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Today’s Notable Sentiment ShiftsGBP – The pound rallied off session lows on Monday and gilts bounced, as former finance minister Rishi Sunak won the race to become the next prime minister, giving investors a greater sense of confidence in the robustness of Britain’s finances. JPY – Japanese policymakers on Monday continued efforts to tame sharp yen falls, including through two straight markets days of suspected intervention, but ultimately failed to prop up the currency against persistent dollar strength.
by thunderpips
GBP USD - FUNDAMENTAL DRIVERSGBP FUNDAMENTAL OUTLOOK: WEAK BEARISH BASELINE A looming recession has been a key source of Pound weakness and has kept pressure on Sterling despite ongoing BoE hikes. But there is a new threat in focus. It seems the PM’s new fiscal plan, even though putting downside pressure on inflation and lowering growth risks, has drastically increased debt concerns. The disorderly move in Gilt yields were enough to force the BoE’s to step in with a limited (both in time and size) bond buying intervention plan. This has brought some calm to the angst but being limited won’t be enough to fix the fiscal concerns. It was another volatile week for Sterling as a result of the political uncertainty with the resignation of PM Truss. In the week ahead we only have S&P Global PMIs to watch on the data side, but all focus and attention will be on the leadership race to see which 2 or 3 candidates will meet the minimum 100 nominations to put their names in the hat. POSSIBLE BULLISH SURPRISES With recession the base assumption, any incoming data that surprises meaningfully higher could trigger relief for the GBP. With focus on stagflation, any downside surprises in CPI or factors that decrease inflation pressures are expected to support the GBP and not pressure it. If massive disorderly moves in Gilts forces the BoE to step up as the buyer of last resorts that could trigger GBP upside. If either Johnson or Sunak gets enough nominations that could ease some of the pressure from the Pound. POSSIBLE BEARISH SURPRISES With recession the base assumption, any material downside surprises in growth data can still trigger short-term pressure. With focus on stagflation, any upside surprises in CPI or factors that increase more inflation pressures are expected to weigh on the GBP and not support it. If we have big disorderly moves in Gilts but the BoE reiterates, they won’t intervene again that could put pressure on GBP. Any outcome that increases the likelihood of a general election should increase the risk premium in the GBP. BIGGER PICTURE The fundamentals for Sterling remain bearish . Recession is around the corner (might be in one already), and the new fiscal plan has failed to provide any assurances for investors (even though we think the negative reaction is not completely warranted). Even though flash PMI data will be important to watch as always, the political situation will likely overshadow the econ data as all eyes will be on the leadership race to see who will win the race as the UK’s next PM. USD FUNDAMENTAL OUTLOOK: BULLISH BASELINE With headline CPI above 8% and Core CPI seeing another acceleration in the SEP CPI data, the Fed is under pressure to continue hiking rates and ramping up QT. Markets expect another 75bsp hike in NOV and currently prices the terminal rate at 4.8%. The Fed is on a data-dependent (meeting-by-meeting) policy stance, meaning incoming growth, inflation and jobs data remains a key driver for short-term USD volatility where we expect a cyclical reaction with incoming data for both the USD and US10Y (good data expected to be supportive for the USD while bad data is expected to pressure the USD). Even though the USD had good composure for the majority of the week, the WSJ article, BoJ intervention and less hawkish comments from Fed’s Daly saw a strong push lower in the DXY . Given what has been priced for the USD and yields, the Daly comments and WSJ article gives us a short-term downside bias for the USD in the week ahead. POSSIBLE BULLISH SURPRISES With the Fed signalling a data dependent policy stance, we expect a cyclical reaction from the USD with incoming US data. Thus, extremely good growth, inflation or jobs data is expected to trigger short-term bullish reactions in the USD. If the cyclical outlook continues to weaken, the USD’s safe haven status still matters. Any incoming catalysts that increase deep recession fears and triggers strong moves lower in risk assets & bonds can trigger safe haven flows into the USD. With a lot priced for the Fed and USD, the bar is high for hawkish Fed surprises, but any aggressive Fed speak talking up a >5.0% terminal rate can trigger further USD upside. POSSIBLE BEARISH SURPRISES With the Fed signalling a data dependent policy stance, we expect a cyclical reaction from the USD with incoming US data. Thus, extremely bad growth, inflation or jobs data is expected to trigger short-term bearish reactions in the USD. If the cyclical outlook starts to improve, the USD’s safe haven status still matters. Any incoming catalysts that decrease deep recession fears and triggers strong moves higher in risk assets & bonds can trigger safe haven outflows out of the USD. With a lot priced in for the Fed and the USD, it won’t take much to disappoint on the dovish side. Any big concerns about growth from Fed speakers could trigger outflows. BIGGER PICTURE The fundamental outlook for the USD remains bullish as long as the Fed stays hawkish and cyclical concerns put pressure on risk sentiment. The data dependent stance from the Fed means that short-term data surprises can pull the USD either way and would be our preferred way of trading the Dollar right now. The econ calendar is slightly more exciting compared to last week with S&P Global PMI, Consumer Confidence and Core PCE, but after the Fed Daly comments and the WSJ article we suspect the USD could trade softer next week as the Fed enters their blackout period from Saturday.
by thunderpips
10
GBP CAD - FUNDAMENTAL DRIVERSGBP FUNDAMENTAL OUTLOOK: WEAK BEARISH BASELINE A looming recession has been a key source of Pound weakness and has kept pressure on Sterling despite ongoing BoE hikes. But there is a new threat in focus. It seems the PM’s new fiscal plan, even though putting downside pressure on inflation and lowering growth risks, has drastically increased debt concerns. The disorderly move in Gilt yields were enough to force the BoE’s to step in with a limited (both in time and size) bond buying intervention plan. This has brought some calm to the angst but being limited won’t be enough to fix the fiscal concerns. It was another volatile week for Sterling as a result of the political uncertainty with the resignation of PM Truss. In the week ahead we only have S&P Global PMIs to watch on the data side, but all focus and attention will be on the leadership race to see which 2 or 3 candidates will meet the minimum 100 nominations to put their names in the hat. POSSIBLE BULLISH SURPRISES With recession the base assumption, any incoming data that surprises meaningfully higher could trigger relief for the GBP. With focus on stagflation, any downside surprises in CPI or factors that decrease inflation pressures are expected to support the GBP and not pressure it. If massive disorderly moves in Gilts forces the BoE to step up as the buyer of last resorts that could trigger GBP upside. If either Johnson or Sunak gets enough nominations that could ease some of the pressure from the Pound. POSSIBLE BEARISH SURPRISES With recession the base assumption, any material downside surprises in growth data can still trigger short-term pressure. With focus on stagflation, any upside surprises in CPI or factors that increase more inflation pressures are expected to weigh on the GBP and not support it. If we have big disorderly moves in Gilts but the BoE reiterates, they won’t intervene again that could put pressure on GBP. Any outcome that increases the likelihood of a general election should increase the risk premium in the GBP. BIGGER PICTURE The fundamentals for Sterling remain bearish . Recession is around the corner (might be in one already), and the new fiscal plan has failed to provide any assurances for investors (even though we think the negative reaction is not completely warranted). Even though flash PMI data will be important to watch as always, the political situation will likely overshadow the econ data as all eyes will be on the leadership race to see who will win the race as the UK’s next PM. CAD FUNDAMENTAL OUTLOOK: NEUTRAL BASELINE Recent economic data has shown some deterioration for the growth outlook with three consecutive months of contraction in jobs, falling house prices, and a deceleration in both core and headline CPI . The previous jobs data gave the CAD a decent lift with its first jobs gain in four weeks, but at 21K jobs added, the job market is still down 92K jobs in the last four months. However, Governor Macklem gave no intention that the bank is getting close to the end of their hiking cycle. Even though he didn’t specifically say that the market’s expectations for the terminal rate is too low, his concerns about inflation saw STIR markets price in close to 88% probability for another 50bsp this upcoming week. With recent data we think the bank is close to taking a pause, but there is a risk that the bank doubles down this upcoming week and increasing the terminal rate which could provide short-term support for the CAD. POSSIBLE BULLISH SURPRISES Catalysts that see upside in Oil (deteriorating supply outlook, ease in demand fears, OPEC developments) could trigger bullish CAD reactions. As a risk sensitive currency, and catalyst that causes big bouts of risk on sentiment could trigger bullish reactions in the CAD. After the bank’s frontloading, there is a very high bar to surprise on the hawkish side for the BoC , but if the bank were to say they think STIR market pricing for the terminal rate is too low that can provide upside for the CAD. POSSIBLE BEARISH SURPRISES Catalysts that trigger downside in oil (deteriorating demand outlook, ease in supply shortage, less supply constraints, OPEC developments) could be a negative catalyst for the CAD as well. As a risk sensitive currency, and catalyst that causes big bouts of risk off sentiment could trigger bearish reactions in the CAD. With the bank 100bsp away from terminal rate expectations, and after recent hawkish comments, it won’t take much to surprise dovish, and any signals or comments from the BoC that they’ll pause hikes should be a negative for the CAD. BIGGER PICTURE The bigger picture outlook for the CAD remains neutral for now. Given the clear risks to the growth outlook (recent negative econ data and fall in oil prices) we remain cautious on the currency. Furthermore, with lots of good news priced, and with the BoC close to terminal rate expectations, our preferred way of trading the CAD is lower on clear short-term negative catalysts. The focus for the CAD will be firmly fixed on the BoC policy decision, to see what the bank has to say about their future path for rates. Whether they talk up the terminal rate or confirm suspicions that they could be nearing a pause.
