rates are overvalued, especially against the Japanese Yen (JPY) and net capital flows are likely to be less supportive. It also considers that the Euro-Zone and Chinese outlooks are more favourable, especially given that gas prices have declined sharply. MUFG also expects the Fed will cut rates before the ECB while the Bank of Japan will tighten policy. Monetary policy will inevitably be a key aspect. Although the immediate debate is still surrounding the potential for further interest rate hikes, MUFG expects the debate will switch to the potential for a Federal Reserve policy reversal as the US economy deteriorates. According to the bank; “ The Fed will be cutting rates prior to the ECB. Inflation in Europe is stickier due to energy and food prices and the Fed will have much more scope to respond once economic conditions in the US weaken further from here. ” After an extended period of quantitative easing, MUFG also expects that the ECB quantitative tightening programme through bond sales will put upward pressure on longer-term yields and support the Euro. Global Growth Trends Still Favourable MUFG notes that previous forecasts of an extended UK recession have been revised away and the Euro-Zone has also been resilient. As far as China is concerned it adds; “ Recent data has disappointed, in particular on the manufacturing side of the economy, but pent-up domestic demand likely has further to run which will act as a source of global growth this year. ” Although market sentiment has been more cautious, it expects overall growth dynamics will not favour the US dollar as Asia rebounds. A related issue is the key area of energy prices. The jump in energy costs last year was a key reason why agencies such as the IMF and central banks were so negative surrounding the European economic outlook last year. Gas prices have, however, declined sharply with a slump from over 90% from the peak and close to 2-year lows. Gas storage levels are also at very high levels in historic terms ang MUFG expects storage levels will hit 100% in the summer. In this context, lower gas prices will improve the growth outlook and strengthen the trade outlook. The Bank of Japan has resisted tightening monetary policy, but MUFG notes that the economy is strengthening and inflation has increased. According to MUFG; “ we maintain that YCC has passed its sell-by-date and while it remains unclear whether price stability at 2% can be achieved, the BoJ will still move to widen the band or scrap it completely. ” The bank expects that the yen will strengthen sharply if the Bank of Japan lets yields increase which will drag the dollar lower. Negative Long-Term US Debt Dynamics The immediate focus is on the US debt ceiling and political brinkmanship ahead of early June when the US Treasury will run out of cash. These short-term dynamics are mixed for the US dollar with concerns over the economy, but potential defensive support if risk appetite deteriorates. MUFG focusses on the underlying debt dynamics and the potentially unsustainable situation. MUFG notes that the budget deficit in the first seven months of fiscal 2022/23 amounted to $928bn from $360bn the previous year. On a longer-term view, in considers the debt dynamics will be potentially negative for the US currency. De-Dollarization Hype Although MUFG considers that the de-dollarization rhetoric is rather more hype than substance, there is still the risk that long-term confidence in the dollar will decline with scope for some further increase in Euro and yuan central bank reserve holdings. MUFG also notes that there has been strong central bank gold buying and it expects this trend will continue. The bank also sees a risk that the US use of financial sanctions will discourage official players to hold reserves in the dollar due to fears over asset freezes. MUFG notes that there has been an extended period of Wall Street out-performance, but expects this trend will reverse and net capital flows will be less supportive for the US currency. It adds; “ We see a renewed drop in US equities as investors position more assertively for US recession. ” Japan’s Nikkei 225 index has posted a 32-year high and the German DAX index has hit a record high. It also sees scope for a sustained rebound in emerging-market equities after an extended period of under-performance. It adds; “ A reversal of the current period of deep EM undervaluation poses downside risks for the USD in the medium-term. ” Long-Term Peak, Dollar Overvalued MUFG notes that the dollar last year reached the highest level for over 20 years. It also notes that at the October peak the currency index was 2 standard deviations stronger than the average over the past 40 years. It adds; “ Similar extreme levels of USD overvaluation were last recorded in the early 2000’s and mid-1980’s and subsequently proved to be long-term bearish turning points for the USD. ” The bank also considers that the dollar is substantially overvalued, especially against the yen, increasing the likelihood of mean reversion.
