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GBP USD - FUNDAMENTAL DRIVERSGBP FUNDAMENTAL OUTLOOK: WEAK BEARISH BASELINE The overall bleak economic outlook for the UK, with exceptionally high Inflation and rapidly falling growth have been the biggest negative driver for Sterling. With rising price pressures and falling demand, the risks of stagflation has risen substantially, so much so that the BoE have forecasted a possible recession for the UK economy heading into 2023. At their June meeting the bank followed through with their more moderate approach by hiking 25bsp instead of growing calls of a potential 50bsp hike. The BoE is stuck between a rock and a hard place, right now they have to hike rates to try and fight inflation but by doing so they risk further damaging economic growth as a result. Even though the June statement was dovish, it wasn’t materially more dovish compared to their previous meeting. The price action was a clear warning sign that a lot of negatives has been priced in for Sterling in recent weeks so chasing lower is very risky right now. It also means we would favour upside opportunities on solid bullish short-term catalysts. POSSIBLE BULLISH SURPRISES Stagflation fears are very high for the UK, with probabilities of recession growing by the week. With so much bad news priced in, incoming news risk is asymmetrical, meaning positive surprises in growth data could trigger strong bullish reactions. The UK is facing one of its biggest cost of living squeezes in history, lower-than-expected inflation could counterintuitively be a positive driver for the currency (lower CPI means less stagflation risk). The economy needs help right now, which means any help from the fiscal side will be a positive. Any major fiscal support measures to help consumers (subsidies for energy or tax cuts) could trigger bullish reactions for the Pound. We have lots of BoE speak next week, and any overly hawkish comments signalling more aggressive policy than what markets are currently pricing in (see our Rate Tracker for STIR expectations) could trigger bullish GBP reactions. POSSIBLE BEARISH SURPRISES Monetary policy is a double-edged sword for the GBP. Odds that the BoE has limited hikes left has been a negative driver, but so too is risks that inflation forces them to hike even more and further damage GDP. Further stagflation risks from higher gas prices or CPI prints could trigger bearish reactions. Politics is also in focus, where any attempts to oust PM Johnson by changing no-confidence laws could trigger bearish reactions. GBP is usually sensitive to political uncertainty and anything that raises odds of a snap election should be negative. With UK threats of triggering Article 16 and EU threats to terminate the Brexit deal if they do Brexit is in focus again. For now, markets have rightly ignored this as posturing, but any actual escalation can see sharp GBP downside. We have lots of BoE speak next week, and any overly dovish comments signalling less aggressive policy than what markets are currently pricing in (see our Rate Tracker for STIR expectations) could trigger bearish GBP reactions. BIGGER PICTURE The fundamental outlook for the GBP remains fairly bleak right now with the economic prospects and risk of stagflation keeping the currency pressured. Anything that exacerbates stagflation fears is expected to weigh on the Pound and anything that alleviates some of that pressure should be positive. Positioning has been looking stretched to the downside, so any new shorts do need to be weary of the risk of some mean reversion, and also means we would favour upside on strong bullish catalysts. USD FUNDAMENTAL OUTLOOK: BULLISH BASELINE Hawkish Fed policy remains a key driver for Dollar strength. With headline inflation >8%, the Fed has been pressured to tighten policy aggressively, hiking rates by 75bsp at their June meeting, and continuing with Quantitative Tightening. However, as a result of increasing fears of a growth slowdown (as evidenced by recent econ data), STIR markets have repriced lower, and now expects a terminal rate of 3.3% (versus >4% before the June FOMC meeting). As STIRs reprice lower, we are expecting that to act as a possible short-term negative driver for the USD. Even though lower STIRs should be negative for the USD, as a lot of hikes have been baked in, the growth concerns sparked further risk off concerns this past week, which supported the USD. The USD is usually inversely correlated to the global economy and trade, appreciating when growth & inflation slows and depreciates when growth & inflation accelerates (reflation). Further expectations of a cyclical slowdown and continued tight monetary policy expectations has seen investors shun risk assets and even bonds (usually considered a safe haven), and the USD has been a key benefactor of the rush to safety in recent weeks. Even though US bonds are considered safe havens, the current high inflation has seen a strong stock-to-bond correlation and has caused big bond outflows. With bonds not fulfilling its usual save haven role the USD has been the haven of choice. POSSIBLE BULLISH SURPRISES As aggressive Fed policy has been supporting the USD, any incoming data (this week’s ISM Services and NFP) that sparks further aggressive hike expectations, or additionally any comments from FOMC members that signals even more aggressive policy could trigger bullish reactions in the USD. As the cyclical outlook for the global economy is very bleak, and the USD is considered a safe haven, it means incoming data that exacerbates fears of recession and triggers a big rush to safety could trigger bullish USD reactions. Further outflows in US bonds means more USD safe haven appeal. So, watching key triggers for further upside in bond yields like rising commodity prices, rising inflation expectations and upside surprises in inflation data could also trigger further USD bullish reactions. POSSIBLE BEARISH SURPRISES Apart from this past week, the USD has reacted cyclically to incoming data which could suggest markets is shifting from safe haven focus to the rising risks of recession. The worse growth data gets, the higher likelihood of a ‘Fed Put’ in the months ahead. Thus, extremely bad ISM Services PMI or NFP data this week could trigger bearish reactions in the USD. Tactically the USD is trading at cycle highs, and aggregate CFTC positioning is close prior highs which acted as local tops for the USD. Thus, stretched positioning could make the USD vulnerable to mean reversion in the short-term. With a lot already priced for the Fed, it won’t take much for the Fed to disappoint markets on the dovish side. Any FOMC comments that suggests more concern about the economy than inflation could trigger bearish reactions in the USD BIGGER PICTURE The fundamental outlook for the USD remains bullish as long as the Fed stays aggressive and cyclical concerns put pressure on risk assets. But we do want to be mindful that lots has been priced for the USD, and as growth deteriorates, we are expecting that the weigh on the USD if markets start pricing in a higher likelihood of a less hawkish Fed due to higher recession risks. The opposite side to that though is that further concerns about the economy sees more safe haven inflows into the Dollar. Positioning is stretched, so we would prefer much deeper pullbacks for new med-term USD longs and would look for short-term catalyst that offer shorter bearish sentiment trades against the current strong bull trend.