by thunderpips
10
GBP USD - FUNDAMENTAL DRIVERSGBP FUNDAMENTAL OUTLOOK: WEAK BEARISH BASELINE A looming recession has been a key source of Pound weakness and has kept pressure on Sterling despite ongoing BoE hikes. But there is a new threat in focus. It seems the PM’s new fiscal plan, even though putting downside pressure on inflation and lowering growth risks, has drastically increased debt concerns. The disorderly move in Gilt yields were enough to force the BoE’s to step in with a limited (both in time and size) bond buying intervention plan. This has brought some calm to the angst but being limited won’t be enough to fix the fiscal concerns. It was another volatile week for Sterling as a result of the political uncertainty with the resignation of PM Truss. In the week ahead we only have S&P Global PMIs to watch on the data side, but all focus and attention will be on the leadership race to see which 2 or 3 candidates will meet the minimum 100 nominations to put their names in the hat. POSSIBLE BULLISH SURPRISES With recession the base assumption, any incoming data that surprises meaningfully higher could trigger relief for the GBP. With focus on stagflation, any downside surprises in CPI or factors that decrease inflation pressures are expected to support the GBP and not pressure it. If massive disorderly moves in Gilts forces the BoE to step up as the buyer of last resorts that could trigger GBP upside. If either Johnson or Sunak gets enough nominations that could ease some of the pressure from the Pound. POSSIBLE BEARISH SURPRISES With recession the base assumption, any material downside surprises in growth data can still trigger short-term pressure. With focus on stagflation, any upside surprises in CPI or factors that increase more inflation pressures are expected to weigh on the GBP and not support it. If we have big disorderly moves in Gilts but the BoE reiterates, they won’t intervene again that could put pressure on GBP. Any outcome that increases the likelihood of a general election should increase the risk premium in the GBP. BIGGER PICTURE The fundamentals for Sterling remain bearish . Recession is around the corner (might be in one already), and the new fiscal plan has failed to provide any assurances for investors (even though we think the negative reaction is not completely warranted). Even though flash PMI data will be important to watch as always, the political situation will likely overshadow the econ data as all eyes will be on the leadership race to see who will win the race as the UK’s next PM. USD FUNDAMENTAL OUTLOOK: BULLISH BASELINE With headline CPI above 8% and Core CPI seeing another acceleration in the SEP CPI data, the Fed is under pressure to continue hiking rates and ramping up QT. Markets expect another 75bsp hike in NOV and currently prices the terminal rate at 4.8%. The Fed is on a data-dependent (meeting-by-meeting) policy stance, meaning incoming growth, inflation and jobs data remains a key driver for short-term USD volatility where we expect a cyclical reaction with incoming data for both the USD and US10Y (good data expected to be supportive for the USD while bad data is expected to pressure the USD). Even though the USD had good composure for the majority of the week, the WSJ article, BoJ intervention and less hawkish comments from Fed’s Daly saw a strong push lower in the DXY . Given what has been priced for the USD and yields, the Daly comments and WSJ article gives us a short-term downside bias for the USD in the week ahead. POSSIBLE BULLISH SURPRISES With the Fed signalling a data dependent policy stance, we expect a cyclical reaction from the USD with incoming US data. Thus, extremely good growth, inflation or jobs data is expected to trigger short-term bullish reactions in the USD. If the cyclical outlook continues to weaken, the USD’s safe haven status still matters. Any incoming catalysts that increase deep recession fears and triggers strong moves lower in risk assets & bonds can trigger safe haven flows into the USD. With a lot priced for the Fed and USD, the bar is high for hawkish Fed surprises, but any aggressive Fed speak talking up a >5.0% terminal rate can trigger further USD upside. POSSIBLE BEARISH SURPRISES With the Fed signalling a data dependent policy stance, we expect a cyclical reaction from the USD with incoming US data. Thus, extremely bad growth, inflation or jobs data is expected to trigger short-term bearish reactions in the USD. If the cyclical outlook starts to improve, the USD’s safe haven status still matters. Any incoming catalysts that decrease deep recession fears and triggers strong moves higher in risk assets & bonds can trigger safe haven outflows out of the USD. With a lot priced in for the Fed and the USD, it won’t take much to disappoint on the dovish side. Any big concerns about growth from Fed speakers could trigger outflows. BIGGER PICTURE The fundamental outlook for the USD remains bullish as long as the Fed stays hawkish and cyclical concerns put pressure on risk sentiment. The data dependent stance from the Fed means that short-term data surprises can pull the USD either way and would be our preferred way of trading the Dollar right now. The econ calendar is slightly more exciting compared to last week with S&P Global PMI, Consumer Confidence and Core PCE, but after the Fed Daly comments and the WSJ article we suspect the USD could trade softer next week as the Fed enters their blackout period from Saturday.