Long
by thunderpips
2
GBP USD - FUNDAMENTAL ANALYSISIn a fresh look at the outlook for the Pound to Dollar (GBP/USD) exchange rate, Jane Foley, Senior FX Strategist at Rabobank, draws attention to a potential slide for the sterling. "We see scope for cable to drop to 1.22 on a 3-month view," says Foley, Senior FX Strategist at Rabobank. This outlook indicates a drop in the value of the pound against the dollar by more than one per cent from its current position. The basis of this outlook, according to Foley, appears to be linked to market positioning and the capability of both the pound and the euro to handle impending disappointing economic data. The narrative surrounding these factors suggests a period of increased volatility for the pound, especially against its major counterparts. A surge in gilt yields and revived anxieties around UK's fiscal management have the potential to disrupt Pound Sterling (GBP)'s recent strength against the US dollar (USD), according to the analyst. This is in light of market expectations of additional Bank of England (BoE) rate hikes, which have failed to solidify GBP/USD's initial gains against major currencies. "Yesterday’s headlines that gilt yields had soared back towards the levels hit after the disastrous mini-budget last September was unsettling for investors and for the pound," says Foley. Further, despite market expectations of BoE rate hikes, "the Pound failed to hold initial gains against either the USD or the EUR," Foley adds. Q1 Performance and Market Positioning of the Sterling In terms of the sterling's performance, the currency had a strong showing in the first quarter. Data from this period suggested that the UK economy was outperforming expectations, earning the sterling the title of the best-performing G10 currency. Despite these positive indicators, Foley posits that the UK's growth outlook remains far from robust. "The Pound was the best performing G10 currency in Q1 as a stream of UK data suggested that the economy was performing better than expected," says Foley. However, Foley points out that, "The UK growth outlook is still far from strong." Market positioning towards the sterling has shown a shift in Q1. Speculators have moved from short GBP positions to net long GBP positions. However, recent data showing stronger-than-expected UK CPI inflation has reintroduced fears of a potential recession. BoE Policy and the Potential of a UK Recession Looking ahead, the BoE's policy decisions might bear heavily on the GBP/USD exchange rate. The possibility of the BoE raising the Bank rate to 5.0% or even higher is under consideration. This raises a serious question: would the BoE need to push the UK economy into recession to restore CPI inflation to its 2% target? "The risk that the BoE will have to raise the Bank rate to 5.0% or maybe higher has clearly increased," says Foley. She goes on to add, "The first is whether the Bank will have to push the UK economy into recession to restore CPI inflation to its 2% target." Impact of Brexit on the Pound Sterling The long-term implications of Brexit are also critical to understanding Pound Sterling's position. The UK's high inflation rate, which is the highest in the G7, alongside other fundamental weaknesses, have caused some to question whether these issues stem from the aftermath of Brexit. "The UK has the highest inflation rate in the G7, a soft growth outlook, a weak record on investment and productivity growth in recent years," Foley points out. She continues, "Inevitably, this has raised questions about how much of this is related to Brexit." Moreover, the sterling's decline to its pre-2016 Brexit referendum levels appears to have impacted price levels in recent years, with changes in post-Brexit trading arrangements possibly causing further economic turbulence. "GBP has never returned to its pre-2016 Brexit referendum levels which likely had had an impact of the price level in recent years," says Foley. UK’s Economic Sensitivities and Recession Risks The UK's particular economic sensitivities may also be playing a role in the inflation scenario. For instance, the UK's high dependency on gas and small agricultural sector could increase its sensitivity to energy crises and food supply shortages. "The UK has little gas storage and a high level of dependency on gas which would have raised its sensitivity to last year’s energy crisis. It also has a very small agricultural sector which has likely increased its sensitivity to supply shortages of food," Foley highlights. These factors, coupled with the risk of higher interest rates, brings the possibility of recession back into focus. According to Foley, speculators who took long GBP positions recently may have acted hastily, considering these lingering threats. "Either way the risk of higher interest rates means that recession risks are back in the sights, just as forecasters such as the IMF had indicated that the UK would avoid this scenario this year," Foley mentions. Comparatively, Kit Juckes, Global Head of FX Strategy at Société Générale Juckes expects depreciation of Pound Sterling (GBP) given the UK's high current account deficit and the global interest rate environment. On the other hand, Shaun Osborne, Chief FX Strategist at Scotiabank envisages Pound Sterling (GBP) potentially benefiting from higher yields in the short term, but warns of a probable depreciation due to the UK's fundamental weaknesses.