by thunderpips
8
EUR GBP - FUNDAMENTAL DRIVERSEUR FUNDAMENTAL OUTLOOK: NEUTRAL BASELINE The EUR has had a bumpy ride over the past few months. At the onset of the war in Ukraine the EUR tumbled across the board. However, in recent weeks, the persistently high inflation has seen the ECB take a more hawkish turn with the bank confirming at least a 25bsp hike for July and possibility of a 50bsp hike in September. Despite the hawkish policy shift, the concerns over fragmentation in bond spreads (BTP\Bund) as well as fears of growing stagflation risks has seen the EUR struggle to hold onto any hawkish ECB momentum. The ECB did try to comfort spread concerns with promises of a new fragmentation tool, and even though it has kept spread from widening further, concerns remain. If the bank can convince markets that their new spread tool(s) can stop fragmentation it should be supportive for the EUR. The bank did back up their attempts at calming fragmentation fears after an ad-hoc meeting by saying they are looking at introducing an additional ‘tool’ as quick as possible, so markets will be focused on any insights into what that tool might be. Even though growth data has been surprisingly resilient in the past few months, the recession fears ramped up when EU Flash PMIs showed a material deceleration in growth. Incoming growth data will be watched carefully after this and any further signs that the deterioration in growth is gaining momentum should weigh on the EUR. POSSIBLE BULLISH SURPRISES Geopolitics remains a focus for the EUR, where any possible de-escalation or cease fire in the Ukraine war would open up a lot of appreciation for the EUR. Stagflation fears are high right now for the Eurozone, with growth expected to slow while inflation stays persistently high. Recent PMI data has invigorated recession fears, which means any materially better-than-expected growth data could spark some upside for the single currency. Even though the ECB’s recent communication has been enough to push BTP/ Bund spreads from their recent highs the concerns remain. Thus, any insights, clarity regarding their new tools that convinces markets it can solve fragmentation should be supportive for the USD. POSSIBLE BEARISH SURPRISES Spread fragmentation remains in focus, and if ECB speak in the week ahead fails to calm fears or walks back on recent hawkish comments it could trigger bearish reactions in the EUR. Flash PMIs confirmed growth risks in the EU is very much alive, we expect growth concerns to continue weighing on the EUR and means incoming growth data will be in focus (in the week ahead we have Final Services PMIs, German Factory Orders and German Industrial Production to keep on the radar). Watch those hike expectations. With a lot of froth recent baked into STIR markets for the ECB, we've seen a chunky repricing in hike expectations and any further lower repricing is expected to weigh on the single currency. BIGGER PICTURE The fundamental outlook for the EUR remains neutral, teetering on bearish with positive and negative forces in play. On the bearish side we have geopolitics, stagflation and spread fragmentation acting as negative drivers. But we also have hawkish ECB policy as a supportive driver. That means our preferred way of trading the EUR right now is taking short-term plays which are driven by clear short-term bearish or bullish catalysts. The disappointing PMI data does open up a potential narrative change for EURGBP and we are currently positioned for some potential downside in the pair. GBP FUNDAMENTAL OUTLOOK: WEAK BEARISH BASELINE The overall bleak economic outlook for the UK, with exceptionally high Inflation and rapidly falling growth have been the biggest negative driver for Sterling. With rising price pressures and falling demand, the risks of stagflation has risen substantially, so much so that the BoE have forecasted a possible recession for the UK economy heading into 2023. At their June meeting the bank followed through with their more moderate approach by hiking 25bsp instead of growing calls of a potential 50bsp hike. The BoE is stuck between a rock and a hard place, right now they have to hike rates to try and fight inflation but by doing so they risk further damaging economic growth as a result. Even though the June statement was dovish, it wasn’t materially more dovish compared to their previous meeting. The price action was a clear warning sign that a lot of negatives has been priced in for Sterling in recent weeks so chasing lower is very risky right now. It also means we would favour upside opportunities on solid bullish short-term catalysts. POSSIBLE BULLISH SURPRISES Stagflation fears are very high for the UK, with probabilities of recession growing by the week. With so much bad news priced in, incoming news risk is asymmetrical, meaning positive surprises in growth data could trigger strong bullish reactions. The UK is facing one of its biggest cost of living squeezes in history, lower-than-expected inflation could counterintuitively be a positive driver for the currency (lower CPI means less stagflation risk). The economy needs help right now, which means any help from the fiscal side will be a positive. Any major fiscal support measures to help consumers (subsidies for energy or tax cuts) could trigger bullish reactions for the Pound. We have lots of BoE speak next week, and any overly hawkish comments signalling more aggressive policy than what markets are currently pricing in (see our Rate Tracker for STIR expectations) could trigger bullish GBP reactions. POSSIBLE BEARISH SURPRISES Monetary policy is a double-edged sword