by thunderpips
GBP CAD - FUNDAMENTAL DRIVERSGBP FUNDAMENTAL OUTLOOK: WEAK BEARISH BASELINE A looming recession has been a key source of Pound weakness and has kept pressure on Sterling despite ongoing BoE hikes. But there is a new threat in focus. It seems the PM’s new fiscal plan, even though putting downside pressure on inflation and lowering growth risks, has drastically increased debt concerns. The disorderly move in Gilt yields were enough to force the BoE’s to step in with a limited (both in time and size) bond buying intervention plan. This has brought some calm to the angst but being limited won’t be enough to fix the fiscal concerns. It was another volatile week for Sterling as a result of the political uncertainty with the resignation of PM Truss. In the week ahead we only have S&P Global PMIs to watch on the data side, but all focus and attention will be on the leadership race to see which 2 or 3 candidates will meet the minimum 100 nominations to put their names in the hat. POSSIBLE BULLISH SURPRISES With recession the base assumption, any incoming data that surprises meaningfully higher could trigger relief for the GBP. With focus on stagflation, any downside surprises in CPI or factors that decrease inflation pressures are expected to support the GBP and not pressure it. If massive disorderly moves in Gilts forces the BoE to step up as the buyer of last resorts that could trigger GBP upside. If either Johnson or Sunak gets enough nominations that could ease some of the pressure from the Pound. POSSIBLE BEARISH SURPRISES With recession the base assumption, any material downside surprises in growth data can still trigger short-term pressure. With focus on stagflation, any upside surprises in CPI or factors that increase more inflation pressures are expected to weigh on the GBP and not support it. If we have big disorderly moves in Gilts but the BoE reiterates, they won’t intervene again that could put pressure on GBP. Any outcome that increases the likelihood of a general election should increase the risk premium in the GBP. BIGGER PICTURE The fundamentals for Sterling remain bearish . Recession is around the corner (might be in one already), and the new fiscal plan has failed to provide any assurances for investors (even though we think the negative reaction is not completely warranted). Even though flash PMI data will be important to watch as always, the political situation will likely overshadow the econ data as all eyes will be on the leadership race to see who will win the race as the UK’s next PM. CAD FUNDAMENTAL OUTLOOK: NEUTRAL BASELINE Recent economic data has shown some deterioration for the growth outlook with three consecutive months of contraction in jobs, falling house prices, and a deceleration in both core and headline CPI. The previous jobs data gave the CAD a decent lift with its first jobs gain in four weeks, but at 21K jobs added, the job market is still down 92K jobs in the last four months. However, Governor Macklem gave no intention that the bank is getting close to the end of their hiking cycle. Even though he didn’t specifically say that the market’s expectations for the terminal rate is too low, his concerns about inflation saw STIR markets price in close to 88% probability for another 50bsp this upcoming week. With recent data we think the bank is close to taking a pause, but there is a risk that the bank doubles down this upcoming week and increasing the terminal rate which could provide short-term support for the CAD. POSSIBLE BULLISH SURPRISES Catalysts that see upside in Oil (deteriorating supply outlook, ease in demand fears, OPEC developments) could trigger bullish CAD reactions. As a risk sensitive currency, and catalyst that causes big bouts of risk on sentiment could trigger bullish reactions in the CAD. After the bank’s frontloading, there is a very high bar to surprise on the hawkish side for the BoC, but if the bank were to say they think STIR market pricing for the terminal rate is too low that can provide upside for the CAD. POSSIBLE BEARISH SURPRISES Catalysts that trigger downside in oil (deteriorating demand outlook, ease in supply shortage, less supply constraints, OPEC developments) could be a negative catalyst for the CAD as well. As a risk sensitive currency, and catalyst that causes big bouts of risk off sentiment could trigger bearish reactions in the CAD. With the bank 100bsp away from terminal rate expectations, and after recent hawkish comments, it won’t take much to surprise dovish, and any signals or comments from the BoC that they’ll pause hikes should be a negative for the CAD. BIGGER PICTURE The bigger picture outlook for the CAD remains neutral for now. Given the clear risks to the growth outlook (recent negative econ data and fall in oil prices) we remain cautious on the currency. Furthermore, with lots of good news priced, and with the BoC close to terminal rate expectations, our preferred way of trading the CAD is lower on clear short-term negative catalysts. The focus for the CAD will be firmly fixed on the BoC policy decision, to see what the bank has to say about their future path for rates. Whether they talk up the terminal rate or confirm suspicions that they could be nearing a pause.
by thunderpips
GBP USD - FUNDAMENTAL DRIVERSGBP FUNDAMENTAL OUTLOOK: WEAK BEARISH BASELINE A looming recession has been a key source of Pound weakness and has kept pressure on Sterling despite ongoing BoE hikes. But there is a new threat in focus. It seems the PM’s new fiscal plan, even though putting downside pressure on inflation and lowering growth risks, has drastically increased debt concerns. The disorderly move in Gilt yields were enough to force the BoE’s to step in with a limited (both in time and size) bond buying intervention plan. This has brought some calm to the angst but being limited won’t be enough to fix the fiscal concerns. It was another volatile week for Sterling as a result of the political uncertainty with the resignation of PM Truss. In the week ahead we only have S&P Global PMIs to watch on the data side, but all focus and attention will be on the leadership race to see which 2 or 3 candidates will meet the minimum 100 nominations to put their names in the hat. POSSIBLE BULLISH SURPRISES With recession the base assumption, any incoming data that surprises meaningfully higher could trigger relief for the GBP. With focus on stagflation, any downside surprises in CPI or factors that decrease inflation pressures are expected to support the GBP and not pressure it. If massive disorderly moves in Gilts forces the BoE to step up as the buyer of last resorts that could trigger GBP upside. If either Johnson or Sunak gets enough nominations that could ease some of the pressure from the Pound. POSSIBLE BEARISH SURPRISES With recession the base assumption, any material downside surprises in growth data can still trigger short-term pressure. With focus on stagflation, any upside surprises in CPI or factors that increase more inflation pressures are expected to weigh on the GBP and not support it. If we have big disorderly moves in Gilts but the BoE reiterates, they won’t intervene again that could put pressure on GBP. Any outcome that increases the likelihood of a general election should increase the risk premium in the GBP. BIGGER PICTURE The fundamentals for Sterling remain bearish. Recession is around the corner (might be in one already), and the new fiscal plan has failed to provide any assurances for investors (even though we think the negative reaction is not completely warranted). Even though flash PMI data will be important to watch as always, the political situation will likely overshadow the econ data as all eyes will be on the leadership race to see who will win the race as the UK’s next PM. USD FUNDAMENTAL OUTLOOK: BULLISH BASELINE With headline CPI above 8% and Core CPI seeing another acceleration in the SEP CPI data, the Fed is under pressure to continue hiking rates and ramping up QT. Markets expect another 75bsp hike in NOV and currently prices the terminal rate at 4.8%. The Fed is on a data-dependent (meeting-by-meeting) policy stance, meaning incoming growth, inflation and jobs data remains a key driver for short-term USD volatility where we expect a cyclical reaction with incoming data for both the USD and US10Y (good data expected to be supportive for the USD while bad data is expected to pressure the USD). Even though the USD had good composure for the majority of the week, the WSJ article, BoJ intervention and less hawkish comments from Fed’s Daly saw a strong push lower in the DXY . Given what has been priced for the USD and yields, the Daly comments and WSJ article gives us a short-term downside bias for the USD in the week ahead. POSSIBLE BULLISH SURPRISES With the Fed signalling a data dependent policy stance, we expect a cyclical reaction from the USD with incoming US data. Thus, extremely good growth, inflation or jobs data is expected to trigger short-term bullish reactions in the USD. If the cyclical outlook continues to weaken, the USD’s safe haven status still matters. Any incoming catalysts that increase deep recession fears and triggers strong moves lower in risk assets & bonds can trigger safe haven flows into the USD. With a lot priced for the Fed and USD, the bar is high for hawkish Fed surprises, but any aggressive Fed speak talking up a >5.0% terminal rate can trigger further USD upside. POSSIBLE BEARISH SURPRISES With the Fed signalling a data dependent policy stance, we expect a cyclical reaction from the USD with incoming US data. Thus, extremely bad growth, inflation or jobs data is expected to trigger short-term bearish reactions in the USD. If the cyclical outlook starts to improve, the USD’s safe haven status still matters. Any incoming catalysts that decrease deep recession fears and triggers strong moves higher in risk assets & bonds can trigger safe haven outflows out of the USD. With a lot priced in for the Fed and the USD, it won’t take much to disappoint on the dovish side. Any big concerns about growth from Fed speakers could trigger outflows. BIGGER PICTURE The fundamental outlook for the USD remains bullish as long as the Fed stays hawkish and cyclical concerns put pressure on risk sentiment. The data dependent stance from the Fed means that short-term data surprises can pull the USD either way and would be our preferred way of trading the Dollar right now. The econ calendar is slightly more exciting compared to last week with S&P Global PMI, Consumer Confidence and Core PCE, but after the Fed Daly comments and the WSJ article we suspect the USD could trade softer next week as the Fed enters their blackout period from Saturday.