Long
by thunderpips
1
Pound Weakness After U.K. InflationAs a young trader (21 years old), I see my trading style as more of an art than a science. I don't understand patterns, and I don't use technical analysis. I am a macro trader. I take information from various sources (WSJ, Twitter, Investing.com, Trading Economics, ect.), and my instincts kick in. I understand where assets should be moving on data releases. The U.K. pound has been on a monster rally in the past month and change. Expectations for the U.S. Federal Reserve to pause rates, with some saying cuts later into the year, has simmered the red hot U.S. dollar. The Bank of England on the other hand, is expected to continue hiking rates in the midst of the highest inflation in recent memory. When yields rise on the U.K. Gilt, that makes their debt more attractive to foreign investors, making their currency appreciate against the greenback. This past Wednesday morning, at 1:00AM (CST), U.K. inflation came in hotter than consensus estimates (8.7% actual versus 8.2% consensus), as did core inflation (6.8% actual versus 6.2% consensus). I would have expected the pound to appreciate against other currencies as their currency becomes more valuable as Gilt yields rise. The opposite happened, FXB has now fallen two consecutive days. I was building up my short position against the pound, but we must remember U.S. data sets can affect currencies across the globe. I exited my FXB position before the open today with the intention of hopping back in after said release. Tomorrow (5/26), before the bell, we have U.K. retail sales MoM, U.S. durable goods orders MoM, core PCE prices MoM, personal spending MoM, and personal income MoM. There's no telling where any of this data will land us, especially the U.S. data, and that is why I closed out of my position today. As far as I can see, we have no upcoming U.K data that would affect the pound. That is why I'm confident in this trade. The market will have time to digest what has transpired, and my hope is that it will come to the same conclusion that I have. I have full intentions of getting back into my trade after this data is priced back into the stock. The most important lesson I've learned in my very young trading career is protecting your capital and letting the trades come to you, don't look for them, they will find you ;) fyi - this is my first writing and any feedback is appreciated! Thanks
Short
by UnknownUnicorn22408063
GBP USD - FUNDAMENTAL ANALYSISForeign exchange forecasters at ING expect that the US Dollar can maintain a firm tone in the short term. It does, however, expect notable deterioration over the second half of the year which will trigger rate cuts. The bank expects that yield spreads will move against the US Dollar with the Bank of England resisting any rate cuts. The bank expects that the Pound to Dollar (GBP/USD) exchange rate will strengthen to 1.33 at the end of 2023. US Economy to Deteriorate ING considers that the dollar could hold a firm tone in the short term, especially with the Fed maintaining a hawkish tone, but it questions whether this stance is sustainable. According to ING; We argue that the sustainability of this kind of dollar trend strongly relies on hard data confirming price pressure remain elevated and the US economic outlook stable.” It adds; “This may be a story for the near-term, where the dollar can still find some support, but we see the second half of the year as the period where evidence of sharply slowing US economic activity will force large cuts by the Fed and cause a rapid dollar depreciation.” ING adds; “Our team forecasts that they are enough to curtail the tightening cycle and prompt 100bp of easing in the fourth quarter.” Yield Spreads will Underpin Pound Dollar (GBP/USD) Exchange Rate ING is still cautious over the Pound outlook, especially as it considers that market expectations surrounding Bank of England interest rates are too high. Overall, ING expects that BoE rates have peaked at 4.50% and an eventual reassessment of BoE expectations will be an important headwind for the Pound. Nevertheless, the bank expects that the BoE will resist rate cuts until at least the second quarter of 2024. In this context, it expects that BoE rates will be 25 basis points above US Fed Funds rates by the end of 2023 and the differential will widen by 125 basis points by the end of the first quarter of 2023. ING expects widening rate differentials will be crucial for currency markets with the dollar losing ground and GBP/USD heading above 1.30. JP Morgan has dropped its negative dollar bias at this stage and does not expect that the US currency will lose traction later in the year. It adds; “Global growth is shifting at the margins towards a less-bearish USD backdrop. In this context, it adds; “Growth models have neutralized USD shorts.” JP Morgan forecasts that the Pound US Dollar exchange rate will decline to 1.17 at the end of 2023.