for the GBP. Odds that the BoE has limited hikes left has been a negative driver, but so too is risks that inflation forces them to hike even more and further damage GDP. Further stagflation risks from higher gas prices or CPI prints could trigger bearish reactions. Politics is also in focus, where any attempts to oust PM Johnson by changing no-confidence laws could trigger bearish reactions. GBP is usually sensitive to political uncertainty and anything that raises odds of a snap election should be negative. With UK threats of triggering Article 16 and EU threats to terminate the Brexit deal if they do Brexit is in focus again. For now, markets have rightly ignored this as posturing, but any actual escalation can see sharp GBP downside. We have lots of BoE speak next week, and any overly dovish comments signalling less aggressive policy than what markets are currently pricing in (see our Rate Tracker for STIR expectations) could trigger bearish GBP reactions. BIGGER PICTURE The fundamental outlook for the GBP remains fairly bleak right now with the economic prospects and risk of stagflation keeping the currency pressured. Anything that exacerbates stagflation fears is expected to weigh on the Pound and anything that alleviates some of that pressure should be positive. Positioning has been looking stretched to the downside, so any new shorts do need to be weary of the risk of some mean reversion, and also means we would favour upside on strong bullish catalysts.
by thunderpips
GBP CAD - FUNDAMENTAL DRIVERSGBP FUNDAMENTAL OUTLOOK: WEAK BEARISH BASELINE The overall bleak economic outlook for the UK, with exceptionally high Inflation and rapidly falling growth have been the biggest negative driver for Sterling. With rising price pressures and falling demand, the risks of stagflation has risen substantially, so much so that the BoE have forecasted a possible recession for the UK economy heading into 2023. At their June meeting the bank followed through with their more moderate approach by hiking 25bsp instead of growing calls of a potential 50bsp hike. The BoE is stuck between a rock and a hard place, right now they have to hike rates to try and fight inflation but by doing so they risk further damaging economic growth as a result. Even though the June statement was dovish, it wasn’t materially more dovish compared to their previous meeting. The price action was a clear warning sign that a lot of negatives has been priced in for Sterling in recent weeks so chasing lower is very risky right now. It also means we would favour upside opportunities on solid bullish short-term catalysts. POSSIBLE BULLISH SURPRISES Stagflation fears are very high for the UK, with probabilities of recession growing by the week. With so much bad news priced in, incoming news risk is asymmetrical, meaning positive surprises in growth data could trigger strong bullish reactions. The UK is facing one of its biggest cost of living squeezes in history, lower-than-expected inflation could counterintuitively be a positive driver for the currency (lower CPI means less stagflation risk). The economy needs help right now, which means any help from the fiscal side will be a positive. Any major fiscal support measures to help consumers (subsidies for energy or tax cuts) could trigger bullish reactions for the Pound. We have lots of BoE speak next week, and any overly hawkish comments signalling more aggressive policy than what markets are currently pricing in (see our Rate Tracker for STIR expectations) could trigger bullish GBP reactions. POSSIBLE BEARISH SURPRISES Monetary policy is a double-edged sword for the GBP. Odds that the BoE has limited hikes left has been a negative driver, but so too is risks that inflation forces them to hike even more and further damage GDP. Further stagflation risks from higher gas prices or CPI prints could trigger bearish reactions. Politics is also in focus, where any attempts to oust PM Johnson by changing no-confidence laws could trigger bearish reactions. GBP is usually sensitive to political uncertainty and anything that raises odds of a snap election should be negative. With UK threats of triggering Article 16 and EU threats to terminate the Brexit deal if they do Brexit is in focus again. For now, markets have rightly ignored this as posturing, but any actual escalation can see sharp GBP downside. We have lots of BoE speak next week, and any overly dovish comments signalling less aggressive policy than what markets are currently pricing in (see our Rate Tracker for STIR expectations) could trigger bearish GBP reactions. BIGGER PICTURE The fundamental outlook for the GBP remains fairly bleak right now with the economic prospects and risk of stagflation keeping the currency pressured. Anything that exacerbates stagflation fears is expected to weigh on the Pound and anything that alleviates some of that pressure should be positive. Positioning has been looking stretched to the downside, so any new shorts do need to be weary of the risk of some mean reversion, and also means we would favour upside on strong bullish catalysts. CAD FUNDAMENTAL OUTLOOK: NEUTRAL BASELINE The CAD has enjoyed far more upside in the past few weeks than we anticipated. We’ve been cautious on the currency given Canada’s dependency on the US (>70% of exports) where the clear signs of a faster than expected slowdown and possible recession should deteriorate the growth outlook for Canada. Apart from that, the risks to the Canadian housing market can negatively impact consumer spending as interest rates rise higher at aggressive speed. Potentially damaging the wealth effect