by thunderpips
GBP/USD analysis: Sterling is no longer supported by gilt yieldsFor most of 2022, currencies were helped by rising yields on short-term government bonds. When looking at the UK bond market, rising gilt yields have reflected expectations of future interest rate hikes by the Bank of England, but ultimately they begin to incorporate more political and fiscal risks into their rate premium. Given the turbulent political climate in the UK over the last two months, the volatility of UK gilts has been exceptionally high. Liz Truss announced her resignation as British Prime Minister on Thursday, following a hectic 45 days in office that included a gilt market crash and a U-turn on her budget proposals. The most recent economic data, meanwhile, continue to paint a gloomy picture. September UK retail sales fell 6.9% year-on-year, a sixth consecutive monthly decline and worse than market expectations of a 5.0% drop. The GfK Consumer Confidence indicator went up a little bit to -47 in October, but it was still close to a record low of -49 in September. The pound is now behaving differently than the yield on 2-year gilts. Rising gilt yields now reflect not only the inflation/interest rate environment, but also the higher investors' uncertainty about the stability of the UK bond market. Episodes of rising gilt yields over the past few weeks have been correlated with a weaker pound. This playbook can be expected to continue in the coming months. If 2-year gilt yields were to surpass the 4% threshold once more, this would likely put downward pressure on the pound, which could eventually test and break below 1.10.
by Capitalcom
Today’s Notable Sentiment ShiftsGBP – Sterling rallied on Thursday, and investors reined in their bets on a big Bank of England interest rate hike in November as UK Prime Minister Liz Truss announced her resignation just six weeks after she was appointed. Despite GBP’s initial rally, Vanda Research cautions: “Initially, this is likely to take an uncertainty premium out of the market but it depends who takes over. You need a steady hand at the top.” Additionally, Societe Generale notes: "I still think sterling will go down, not up, because rates won’t go as high as traders expect, but I think you’ve probably already seen the low in cable.”
by thunderpips
1
Today’s Notable Sentiment ShiftsGBP – Sterling came under pressure on Wednesday as UK CPI once again hit double digits and 40-year highs at 10.1% Y/Y for September. The stronger than expected report reignited concerns surrounding the severity of the UK’s impending economic decline, with Ebury summarizing: “The outlook for the UK economy remains relatively murky, with ballooning borrowing costs, soaring consumer prices and a government in chaos with its credibility shot to bits unlikely to inspire much confidence.”
by thunderpips
4
GBP NZD - FUNDAMENTAL DRIVERSGBP FUNDAMENTAL OUTLOOK: WEAK BEARISH BASELINE A looming recession has been a key source of Pound weakness and has kept pressure on Sterling despite ongoing BoE hikes. But there is a new threat in focus. It seems the PM’s new fiscal plan, even though putting downside pressure on inflation and lowering growth risks, has drastically increased debt concerns. The disorderly move in Gilt yields were enough to force the BoE’s to step in with a limited (both in time and size) bond buying intervention plan. This has brought some calm to the angst but being limited won’t be enough to fix the fiscal concerns. It was a volatile week for Cable with punchy swings both higher and lower. Between US CPI , bad communication from the BoE and sacking of the Chancellor Sterling struggled for direction. In the week ahead, focus will be on CPI , but after the BoE’s bond intervention program ended on Friday markets will also turn attention to the new Chancellor to see whether he can restore some confidence, or whether he’ll add fuel to the fiscal flames. POSSIBLE BULLISH SURPRISES With recession the base assumption, any incoming data that surprises meaningfully higher could trigger relief for the GBP. With focus on stagflation, any downside surprises in CPI or factors that decrease inflation pressures are expected to support the GBP and not pressure it. If massive disorderly moves in Gilts forces the BoE to step up as the buyer of last resorts that could trigger GBP upside. If the new Chancellor can restore confidence and push back more mini-budget elements it could provide upside for GBP. POSSIBLE BEARISH SURPRISES With recession the base assumption, any material downside surprises in growth data can still trigger short-term pressure. With focus on stagflation, any upside surprises in CPI or factors that increase more inflation pressures are expected to weigh on the GBP and not support it. If we have big disorderly moves in Gilts but the BoE reiterates, they won’t intervene again that could put pressure on GBP. If the new Chancellor can’t restore confidence and won’t push back on the fiscal plan it could add pressure on Sterling. BIGGER PICTURE The fundamentals for Sterling remain bearish . Recession is around the corner (might be in one already), and the new fiscal plan has failed to provide any assurances for investors (even though we think the negative reaction is not completely warranted). As usual there will be a lot of focus on Wednesday’s CPI data, where we still expect a counter-cyclical reaction from Sterling (meaning very high CPI being negative for Sterling while very low CPI prints is expected to be supportive). However, the market’s attention will be firmly fixed on the new Chancellor to see whether he can restore some confidence. NZD FUNDAMENTAL OUTLOOK: NEUTRAL BASELINE The NZD remains a tricky currency to pin down. Fundamentals that should have provided support over recent months haven’t, and the country’s lower terms of trade has made it the biggest loser among the high betas during recent weeks. The RBNZ stuck to the same script in their meeting this past week, disappointing some who were expecting some caution regarding the longevity of the bank’s current hiking cycle. This was initially supportive for the NZD, but as we’ve seen time and time again the NZD was not able to trade convincingly in line with what its fundamentals suggest. As always risk sensitivity needs to be kept in mind for the NZD, and that means US Q3 earnings season is one to be kept on the radar this incoming week. Any surprise positive or negative announcements from the National Congress of the CCP will be important to watch as well. POSSIBLE BULLISH SURPRISES Positive Covid developments in China (easing restrictions, more fiscal or monetary stimulus, or letting go of the covidzero policy) could trigger bullish reactions in the NZD. As a risk sensitive currency, and catalyst that causes big bouts of risk on sentiment could trigger bullish reactions in the NZD. Catalyst that triggers recovery in key export commodities (China stimulus, lifting covid restrictions, new infrastructure projects in China) should be supportive for the NZD. Data showing China’s growth outlook is improving or surprise announcement at the CCP congress that Covid-zero will end could provide upside for the NZD. POSSIBLE BEARISH SURPRISES Negative Covid developments in China (increasing restrictions or adding additional ones) could trigger bearish reactions in the NZD. As a risk sensitive currency, and catalyst that causes big bouts of risk off sentiment could trigger bearish reactions in the NZD. Catalyst that triggers further weakness in key export commodities (additional China restrictions, demand destruction) could be negative for the NZD. Data showing China’s growth outlook is deteriorating or strong affirmation that the covid-zero policy is here to stay could add additional pressure on the NZD. BIGGER PICTURE The bigger picture outlook for the NZD is neutral for now, but that is largely dependent on what happens to China as the New Zealand economy is also very dependent on trade with China and Australia, and also dependent on whether the RNBZ sticks to their hawkish tone or pivots more dovish in the meetings ahead. Given the currency’s inability to trade in line with any clear fundamental drivers, we’re opting to stay patient with the NZD until further notice.