Long
by thunderpips
3
GBP USD - FUNDAMENTAL ANALYSISForeign exchange forecasters at ING expect that the US Dollar can maintain a firm tone in the short term. It does, however, expect notable deterioration over the second half of the year which will trigger rate cuts. The bank expects that yield spreads will move against the US Dollar with the Bank of England resisting any rate cuts. The bank expects that the Pound to Dollar (GBP/USD) exchange rate will strengthen to 1.33 at the end of 2023. US Economy to Deteriorate ING considers that the dollar could hold a firm tone in the short term, especially with the Fed maintaining a hawkish tone, but it questions whether this stance is sustainable. According to ING; We argue that the sustainability of this kind of dollar trend strongly relies on hard data confirming price pressure remain elevated and the US economic outlook stable.” It adds; “This may be a story for the near-term, where the dollar can still find some support, but we see the second half of the year as the period where evidence of sharply slowing US economic activity will force large cuts by the Fed and cause a rapid dollar depreciation.” ING adds; “Our team forecasts that they are enough to curtail the tightening cycle and prompt 100bp of easing in the fourth quarter.” Yield Spreads will Underpin Pound Dollar (GBP/USD) Exchange Rate ING is still cautious over the Pound outlook, especially as it considers that market expectations surrounding Bank of England interest rates are too high. Overall, ING expects that BoE rates have peaked at 4.50% and an eventual reassessment of BoE expectations will be an important headwind for the Pound. Nevertheless, the bank expects that the BoE will resist rate cuts until at least the second quarter of 2024. In this context, it expects that BoE rates will be 25 basis points above US Fed Funds rates by the end of 2023 and the differential will widen by 125 basis points by the end of the first quarter of 2023. ING expects widening rate differentials will be crucial for currency markets with the dollar losing ground and GBP/USD heading above 1.30. JP Morgan has dropped its negative dollar bias at this stage and does not expect that the US currency will lose traction later in the year. It adds; “Global growth is shifting at the margins towards a less-bearish USD backdrop. In this context, it adds; “Growth models have neutralized USD shorts.” JP Morgan forecasts that the Pound US Dollar exchange rate will decline to 1.17 at the end of 2023.
Long
by thunderpips
6
EUR GBP - FUNDAMENTAL ANALYSISThe Pound to Dollar (GBP/USD) exchange rate hit 12-month highs at 1.2675 on May 10th before a retreat to 1.2400 amid a dollar rebound. The Pound to Euro (GBP/EUR) exchange rate also hit 2023 highs close to 1.1550 before settling just above 1.1500. Pound Sterling: UK Outlook Half Full or Half Empty The UK fundamentals have improved over the past few months with an important boost from lower energy prices. Markets assume that the UK government is now embracing convention policies, increasing the importance of monetary policies. The latest UK GfK consumer confidence data recorded a further improvement to a 15-month high. Although the PMI data records a further contraction, there has been further expansion in services. The Bank of England now forecasts limited growth for 2023 and 2024 and abandoned its call of a shallow and extended recession. According to HSBC; “We no longer see a recession, and are now forecasting a rise of 0.4% in GDP in 2023. While this looks very poor compared with 2022’s 4.1%, in fact, it’s an acceleration.” The UK economy has, however, continued to under-perform in global terms. GDP is still 0.5% below the pre-covid peak and the worst performance in the G10 area. According to Rabobank; “It is our view that GBP’s gains since early March suggest that a lot of better news regarding UK fundamentals is already baked into the price. It added; “However, there is a strong distinction between ‘better’ and ‘strong’ fundamentals, and the UK continues to fall significantly short of the latter measure. According to MUFG; “UK Economic resilience helped by the improved energy terms of trade will help provide support and improve the UK’s trade and fiscal position which will further help provide support for the pound.” Bank of England Watching Inflation Very Closely The Bank of England (BoE) increased interest rates by a further 25 basis points to 4.50% at the May policy meeting. The headline inflation rate will inevitably decline sharply in the short term, primarily due to base effects. The latest inflation data will be published on May 24th. Consensus forecasts are for the headline rate to decline