created by the rapid rise in house prices since covid. However, despite the risks to the economy and the outlook, markets still price in a very favourable growth environment for Canada, also supported by a big push higher in terms of trade due to the rise in commodity prices. Furthermore, despite clear warning signals, the BoC has chosen to ignore the negatives and has stayed surprisingly optimistic and hawkish. We’ve missed most of the move higher in the CAD as our bias has kept us cautious, but the risks are still present and with the currency close to 9-year highs (at the index level) we are looking for opportunities to trade it lower on bearish catalyst. POSSIBLE BULLISH SURPRISES As an oil exporter, oil prices are important for CAD. Catalysts that see further upside in Oil (deteriorating supply outlook, ease in demand fears) could trigger bullish CAD reactions. The correlation has been hit and miss in recent weeks though. As a risk sensitive currency, and catalyst that causes big bouts of risk on sentiment could trigger bullish reactions in the CAD. With more market participants noticing cracks in the housing markets, a less dramatic decline in house prices could ease some of those concerns and provide some upside. Even though lots of tightening has been priced for the BoC , big enough upside surprise in CPI or incoming jobs data (showing the jobs market is holding up good) that triggers further hike expectations could provide some short-term upside. POSSIBLE BEARISH SURPRISES As an oil exporter, oil prices are important for CAD. Any catalyst that triggers meaningful downside in oil (deteriorating demand outlook, ease in supply shortage, less supply constraints) 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. Since a lot of policy tightening has been priced into STIR markets, any negative catalysts that triggers less hawkish BoC expectations (faster deceleration in growth, inflation or jobs) could trigger outsized downside for the CAD. In recent communication, Governor Macklem started to mention some hiccups in housing. Big downside surprises in house prices could trigger speculation of a less hawkish bank and trigger downside for the CAD. BIGGER PICTURE The bigger picture outlook for the CAD remains neutral for now. Given the clear risks to the growth outlook due to the slowdown in the US, as well as rising risks to the consumer and the housing market, we remain cautious on the currency, even though it’s moved much higher than we anticipated. With a lot of good news priced in for the CAD and yields, our preferred way of trading the CAD is lower on short-term negative catalysts.
by thunderpips
GBP CAD - FUNDAMENTAL DRIVERSGBP FUNDAMENTAL OUTLOOK: WEAK BEARISH BASELINE The overall bleak economic outlook for the UK, with exceptionally high Inflation and rapidly falling growth have been the biggest negative driver for Sterling. With rising price pressures and falling demand, the risks of stagflation has risen substantially, so much so that the BoE have forecasted a possible recession for the UK economy heading into 2023. At their June meeting the bank followed through with their more moderate approach by hiking 25bsp instead of growing calls of a potential 50bsp hike. The BoE is stuck between a rock and a hard place, right now they have to hike rates to try and fight inflation but by doing so they risk further damaging economic growth as a result. Even though the June statement was dovish, it wasn’t materially more dovish compared to their previous meeting. The price action was a clear warning sign that a lot of negatives has been priced in for Sterling in recent weeks so chasing lower is very risky right now. It also means we would favour upside opportunities on solid bullish short-term catalysts. POSSIBLE BULLISH SURPRISES Stagflation fears are very high for the UK, with probabilities of recession growing by the week. With so much bad news priced in, incoming news risk is asymmetrical, meaning positive surprises in growth data could trigger strong bullish reactions. The UK is facing one of its biggest cost of living squeezes in history, lower-than-expected inflation could counterintuitively be a positive driver for the currency (lower CPI means less stagflation risk). The economy needs help right now, which means any help from the fiscal side will be a positive. Any major fiscal support measures to help consumers (subsidies for energy or tax cuts) could trigger bullish reactions for the Pound. We have lots of BoE speak next week, and any overly hawkish comments signalling more aggressive policy than what markets are currently pricing in (see our Rate Tracker for STIR expectations) could trigger bullish GBP reactions. POSSIBLE BEARISH SURPRISES Monetary policy is a double-edged sword for the GBP. Odds that the BoE has limited hikes left has been a negative driver, but so too is risks that inflation forces them to hike even more and further damage GDP. Further stagflation risks from higher gas prices or CPI prints could trigger bearish reactions. Politics is also in focus, where any attempts to oust PM Johnson by changing no-confidence laws could trigger bearish reactions. GBP is usually sensitive to political uncertainty and anything that raises odds of a snap election should be negative. With UK threats of triggering Article 16 and EU threats to terminate the Brexit deal if they do Brexit is in focus again. For now, markets have rightly ignored this as posturing, but any actual escalation can see sharp GBP downside. We have lots of BoE speak next week, and any overly dovish comments signalling less aggressive policy than what markets