by thunderpips
5
GBPUSD 19th OCTOBER 2022UK GDP fell sharply, from showing growth to showing weakness. The following GDP data will determine whether the UK can be said to be in recession or not. The BoE Governor, Andrew Bailey, has been saying for several months that the UK will go into recession in the 4th quarter of this year. Will his prediction come true or can the UK change its fate? Here are some of the agenda and data releases scheduled for October 19th 2022 : 1. UK consumer price index data release for September 2022 2. UK producer price index data for September 2022 3. Release of data on the UK retail price index for September 2022
Short
by DNP-FX
3
$GBPUSD | Double Top-ish? The GBPUSD has had a wild ride in the past two weeks. Things are starting to normalize for the pound but here we have a simple 1:1 type of trade potential. We have GBPUSD breaking the upper Bollinger Band twice and not resistance at 1.14339 area. We also have over bought levels on the RSI in a micmic-ing double top like pattern. The only potential saving grace that could change this is the 200 EMA which is currently underneath. We have a couple of landing spots if all goes as planned at 1.133 and 1.125. The 1.13 line has not been respected since September and the latest support line is the latter. My trade is currently highlighted by short position graphic.
Short
by CryptoHotep
GBP USD - FUNDAMENTAL DRIVERSGBP FUNDAMENTAL OUTLOOK: WEAK BEARISH BASELINE A looming recession has been a key source of Pound weakness and has kept pressure on Sterling despite ongoing BoE hikes. But there is a new threat in focus. It seems the PM’s new fiscal plan, even though putting downside pressure on inflation and lowering growth risks, has drastically increased debt concerns. The disorderly move in Gilt yields were enough to force the BoE’s to step in with a limited (both in time and size) bond buying intervention plan. This has brought some calm to the angst but being limited won’t be enough to fix the fiscal concerns. It was a volatile week for Cable with punchy swings both higher and lower. Between US CPI, bad communication from the BoE and sacking of the Chancellor Sterling struggled for direction. In the week ahead, focus will be on CPI, but after the BoE’s bond intervention program ended on Friday markets will also turn attention to the new Chancellor to see whether he can restore some confidence, or whether he’ll add fuel to the fiscal flames. POSSIBLE BULLISH SURPRISES With recession the base assumption, any incoming data that surprises meaningfully higher could trigger relief for the GBP. With focus on stagflation, any downside surprises in CPI or factors that decrease inflation pressures are expected to support the GBP and not pressure it. If massive disorderly moves in Gilts forces the BoE to step up as the buyer of last resorts that could trigger GBP upside. If the new Chancellor can restore confidence and push back more mini-budget elements it could provide upside for GBP. POSSIBLE BEARISH SURPRISES With recession the base assumption, any material downside surprises in growth data can still trigger short-term pressure. With focus on stagflation, any upside surprises in CPI or factors that increase more inflation pressures are expected to weigh on the GBP and not support it. If we have big disorderly moves in Gilts but the BoE reiterates, they won’t intervene again that could put pressure on GBP. If the new Chancellor can’t restore confidence and won’t push back on the fiscal plan it could add pressure on Sterling. BIGGER PICTURE The fundamentals for Sterling remain bearish. Recession is around the corner (might be in one already), and the new fiscal plan has failed to provide any assurances for investors (even though we think the negative reaction is not completely warranted). As usual there will be a lot of focus on Wednesday’s CPI data, where we still expect a counter-cyclical reaction from Sterling (meaning very high CPI being negative for Sterling while very low CPI prints is expected to be supportive). However, the market’s attention will be firmly fixed on the new Chancellor to see whether he can restore some confidence. USD FUNDAMENTAL OUTLOOK: BULLISH BASELINE With headline CPI above 8% and Core CPI seeing another acceleration in the SEP CPI data, the Fed is under pressure to continue hiking rates and ramping up QT. Markets expect another 75bsp hike in NOV and currently prices the terminal rate at 4.8%. The Fed is on a data-dependent (meeting-by-meeting) policy stance, meaning incoming growth, inflation and jobs data remains a key driver for short-term USD volatility where we expect a cyclical reaction with incoming data for both the USD and US10Y (good data expected to be supportive for the USD while bad data is expected to pressure the USD). Another choppy week for the USD finishing 0.5% stronger on the week but keeping a small range. With a quiet week ahead on the data side, the USD is most likely going to get most of it’s momentum from overall risk flows. POSSIBLE BULLISH SURPRISES With the Fed signalling a data dependent policy stance, we expect a cyclical reaction from the USD with incoming US data. Thus, extremely good growth, inflation or jobs data is expected to trigger short-term bullish reactions in the USD. If the cyclical outlook continues to weaken, the USD’s safe haven status still matters. Any incoming catalysts that increase deep recession fears and triggers strong moves lower in risk assets & bonds can trigger safe haven flows into the USD. With a lot priced for the Fed and USD, the bar is high for hawkish Fed surprises, but any aggressive Fed speak talking up a >5.0% terminal rate can trigger further USD upside. POSSIBLE BEARISH SURPRISES With the Fed signalling a data dependent policy stance, we expect a cyclical reaction from the USD with incoming US data. Thus, extremely bad growth, inflation or jobs data is expected to trigger short-term bearish reactions in the USD. If the cyclical outlook starts to improve, the USD’s safe haven status still matters. Any incoming catalysts that decrease deep recession fears and triggers strong moves higher in risk assets & bonds can trigger safe haven outflows out of the USD. With a lot priced in for the Fed and the USD, it won’t take much to disappoint on the dovish side. Any big concerns about growth from Fed speakers could trigger outflows. BIGGER PICTURE The fundamental outlook for the USD remains bullish as long as the Fed stays hawkish and cyclical concerns put pressure on risk sentiment. The data dependent stance from the Fed means that short-term data surprises can pull the USD either way and would be our preferred way of trading the Dollar right now. The calendar is extremely light in the week ahead, which means overall risk sentiment could be the biggest source of momentum (which means keeping a close eye on further equity and bond market sell offs). Keep in mind earnings season gets a bit mor exciting this week and will be important to watch for risk.