to 8.2% from 10.1% due to the fact that prices surged last April due to the increases in energy prices. The core rate is expected to be more stubborn with a small decline to 6.1% from 6.2%. The Bank of England is concerned that underlying inflation pressures will persist and potentially force further interest rate hikes. According to ING; “We continue to think that further tightening is unlikely. Wage disinflation can allow the BoE to pause at its 22 June meeting.” Goldman Sachs is more positive surrounding the Pound and more hawkish surrounding the BoE. It notes; “Despite being vulnerable to further bouts of risk-off, we remain constructive on Sterling, especially after the latest BoE meeting. Goldman adds; “While the Bank’s significant forecast upgrades to growth and inflation present a higher bar for the incoming data to beat, it also reflects the risk of higher inflation persistence that would require additional monetary policy tightening. Goldman expects that the BoE will raise rates to 5.0%. BNPP expects the medium-term BoE stance will be more dovish; “We remain of the view that the BoE will begin easing through Q1 2024, and at 3.5% we have a significantly lower end-2024 expectation on Bank Rate than the market (around 42bp higher). This adds to our view that there is a hawkish mispricing, especially as we move into the first quarter of next year.” To some extent, the BoE is caught in the middle of the ECB and Federal Reserve inflation battles. According to BNPP; “The ECB is the most hawkish in that it has retained a clear bias for further tightening. The Fed, by contrast, has more explicitly signalled a bias to pause. We think the BoE has a bias to tighten further, but it is by no means explicit.” ECB Committed to Inflation Fight The ECB increased interest rates by a further 25 basis points at the May meeting with the refi rate at 3.75%. The bank remains committed to battling inflation but has not provided guidance on further rate hikes. Nordea expects that the ECB will maintain a hawkish stance; “The economy has been holding up relatively well, the labour market remains hot and with services inflation still accelerating in April, the ECB is lacking evidence of inflation returning to target in a timely manner. We think the ECB will hike rates by 25bp in both June and July.” Nordea expects that GBP/EUR will weaken to 1.11 at the end of 2023 with a further slide to 1.08 at the end of 2024. Lower Gas Prices still Euro Positive MUFG notes; “After a period of strong outperformance, cyclical stocks are now underperforming again. Is this a reflection of bad news emerging or more a reflection of excessive optimism correcting back to a more realistic level? The bank points to a further decline in gas prices with European prices trading close to 2-year lows. In this context, it adds; “For now we would be in the latter camp with no real deterioration in the data or news flow to warrant a reassessment of the outlook.” MUFG expects lower energy prices will support the UK and Euro-Zone outlooks. In this context, it has an end-2023 GBP/EUR forecast of 1.14. Danske Bank expects that GBP/EUR will trade in a 1.14-1.15 range for much of the time due to similar fundamentals. Federal Reserve Stance Crucial The Federal Reserve increased interest rates by a further 25 basis points to 5.25% at the May policy meeting. The central bank did adjust its rhetoric and suggested that there may be a pause at the June meeting to assess developments. The Fed has consistently stated that interest rates are not expected to be cut this year. There is an important divergence in investment bank interest rate forecasts. Danske Bank expects that the Fed will not cut rates and that tighter financial conditions will underpin the dollar. It adds; “In line with market expectations, we think the Fed has delivered its last rate hike for this hiking cycle. However, we think the current 65bp of rate cuts priced for the rest of the year is too aggressive.” ING, however, expects the economy will deteriorate more sharply over the second half of the year and this will force the Fed to cut rates more aggressively. The bank expects that the Fed will cut interest rates by 100 basis points by the end of 2023. These interest rate expectations are crucial in determining dollar forecasts and the GBP/USD outlook. According to ING; “Based on our overall dollar view, GBP/USD should be heading higher this year. 1.33 is our target for year-end.” Danske Bank, however, expects the Federal Reserve stance and tightening financial conditions will undermine the Pound. It has a 6-month GBP/USD forecast of 1.20 and a 12-month forecast of 1.17. Rabobank has a 3-month GBP/USD forecast of 1.22.