are currently pricing in (see our Rate Tracker for STIR expectations) could trigger bearish GBP reactions. BIGGER PICTURE The fundamental outlook for the GBP remains fairly bleak right now with the economic prospects and risk of stagflation keeping the currency pressured. Anything that exacerbates stagflation fears is expected to weigh on the Pound and anything that alleviates some of that pressure should be positive. Positioning has been looking stretched to the downside, so any new shorts do need to be weary of the risk of some mean reversion, and also means we would favour upside on strong bullish catalysts. CAD FUNDAMENTAL OUTLOOK: NEUTRAL BASELINE The CAD has enjoyed far more upside in the past few weeks than we anticipated. We’ve been cautious on the currency given Canada’s dependency on the US (>70% of exports) where the clear signs of a faster than expected slowdown and possible recession should deteriorate the growth outlook for Canada. Apart from that, the risks to the Canadian housing market can negatively impact consumer spending as interest rates rise higher at aggressive speed. Potentially damaging the wealth effect created by the rapid rise in house prices since covid. However, despite the risks to the economy and the outlook, markets still price in a very favourable growth environment for Canada, also supported by a big push higher in terms of trade due to the rise in commodity prices. Furthermore, despite clear warning signals, the BoC has chosen to ignore the negatives and has stayed surprisingly optimistic and hawkish. We’ve missed most of the move higher in the CAD as our bias has kept us cautious, but the risks are still present and with the currency close to 9-year highs (at the index level) we are looking for opportunities to trade it lower on bearish catalyst. POSSIBLE BULLISH SURPRISES As an oil exporter, oil prices are important for CAD. Catalysts that see further upside in Oil (deteriorating supply outlook, ease in demand fears) could trigger bullish CAD reactions. The correlation has been hit and miss in recent weeks though. As a risk sensitive currency, and catalyst that causes big bouts of risk on sentiment could trigger bullish reactions in the CAD. With more market participants noticing cracks in the housing markets, a less dramatic decline in house prices could ease some of those concerns and provide some upside. Even though lots of tightening has been priced for the BoC , big enough upside surprise in CPI or incoming jobs data (showing the jobs market is holding up good) that triggers further hike expectations could provide some short-term upside. POSSIBLE BEARISH SURPRISES As an oil exporter, oil prices are important for CAD. Any catalyst that triggers meaningful downside in oil (deteriorating demand outlook, ease in supply shortage, less supply constraints) 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. Since a lot of policy tightening has been priced into STIR markets, any negative catalysts that triggers less hawkish BoC expectations (faster deceleration in growth, inflation or jobs) could trigger outsized downside for the CAD. In recent communication, Governor Macklem started to mention some hiccups in housing. Big downside surprises in house prices could trigger speculation of a less hawkish bank and trigger downside for the CAD. BIGGER PICTURE The bigger picture outlook for the CAD remains neutral for now. Given the clear risks to the growth outlook due to the slowdown in the US, as well as rising risks to the consumer and the housing market, we remain cautious on the currency, even though it’s moved much higher than we anticipated. With a lot of good news priced in for the CAD and yields, our preferred way of trading the CAD is lower on short-term negative catalysts.
by thunderpips
GBP USD - FUNDAMENTAL DRIVERSGBP FUNDAMENTAL OUTLOOK: WEAK BEARISH BASELINE The overall bleak economic outlook for the UK, with exceptionally high Inflation and rapidly falling growth have been the biggest negative driver for Sterling. With rising price pressures and falling demand, the risks of stagflation has risen substantially, so much so that the BoE have forecasted a possible recession for the UK economy heading into 2023. At their June meeting the bank followed through with their more moderate approach by hiking 25bsp instead of growing calls of a potential 50bsp hike. The BoE is stuck between a rock and a hard place, right now they have to hike rates to try and fight inflation but by doing so they risk further damaging economic growth as a result. Even though the June statement was dovish, it wasn’t materially more dovish compared to their previous meeting. The price action was a clear warning sign that a lot of negatives has been priced in for Sterling in recent weeks so chasing lower is very risky right now. It also means we would favour upside opportunities on solid bullish short-term catalysts. POSSIBLE BULLISH SURPRISES Stagflation fears are very high for the UK, with probabilities of recession growing by the week. With so much bad news priced in, incoming news risk is asymmetrical, meaning positive surprises in growth data could trigger strong bullish reactions. The UK is facing one of its biggest cost of living squeezes in history, lower-than-expected inflation could counterintuitively be a positive driver for the currency (lower CPI means less stagflation risk). The economy needs help right now, which means any help from the fiscal side will be a positive. Any major fiscal support measures to help consumers (subsidies for energy or tax cuts) could trigger bullish reactions for the Pound. We have lots