by thunderpips
GBP USD - FUNDAMENTAL DRIVERSGBP FUNDAMENTAL OUTLOOK: WEAK BEARISH BASELINE A looming recession has been a key source of Pound weakness and has kept pressure on Sterling despite ongoing BoE hikes. But there is a new threat in focus. It seems the PM’s new fiscal plan, even though putting downside pressure on inflation and lowering growth risks, has drastically increased debt concerns. The disorderly move in Gilt yields were enough to force the BoE’s to step in with a limited (both in time and size) bond buying intervention plan. This has brought some calm to the angst but being limited won’t be enough to fix the fiscal concerns. Early in the week the GBP clawed out decent gains as the Chancellor walked back the planned 45p tax cut. However, after a 10% rally from all-time lows, Sterling gave back gains as the USD resumed upside heading into the end of the week. POSSIBLE BULLISH SURPRISES With recession the base assumption, any incoming data that surprises meaningfully higher could trigger relief for the GBP. With focus on stagflation, any downside surprises in CPI or factors that decrease inflation pressures are expected to support the GBP and not pressure it. If Gilt yields resume their rise, it could see further bond buying from the BoE which should provide support for Sterling. POSSIBLE BEARISH SURPRISES With recession the base assumption, any material downside surprises in growth data can still trigger short-term pressure. With focus on stagflation, any upside surprises in CPI or factors that increase more inflation pressures are expected to weigh on the GBP and not support it. If Gilt yields resume their rise, but the BoE decided not to get involved again, it could put further pressure on Sterling. BIGGER PICTURE The fundamentals for Sterling remain bearish . Recession is around the corner (might be in one already), and the new fiscal plan has failed to provide any assurances for investors (even though we think the negative reaction is not completely warranted). The week ahead is incredible light for Sterling, with the US CPI the main event to keep on the radar as well as any additional action taken by the Bank of England regarding their short-term bond buying plan. USD FUNDAMENTAL OUTLOOK: BULLISH BASELINE With headline CPI above 8% and Core CPI seeing acceleration in August, the Fed is under pressure to continue hiking rates and ramping up QT. The bank made its third 75bsp at the Sep meeting and pushed up their 2023 terminal rate projection to 4.6%. The Fed is on a data-dependent (meeting-by-meeting) policy stance, meaning incoming growth, inflation and jobs data remains a key driver for short-term USD volatility where we expect a cyclical reaction with incoming data for both the USD and US10Y (good data expected to be supportive for the USD while bad data is expected to pressure the USD). It was a choppy week for the USD, with entertaining ‘Fed Pivot’ narratives trying to make sense of the price action. In the week ahead, all eyes turns to the week’s main event which is Thursday’s September US CPI report. POSSIBLE BULLISH SURPRISES With the Fed signalling a data dependent policy stance, we expect a cyclical reaction from the USD with incoming US data. Thus, extremely good growth, inflation or jobs data is expected to trigger short-term bullish reactions in the USD. If the cyclical outlook continues to weaken, the USD’s safe haven status still matters. Any incoming catalysts that increase deep recession fears and triggers strong moves lower in risk assets & bonds can trigger safe haven flows into the USD. With a lot priced in for the Fed and the USD, the bar is high for hawkish Fed surprises, but any aggressive Fed speak talking up a higher than 5% terminal rate can trigger further USD upside. POSSIBLE BEARISH SURPRISES With the Fed signalling a data dependent policy stance, we expect a cyclical reaction from the USD with incoming US data. Thus, extremely bad growth, inflation or jobs data is expected to trigger short-term bearish reactions in the USD. If the cyclical outlook starts to improve, the USD’s safe haven status still matters. Any incoming catalysts that decrease deep recession fears and triggers strong moves higher in risk assets & bonds can trigger safe haven outflows out of the USD. With a lot priced in for the Fed and the USD, it won’t take much to disappoint on the dovish side. Any big concerns about growth from Fed speakers could trigger outflows. BIGGER PICTURE The fundamental outlook for the USD remains bullish as long as the Fed stays hawkish and cyclical concerns put pressure on risk sentiment. The data dependent stance from the Fed means that short-term data surprises can pull the USD either way and would be our preferred way of trading the Dollar right now. In the upcoming week markets will only have eyes for one data point and that will be the US September CPI data released on Thursday. With expectations of a higher Core CPI YY but expectations of a lower Headline CPI YY it seems risky to trade into this event.
by thunderpips
3
GBP USD - FUNDAMENTAL DRIVERSGBP FUNDAMENTAL OUTLOOK: WEAK BEARISH BASELINE A looming recession has been a key source of Pound weakness and has kept pressure on Sterling despite ongoing BoE hikes. But there is a new threat in focus. It seems the PM’s new fiscal plan, even though putting downside pressure on inflation and lowering growth risks, has drastically increased debt concerns. The disorderly move in Gilt yields were enough to force the BoE’s to step in with a limited (both in time and size) bond buying intervention plan. This has brought some calm to the angst but being limited won’t be enough to fix the fiscal concerns. Early in the week the GBP clawed out decent gains as the Chancellor walked back the planned 45p tax cut. However, after a 10% rally from all-time lows, Sterling gave back gains as the USD resumed upside heading into the end of the week. POSSIBLE BULLISH SURPRISES With recession the base assumption, any incoming data that surprises meaningfully higher could trigger relief for the GBP. With focus on stagflation, any downside surprises in CPI or factors that decrease inflation pressures are expected to support the GBP and not pressure it. If Gilt yields resume their rise, it could see further bond buying from the BoE which should provide support for Sterling. POSSIBLE BEARISH SURPRISES With recession the base assumption, any material downside surprises in growth data can still trigger short-term pressure. With focus on stagflation, any upside surprises in CPI or factors that increase more inflation pressures are expected to weigh on the GBP and not support it. If Gilt yields resume their rise, but the BoE decided not to get involved again, it could put further pressure on Sterling. BIGGER PICTURE The fundamentals for Sterling remain bearish . Recession is around the corner (might be in one already), and the new fiscal plan has failed to provide any assurances for investors (even though we think the negative reaction is not completely warranted). The week ahead is incredible light for Sterling, with the US CPI the main event to keep on the radar as well as any additional action taken by the Bank of England regarding their short-term bond buying plan. USD FUNDAMENTAL OUTLOOK: BULLISH BASELINE With headline CPI above 8% and Core CPI seeing acceleration in August, the Fed is under pressure to continue hiking rates and ramping up QT. The bank made its third 75bsp at the Sep meeting and pushed up their 2023 terminal rate projection to 4.6%. The Fed is on a data-dependent (meeting-by-meeting) policy stance, meaning incoming growth, inflation and jobs data remains a key driver for short-term USD volatility where we expect a cyclical reaction with incoming data for both the USD and US10Y (good data expected to be supportive for the USD while bad data is expected to pressure the USD). It was a choppy week for the USD, with entertaining ‘Fed Pivot’ narratives trying to make sense of the price action. In the week ahead, all eyes turns to the week’s main event which is Thursday’s September US CPI report. POSSIBLE BULLISH SURPRISES With the Fed signalling a data dependent policy stance, we expect a cyclical reaction from the USD with incoming US data. Thus, extremely good growth, inflation or jobs data is expected to trigger short-term bullish reactions in the USD. If the cyclical outlook continues to weaken, the USD’s safe haven status still matters. Any incoming catalysts that increase deep recession fears and triggers strong moves lower in risk assets & bonds can trigger safe haven flows into the USD. With a lot priced in for the Fed and the USD, the bar is high for hawkish Fed surprises, but any aggressive Fed speak talking up a higher than 5% terminal rate can trigger further USD upside. POSSIBLE BEARISH SURPRISES With the Fed signalling a data dependent policy stance, we expect a cyclical reaction from the USD with incoming US data. Thus, extremely bad growth, inflation or jobs data is expected to trigger short-term bearish reactions in the USD. If the cyclical outlook starts to improve, the USD’s safe haven status still matters. Any incoming catalysts that decrease deep recession fears and triggers strong moves higher in risk assets & bonds can trigger safe haven outflows out of the USD. With a lot priced in for the Fed and the USD, it won’t take much to disappoint on the dovish side. Any big concerns about growth from Fed speakers could trigger outflows. BIGGER PICTURE The fundamental outlook for the USD remains bullish as long as the Fed stays hawkish and cyclical concerns put pressure on risk sentiment. The data dependent stance from the Fed means that short-term data surprises can pull the USD either way and would be our preferred way of trading the Dollar right now. In the upcoming week markets will only have eyes for one data point and that will be the US September CPI data released on Thursday. With expectations of a higher Core CPI YY but expectations of a lower Headline CPI YY it seems risky to trade into this event.