Long
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GBP USD - FUNDAMENTAL ANALYSISThe Pound US Dollar (GBP/USD) exchange rate ended the weekly session on a high, quoted at 1.24453 as currency markets closed. EUR/USD had also risen on Friday, bolstered by weakness in the US Dollar, sparked by Fed Chair Powell's US banking sector comments, profit-taking and a correction. The Pound Sterling had been relatively resilient towards the end of the week but struggled to make any significant headway on the major crosses while US currency moves dominated global currency moves. The US Dollar posted notable gains and the Pound to Dollar (GBP/USD) exchange rate posted steady losses to fresh 3-week lows just below the 1.2400 level. A rally attempt faltered quickly on Friday with GBP/USD held close to 1.2400. Dollar Secures Further Gains ING noted; “GBP/USD is being driven almost entirely by the dollar leg at this stage, with comments by some Bank of England officials yesterday not having a sizeable FX impact.” The US Dollar (USD) exchange rates were able to make further headway on Thursday with three significant catalysts. The Philadelphia Fed manufacturing index recovered to -10.4 for May from -31.3 the previous month and stronger than consensus forecasts of -19.8, although new orders continued to contract. Inflation readings were mixed with a slightly faster rate of increases for prices paid while prices received edged lower at a faster rate. Companies are less optimistic over the outlook while pricing pressure are expected to be stronger. Markets noted the risk of sticky inflation pressures. US Initial jobless claims declined to 242,000 in the latest week from 264,000 previously and significantly below consensus forecasts of 254,000 while continuing claims were marginally lower at 1.80mn from 1.81mn previously. The data overall eased concerns surrounding a weaker economy. Dallas Fed President Logan stated that the central bank still has work to do to achieve price stability and she is concerned whether inflation is falling fast enough. She recognises the risk of tightening too far or too fast, but added that she considers the data at this time does not support skipping a rate hike at the June meeting. Although the data in coming weeks could show it is appropriate to pause, the evidence is not there yet. There was a repricing of interest rate expectations with Fed Funds rate futures indicating close to a 40% chance that there would be a further rate hike in June. Markets were also optimistic that the US would reach a deal on raising the debt ceiling. The Treasury will issue a very high volume of bonds if a deal is reached and US yields continued to move higher. Thierry Wizman, global FX and rates strategist at Macquarie commented; "It's pretty clear that some people were shorting the dollar as a hedge in anticipation of a crisis, but now with all the signals that we will find a resolution in the next few days, people are unwinding these positions so the dollar is strengthening." ING added; “It's hard to buck the dollar's bullish momentum now, as we also think some substantial squeezing of short USD positions can be behind the move.” According to MUFG; “if the US rates market continues to price a greater probability of a June hike, then further dollar gains over the short-term are likely.” Pound Sterling Unmoved by 15-Month High in UK Consumer Confidence The UK GfK consumer confidence index improved to –27 for May from –30 the previous month. This was in line with consensus forecasts and the strongest reading for 15 months. Consumers overall were more confident over personal finances and the wider economic outlook and all major sub-indices improved on the month. Joe Staton, GfK's client strategy director commented; "The overall trajectory this year is positive and might reflect a stronger underlying financial picture across the UK than many would think." He still noted an element of caution; "But everybody must hold on tight as it could still be a rocky ride out of these tough times." There are suspicions that the more positive UK outlook has been priced in. According to UoB; “GBP is likely to weaken further; a clear break of 1.2390 will suggest it could drop to 1.2350, as low as 1.2300.”
Long
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EUR GBP - FUNDAMENTAL ANALYSISForeign exchange analysts at BNP Paribas suggest the Euro (EUR) is tipped to rise against the Pound Sterling (GBP) in the near-term outlook. They believe that although UK data has been surprisingly strong recently, the underlying data strength remains subdued. "UK data have been surprisingly strong recently, but surprises tend to mean revert and underlying data strength remains subdued," says Oliver Brennan, FX Volatility Strategist at BNP Paribas. The analyst says, "Short-GBP positioning has also been a tailwind for GBP this year. But now that the client survey component of GBP positioning – a proxy of real-money positioning – has flipped from short to long, the positioning backdrop may be clean." Euro to Pound (EURGBP) Exchange Rate Tipped to Gain Although UK data has shown unexpected strength, the overall vigour of the data remains low. The analyst suggests a mean reversion tendency in the data surprises, hinting at a likely change of course. Additionally, the shift in GBP positioning from short to long suggests a fresh slate for the currency's performance, presenting an attractive opportunity for GBP short positions. The analyst also anticipates a singular additional hike at the Bank of England's forthcoming meeting, but sees the risk leaning more towards no change than a hawkish shift. He notes, "We expect one further hike at the Bank of England’s next meeting, but the risk is skewed more towards no change than towards a more-hawkish shift." However, Brennan emphasises the importance of timing in entering GBP short positions, given the positive GBP carry and the uncertainty surrounding the weakening economy's potential impact on the Bank of England's stance. "All the above factors support re-entering short GBP positions. But the combination of positive GBP carry and uncertainty around when a weakening economy may trigger a change in BoE stance means timing the weakness is as important as identifying the opportunity," Brennan adds. Brennan proposes a trade strategy that seeks to capitalise on this analysis by initiating a long EURGBP position via a digital call with a knockout above the recent range high. He explains, "We structure a long EURGBP position via a digital call with knockout above the recent range high. The knockout makes the structure less than half the equivalent single digital premium. Theta is positive at inception, and the structure decays shorter-GBP delta over time." Despite the current low level of implied volatility in Euro to Pound exchange rate (EURGBP), which is in line with most G10 FX pairs over the past month, Brennan cautions that it is not yet a cheap currency.
Long
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