of BoE speak next week, and any overly hawkish comments signalling more aggressive policy than what markets are currently pricing in (see our Rate Tracker for STIR expectations) could trigger bullish GBP reactions. POSSIBLE BEARISH SURPRISES Monetary policy is a double-edged sword for the GBP. Odds that the BoE has limited hikes left has been a negative driver, but so too is risks that inflation forces them to hike even more and further damage GDP. Further stagflation risks from higher gas prices or CPI prints could trigger bearish reactions. Politics is also in focus, where any attempts to oust PM Johnson by changing no-confidence laws could trigger bearish reactions. GBP is usually sensitive to political uncertainty and anything that raises odds of a snap election should be negative. With UK threats of triggering Article 16 and EU threats to terminate the Brexit deal if they do Brexit is in focus again. For now, markets have rightly ignored this as posturing, but any actual escalation can see sharp GBP downside. We have lots of BoE speak next week, and any overly dovish comments signalling less aggressive policy than what markets are currently pricing in (see our Rate Tracker for STIR expectations) could trigger bearish GBP reactions. BIGGER PICTURE The fundamental outlook for the GBP remains fairly bleak right now with the economic prospects and risk of stagflation keeping the currency pressured. Anything that exacerbates stagflation fears is expected to weigh on the Pound and anything that alleviates some of that pressure should be positive. Positioning has been looking stretched to the downside, so any new shorts do need to be weary of the risk of some mean reversion, and also means we would favour upside on strong bullish catalysts. USD FUNDAMENTAL OUTLOOK: BULLISH BASELINE Hawkish Fed policy remains a key driver for Dollar strength. With headline inflation >8%, the Fed has been pressured to tighten policy aggressively, hiking rates by 75bsp at their June meeting, and continuing with Quantitative Tightening. However, as a result of increasing fears of a growth slowdown (as evidenced by recent econ data), STIR markets have repriced lower, and now expects a terminal rate of 3.3% (versus >4% before the June FOMC meeting). As STIRs reprice lower, we are expecting that to act as a possible short-term negative driver for the USD. Even though lower STIRs should be negative for the USD, as a lot of hikes have been baked in, the growth concerns sparked further risk off concerns this past week, which supported the USD. The USD is usually inversely correlated to the global economy and trade, appreciating when growth & inflation slows and depreciates when growth & inflation accelerates (reflation). Further expectations of a cyclical slowdown and continued tight monetary policy expectations has seen investors shun risk assets and even bonds (usually considered a safe haven), and the USD has been a key benefactor of the rush to safety in recent weeks. Even though US bonds are considered safe havens, the current high inflation has seen a strong stock-to-bond correlation and has caused big bond outflows. With bonds not fulfilling its usual save haven role the USD has been the haven of choice. POSSIBLE BULLISH SURPRISES As aggressive Fed policy has been supporting the USD, any incoming data (this week’s ISM Services and NFP) that sparks further aggressive hike expectations, or additionally any comments from FOMC members that signals even more aggressive policy could trigger bullish reactions in the USD. As the cyclical outlook for the global economy is very bleak, and the USD is considered a safe haven, it means incoming data that exacerbates fears of recession and triggers a big rush to safety could trigger bullish USD reactions. Further outflows in US bonds means more USD safe haven appeal. So, watching key triggers for further upside in bond yields like rising commodity prices, rising inflation expectations and upside surprises in inflation data could also trigger further USD bullish reactions. POSSIBLE BEARISH SURPRISES Apart from this past week, the USD has reacted cyclically to incoming data which could suggest markets is shifting from safe haven focus to the rising risks of recession. The worse growth data gets, the higher likelihood of a ‘Fed Put’ in the months ahead. Thus, extremely bad ISM Services PMI or NFP data this week could trigger bearish reactions in the USD. Tactically the USD is trading at cycle highs, and aggregate CFTC positioning is close prior highs which acted as local tops for the USD. Thus, stretched positioning could make the USD vulnerable to mean reversion in the short-term. With a lot already priced for the Fed, it won’t take much for the Fed to disappoint markets on the dovish side. Any FOMC comments that suggests more concern about the economy than inflation could trigger bearish reactions in the USD BIGGER PICTURE The fundamental outlook for the USD remains bullish as long as the Fed stays aggressive and cyclical concerns put pressure on risk assets. But we do want to be mindful that lots has been priced for the USD, and as growth deteriorates, we are expecting that the weigh on the USD if markets start pricing in a higher likelihood of a less hawkish Fed due to higher recession risks. The opposite side to that though is that further concerns about the economy sees more safe haven inflows into the Dollar. Positioning is stretched, so we would prefer much deeper pullbacks for new med-term USD longs and would look for short-term catalyst that offer shorter bearish sentiment trades against the current strong bull trend.