by thunderpips
2
Today’s Notable Sentiment ShiftsGBP – Sterling rose on Tuesday, pausing its recent slide after the BoE added more support to the gilts market. However, the day’s low of 1.0999 may not hold as the UK’s combination of inflation and rate-hike vulnerability will challenge even the most astute policymakers. Commenting on the UK and GBP outlook, Credit Agricole notes: “Potentially, there could be some clear downside risk in cable, I would think, towards $1.05 and euro/sterling towards $0.90. Certainly, we’ll have to wait and see how it plays out given how fluid the situation in the UK in particular is. It is a difficult situation. Like it or not, the BoE is at the forefront of that effort to try to contain the sell-off and hopefully, with some luck, that will help restore market stability. But it’s paramount that in order to succeed, these efforts should go hand in hand with efforts by the government to restore investor confidence.”
by thunderpips
2
GBP USD - FUNDAMENTAL DRIVERSGBP FUNDAMENTAL OUTLOOK: WEAK BEARISH BASELINE A looming recession has been a key source of Pound weakness and has kept pressure on Sterling despite ongoing BoE hikes. But there is a new threat in focus. It seems the PM’s new fiscal plan, even though putting downside pressure on inflation and lowering growth risks, has drastically increased debt concerns. The disorderly move in Gilt yields were enough to force the BoE’s to step in with a limited (both in time and size) bond buying intervention plan. This has brought some calm to the angst but being limited won’t be enough to fix the fiscal concerns. Early in the week the GBP clawed out decent gains as the Chancellor walked back the planned 45p tax cut. However, after a 10% rally from all-time lows, Sterling gave back gains as the USD resumed upside heading into the end of the week. POSSIBLE BULLISH SURPRISES With recession the base assumption, any incoming data that surprises meaningfully higher could trigger relief for the GBP. With focus on stagflation, any downside surprises in CPI or factors that decrease inflation pressures are expected to support the GBP and not pressure it. If Gilt yields resume their rise, it could see further bond buying from the BoE which should provide support for Sterling. POSSIBLE BEARISH SURPRISES With recession the base assumption, any material downside surprises in growth data can still trigger short-term pressure. With focus on stagflation, any upside surprises in CPI or factors that increase more inflation pressures are expected to weigh on the GBP and not support it. If Gilt yields resume their rise, but the BoE decided not to get involved again, it could put further pressure on Sterling. BIGGER PICTURE The fundamentals for Sterling remain bearish . Recession is around the corner (might be in one already), and the new fiscal plan has failed to provide any assurances for investors (even though we think the negative reaction is not completely warranted). The week ahead is incredible light for Sterling, with the US CPI the main event to keep on the radar as well as any additional action taken by the Bank of England regarding their short-term bond buying plan. USD FUNDAMENTAL OUTLOOK: BULLISH BASELINE With headline CPI above 8% and Core CPI seeing acceleration in August, the Fed is under pressure to continue hiking rates and ramping up QT. The bank made its third 75bsp at the Sep meeting and pushed up their 2023 terminal rate projection to 4.6%. The Fed is on a data-dependent (meeting-by-meeting) policy stance, meaning incoming growth, inflation and jobs data remains a key driver for short-term USD volatility where we expect a cyclical reaction with incoming data for both the USD and US10Y (good data expected to be supportive for the USD while bad data is expected to pressure the USD). It was a choppy week for the USD, with entertaining ‘Fed Pivot’ narratives trying to make sense of the price action. In the week ahead, all eyes turns to the week’s main event which is Thursday’s September US CPI report. POSSIBLE BULLISH SURPRISES With the Fed signalling a data dependent policy stance, we expect a cyclical reaction from the USD with incoming US data. Thus, extremely good growth, inflation or jobs data is expected to trigger short-term bullish reactions in the USD. If the cyclical outlook continues to weaken, the USD’s safe haven status still matters. Any incoming catalysts that increase deep recession fears and triggers strong moves lower in risk assets & bonds can trigger safe haven flows into the USD. With a lot priced in for the Fed and the USD, the bar is high for hawkish Fed surprises, but any aggressive Fed speak talking up a higher than 5% terminal rate can trigger further USD upside. POSSIBLE BEARISH SURPRISES With the Fed signalling a data dependent policy stance, we expect a cyclical reaction from the USD with incoming US data. Thus, extremely bad growth, inflation or jobs data is expected to trigger short-term bearish reactions in the USD. If the cyclical outlook starts to improve, the USD’s safe haven status still matters. Any incoming catalysts that decrease deep recession fears and triggers strong moves higher in risk assets & bonds can trigger safe haven outflows out of the USD. With a lot priced in for the Fed and the USD, it won’t take much to disappoint on the dovish side. Any big concerns about growth from Fed speakers could trigger outflows. BIGGER PICTURE The fundamental outlook for the USD remains bullish as long as the Fed stays hawkish and cyclical concerns put pressure on risk sentiment. The data dependent stance from the Fed means that short-term data surprises can pull the USD either way and would be our preferred way of trading the Dollar right now. In the upcoming week markets will only have eyes for one data point and that will be the US September CPI data released on Thursday. With expectations of a higher Core CPI YY but expectations of a lower Headline CPI YY it seems risky to trade into this event.