by thunderpips
EUR GBP - FUNDAMENTAL DRIVERSEUR FUNDAMENTAL OUTLOOK: NEUTRAL BASELINE The EUR has had a bumpy ride over the past few months. At the onset of the war in Ukraine the EUR tumbled across the board. However, in recent weeks, the persistently high inflation has seen the ECB take a more hawkish turn with the bank confirming at least a 25bsp hike for July and possibility of a 50bsp hike in September. Despite the hawkish policy shift, the concerns over fragmentation in bond spreads (BTP\Bund) as well as fears of growing stagflation risks has seen the EUR struggle to hold onto any hawkish ECB momentum. The ECB did try to comfort spread concerns with promises of a new fragmentation tool, and even though it has kept spread from widening further, concerns remain. If the bank can convince markets that their new spread tool(s) can stop fragmentation it should be supportive for the EUR. The bank did back up their attempts at calming fragmentation fears after an ad-hoc meeting by saying they are looking at introducing an additional ‘tool’ as quick as possible, so markets will be focused on any insights into what that tool might be. Even though growth data has been surprisingly resilient in the past few months, the recession fears ramped up when EU Flash PMIs showed a material deceleration in growth. Incoming growth data will be watched carefully after this and any further signs that the deterioration in growth is gaining momentum should weigh on the EUR. POSSIBLE BULLISH SURPRISES Geopolitics remains a focus for the EUR, where any possible de-escalation or cease fire in the Ukraine war would open up a lot of appreciation for the EUR. Stagflation fears are high right now for the Eurozone, with growth expected to slow while inflation stays persistently high. Recent PMI data has invigorated recession fears, which means any materially better-than-expected growth data could spark some upside for the single currency. Even though the ECB’s recent communication has been enough to push BTP/Bund spreads from their recent highs the concerns remain. Thus, any insights, clarity regarding their new tools that convinces markets it can solve fragmentation should be supportive for the USD. POSSIBLE BEARISH SURPRISES Spread fragmentation remains in focus, and if ECB speak in the week ahead fails to calm fears or walks back on recent hawkish comments it could trigger bearish reactions in the EUR. Flash PMIs confirmed growth risks in the EU is very much alive, we expect growth concerns to continue weighing on the EUR and means incoming growth data will be in focus (in the week ahead we have Final Services PMIs, German Factory Orders and German Industrial Production to keep on the radar). Watch those hike expectations. With a lot of froth recent baked into STIR markets for the ECB, we've seen a chunky repricing in hike expectations and any further lower repricing is expected to weigh on the single currency. BIGGER PICTURE The fundamental outlook for the EUR remains neutral, teetering on bearish with positive and negative forces in play. On the bearish side we have geopolitics, stagflation and spread fragmentation acting as negative drivers. But we also have hawkish ECB policy as a supportive driver. That means our preferred way of trading the EUR right now is taking short-term plays which are driven by clear short-term bearish or bullish catalysts. The disappointing PMI data does open up a potential narrative change for EURGBP and we are currently positioned for some potential downside in the pair. GBP FUNDAMENTAL OUTLOOK: WEAK BEARISH BASELINE The overall bleak economic outlook for the UK, with exceptionally high Inflation and rapidly falling growth have been the biggest negative driver for Sterling. With rising price pressures and falling demand, the risks of stagflation has risen substantially, so much so that the BoE have forecasted a possible recession for the UK economy heading into 2023. At their June meeting the bank followed through with their more moderate approach by hiking 25bsp instead of growing calls of a potential 50bsp hike. The BoE is stuck between a rock and a hard place, right now they have to hike rates to try and fight inflation but by doing so they risk further damaging economic growth as a result. Even though the June statement was dovish, it wasn’t materially more dovish compared to their previous meeting. The price action was a clear warning sign that a lot of negatives has been priced in for Sterling in recent weeks so chasing lower is very risky right now. It also means we would favour upside opportunities on solid bullish short-term catalysts. POSSIBLE BULLISH SURPRISES Stagflation fears are very high for the UK, with probabilities of recession growing by the week. With so much bad news priced in, incoming news risk is asymmetrical, meaning positive surprises in growth data could trigger strong bullish reactions. The UK is facing one of its biggest cost of living squeezes in history, lower-than-expected inflation could counterintuitively be a positive driver for the currency (lower CPI means less stagflation risk). The economy needs help right now, which means any help from the fiscal side will be a positive. Any major fiscal support measures to help consumers (subsidies for energy or tax cuts) could trigger bullish reactions for the Pound. We have lots of BoE speak next week, and any overly hawkish comments signalling more aggressive policy than what markets are currently pricing in (see our Rate Tracker for STIR expectations) could trigger bullish GBP reactions. POSSIBLE BEARISH SURPRISES Monetary policy is a double-edged sword for the GBP. Odds that the BoE has limited hikes left has been a negative driver, but so too is risks that inflation forces them to hike even more and further damage GDP. Further stagflation risks from higher gas prices or CPI prints could trigger bearish reactions. Politics is also in focus, where any attempts to oust PM Johnson by changing no-confidence laws could trigger bearish reactions. GBP is usually sensitive to political uncertainty and anything that raises odds of a snap election should be negative. With UK threats of triggering Article 16 and EU threats to terminate the Brexit deal if they do Brexit is in focus again. For now, markets have rightly ignored this as posturing, but any actual escalation can see sharp GBP downside. We have lots of BoE speak next week, and any overly dovish comments signalling less aggressive policy than what markets are currently pricing in (see our Rate Tracker for STIR expectations) could trigger bearish GBP reactions. BIGGER PICTURE The fundamental outlook for the GBP remains fairly bleak right now with the economic prospects and risk of stagflation keeping the currency pressured. Anything that exacerbates stagflation fears is expected to weigh on the Pound and anything that alleviates some of that pressure should be positive. Positioning has been looking stretched to the downside, so any new shorts do need to be weary of the risk of some mean reversion, and also means we would favour upside on strong bullish catalysts.