by thunderpips
GBP USD - FUNDAMENTAL DRIVERSGBP FUNDAMENTAL OUTLOOK: WEAK BEARISH BASELINE A looming recession has been a key source of Pound weakness and has kept pressure on Sterling despite ongoing BoE hikes. But there is a new threat in focus. It seems the PM’s new fiscal plan, even though putting downside pressure on inflation and lowering growth risks, has drastically increased debt concerns. The disorderly move in Gilt yields were enough to force the BoE’s to step in with a limited (both in time and size) bond buying intervention plan. This has brought some calm to the angst but being limited won’t be enough to fix the fiscal concerns. Early in the week the GBP clawed out decent gains as the Chancellor walked back the planned 45p tax cut. However, after a 10% rally from all-time lows, Sterling gave back gains as the USD resumed upside heading into the end of the week. POSSIBLE BULLISH SURPRISES With recession the base assumption, any incoming data that surprises meaningfully higher could trigger relief for the GBP. With focus on stagflation, any downside surprises in CPI or factors that decrease inflation pressures are expected to support the GBP and not pressure it. If Gilt yields resume their rise, it could see further bond buying from the BoE which should provide support for Sterling. POSSIBLE BEARISH SURPRISES With recession the base assumption, any material downside surprises in growth data can still trigger short-term pressure. With focus on stagflation, any upside surprises in CPI or factors that increase more inflation pressures are expected to weigh on the GBP and not support it. If Gilt yields resume their rise, but the BoE decided not to get involved again, it could put further pressure on Sterling. BIGGER PICTURE The fundamentals for Sterling remain bearish . Recession is around the corner (might be in one already), and the new fiscal plan has failed to provide any assurances for investors (even though we think the negative reaction is not completely warranted). The week ahead is incredible light for Sterling, with the US CPI the main event to keep on the radar as well as any additional action taken by the Bank of England regarding their short-term bond buying plan. USD FUNDAMENTAL OUTLOOK: BULLISH BASELINE With headline CPI above 8% and Core CPI seeing acceleration in August, the Fed is under pressure to continue hiking rates and ramping up QT. The bank made its third 75bsp at the Sep meeting and pushed up their 2023 terminal rate projection to 4.6%. The Fed is on a data-dependent (meeting-by-meeting) policy stance, meaning incoming growth, inflation and jobs data remains a key driver for short-term USD volatility where we expect a cyclical reaction with incoming data for both the USD and US10Y (good data expected to be supportive for the USD while bad data is expected to pressure the USD). It was a choppy week for the USD, with entertaining ‘Fed Pivot’ narratives trying to make sense of the price action. In the week ahead, all eyes turns to the week’s main event which is Thursday’s September US CPI report. POSSIBLE BULLISH SURPRISES With the Fed signalling a data dependent policy stance, we expect a cyclical reaction from the USD with incoming US data. Thus, extremely good growth, inflation or jobs data is expected to trigger short-term bullish reactions in the USD. If the cyclical outlook continues to weaken, the USD’s safe haven status still matters. Any incoming catalysts that increase deep recession fears and triggers strong moves lower in risk assets & bonds can trigger safe haven flows into the USD. With a lot priced in for the Fed and the USD, the bar is high for hawkish Fed surprises, but any aggressive Fed speak talking up a higher than 5% terminal rate can trigger further USD upside. POSSIBLE BEARISH SURPRISES With the Fed signalling a data dependent policy stance, we expect a cyclical reaction from the USD with incoming US data. Thus, extremely bad growth, inflation or jobs data is expected to trigger short-term bearish reactions in the USD. If the cyclical outlook starts to improve, the USD’s safe haven status still matters. Any incoming catalysts that decrease deep recession fears and triggers strong moves higher in risk assets & bonds can trigger safe haven outflows out of the USD. With a lot priced in for the Fed and the USD, it won’t take much to disappoint on the dovish side. Any big concerns about growth from Fed speakers could trigger outflows. BIGGER PICTURE The fundamental outlook for the USD remains bullish as long as the Fed stays hawkish and cyclical concerns put pressure on risk sentiment. The data dependent stance from the Fed means that short-term data surprises can pull the USD either way and would be our preferred way of trading the Dollar right now. In the upcoming week markets will only have eyes for one data point and that will be the US September CPI data released on Thursday. With expectations of a higher Core CPI YY but expectations of a lower Headline CPI YY it seems risky to trade into this event.
by thunderpips
2
GBP USD - FUNDAMENTAL DRIVERSGBP FUNDAMENTAL OUTLOOK: WEAK BEARISH BASELINE A looming recession has been a key source of Pound weakness and has kept pressure on Sterling despite ongoing BoE hikes. But there is a new threat in focus. It seems the PM’s new fiscal plan, even though putting downside pressure on inflation and lowering growth risks, has drastically increased debt concerns. The disorderly move in Gilt yields were enough to force the BoE’s to step in with a limited (both in time and size) bond buying intervention plan. This has brought some calm to the angst but being limited won’t be enough to fix the fiscal concerns. Early in the week the GBP clawed out decent gains as the Chancellor walked back the planned 45p tax cut. However, after a 10% rally from all-time lows, Sterling gave back gains as the USD resumed upside heading into the end of the week. POSSIBLE BULLISH SURPRISES With recession the base assumption, any incoming data that surprises meaningfully higher could trigger relief for the GBP. With focus on stagflation, any downside surprises in CPI or factors that decrease inflation pressures are expected to support the GBP and not pressure it. If Gilt yields resume their rise, it could see further bond buying from the BoE which should provide support for Sterling. POSSIBLE BEARISH SURPRISES With recession the base assumption, any material downside surprises in growth data can still trigger short-term pressure. With focus on stagflation, any upside surprises in CPI or factors that increase more inflation pressures are expected to weigh on the GBP and not support it. If Gilt yields resume their rise, but the BoE decided not to get involved again, it could put further pressure on Sterling. BIGGER PICTURE The fundamentals for Sterling remain bearish. Recession is around the corner (might be in one already), and the new fiscal plan has failed to provide any assurances for investors (even though we think the negative reaction is not completely warranted). The week ahead is incredible light for Sterling, with the US CPI the main event to keep on the radar as well as any additional action taken by the Bank of England regarding their short-term bond buying plan. USD FUNDAMENTAL OUTLOOK: BULLISH BASELINE With headline CPI above 8% and Core CPI seeing acceleration in August, the Fed is under pressure to continue hiking rates and ramping up QT. The bank made its third 75bsp at the Sep meeting and pushed up their 2023 terminal rate projection to 4.6%. The Fed is on a data-dependent (meeting-by-meeting) policy stance, meaning incoming growth, inflation and jobs data remains a key driver for short-term USD volatility where we expect a cyclical reaction with incoming data for both the USD and US10Y (good data expected to be supportive for the USD while bad data is expected to pressure the USD). It was a choppy week for the USD, with entertaining ‘Fed Pivot’ narratives trying to make sense of the price action. In the week ahead, all eyes turns to the week’s main event which is Thursday’s September US CPI report. POSSIBLE BULLISH SURPRISES With the Fed signalling a data dependent policy stance, we expect a cyclical reaction from the USD with incoming US data. Thus, extremely good growth, inflation or jobs data is expected to trigger short-term bullish reactions in the USD. If the cyclical outlook continues to weaken, the USD’s safe haven status still matters. Any incoming catalysts that increase deep recession fears and triggers strong moves lower in risk assets & bonds can trigger safe haven flows into the USD. With a lot priced in for the Fed and the USD, the bar is high for hawkish Fed surprises, but any aggressive Fed speak talking up a higher than 5% terminal rate can trigger further USD upside. POSSIBLE BEARISH SURPRISES With the Fed signalling a data dependent policy stance, we expect a cyclical reaction from the USD with incoming US data. Thus, extremely bad growth, inflation or jobs data is expected to trigger short-term bearish reactions in the USD. If the cyclical outlook starts to improve, the USD’s safe haven status still matters. Any incoming catalysts that decrease deep recession fears and triggers strong moves higher in risk assets & bonds can trigger safe haven outflows out of the USD. With a lot priced in for the Fed and the USD, it won’t take much to disappoint on the dovish side. Any big concerns about growth from Fed speakers could trigger outflows. BIGGER PICTURE The fundamental outlook for the USD remains bullish as long as the Fed stays hawkish and cyclical concerns put pressure on risk sentiment. The data dependent stance from the Fed means that short-term data surprises can pull the USD either way and would be our preferred way of trading the Dollar right now. In the upcoming week markets will only have eyes for one data point and that will be the US September CPI data released on Thursday. With expectations of a higher Core CPI YY but expectations of a lower Headline CPI YY it seems risky to trade into this event.
by thunderpips
6