by thunderpips
EUR GBP - FUNDAMENTAL DRIVERSEUR FUNDAMENTAL OUTLOOK: NEUTRAL BASELINE The EUR has had a bumpy ride over the past few months. At the onset of the war in Ukraine the EUR tumbled across the board. However, in recent weeks, the persistently high inflation has seen the ECB take a more hawkish turn with the bank confirming at least a 25bsp hike for July and possibility of a 50bsp hike in September. Despite the hawkish policy shift, the concerns over fragmentation in bond spreads like the BTP\Bund spread as well as fears of growing stagflation risks has seen the EUR struggled to hold onto any real hawkish ECB momentum. The ECB did try to comfort spread concerns last week with an ad-hoc meeting and decided to use PEPP reinvestments as a way to calm fragmentation. But this wasn’t enough to calm concerns as reinvestment would amount to about €20 billion per month. However, the bank’s decision was enough to push the BTP\Bund down 50bsp, and if that trend can continue lower it should be supportive for the EUR. The bank did back up their attempts at calming fragmentation fears after their ad-hoc meeting by saying they are looking at introducing an additional ‘tool’ as quick as possible, so markets will be focused on any insights into what that tool might be. Even though growth data has been surprisingly resilient in the past few months, the recession fears ramped up this past week when EU Flash PMIs showed a material deceleration in growth. Incoming growth data will be watched carefully after this and any further signs that the deterioration in growth is gaining momentum should weigh on the EUR. POSSIBLE BULLISH SURPRISES Geopolitics remains a focus for the EUR, where any possible de-escalation or cease fire in the Ukraine war would open up a lot of appreciation for the EUR. Stagflation fears are high right now for the Eurozone, with growth expected to slow while inflation stays persistently high. Recent PMI data has invigorated recession fears, which means any materially better-than-expected growth data could spark some upside for the single currency. Inflation remains a key focus, which means the incoming Flash PMI prints on Friday will be important for interest rate expectations. A big upside surprise should be positive for the EUR, but there are risks that further upside in inflation which leads to higher rates also leads to further fragmentation risks. POSSIBLE BEARISH SURPRISES Spread fragmentation remains in focus, and if ECB speak in the week ahead fails to calm fears or walks back on recent hawkish comments it could trigger bearish reactions in the EUR. Flash PMIs confirmed growth risks in the EU is very much alive, we expect growth concerns to continue weighing on the EUR and means German & French retail sales will be in focus for the week ahead. Even though we expect EUR upside on big upside surprises for Friday’s flash CPI data, the secondary reaction might be negative. A CPI surprise that sparks further stagflation or spread fragmentation fears could see an initial upside reaction followed by immediate downside afterwards (which means be careful with this one) BIGGER PICTURE The fundamental outlook for the EUR remains neutral with positive and negative forces in play. On the negative side we have geopolitics, stagflation and spread fragmentation acting as negative drivers. But we also have hawkish ECB policy as a supportive driver. That means our preferred way of trading the EUR right now is taking short-term plays which are driven by clear shortterm bearish or bullish catalysts. The disappointing PMI data does open up a potential narrative change for EURGBP and we are currently positioned for some potential downside in the pair. GBP FUNDAMENTAL OUTLOOK: WEAK BEARISH BASELINE The overall bleak economic outlook for the UK, with exceptionally high Inflation and rapidly falling growth have been the biggest negative driver for Sterling. With rising price pressures and falling demand, the risks of stagflation has risen substantially, so much so that the BoE have forecasted a possible recession for the UK economy heading into 2023. At their June meeting the bank followed through with their more moderate approach by hiking 25bsp instead of growing calls of a potential 50bsp hike. The BoE is stuck between a rock and a hard place, right now they have to hike rates to try and fight inflation but by doing so they risk further damaging economic growth as a result. Even though the June statement was dovish, it wasn’t materially more dovish compared to their previous meeting. The price action was a clear warning sign that a lot of negatives has been priced in for Sterling in recent weeks so chasing lower is very risky right now. It also means we would favour upside opportunities on solid bullish short-term catalysts. POSSIBLE BULLISH SURPRISES Stagflation fears are very high for the UK, with probabilities of recession growing by the week. With so much bad news priced in, incoming news risk is asymmetrical, meaning positive surprises in growth data could trigger bullish reactions. Furthermore, as the UK is facing one of its biggest cost of living squeezes in history, lower-than-expected inflation could counterintuitively be a positive driver for the currency (lower CPI means less stagflation risk). The economy needs help right now, which means any help from the fiscal side will be a positive. Any major fiscal support measures to help consumers (subsidies for energy or tax cuts) could trigger bullish reactions for the Pound. We have BoE’s Bailey and Cunliffe up next week, any overly hawkish comments signalling more aggressive policy than what markets are currently pricing in (see our Rate Tracker for STIR expectations) could trigger bullish GBP reactions. POSSIBLE BEARISH SURPRISES Monetary policy is a double-edged sword for the GBP. Odds that the BoE has limited hikes left has been a negative driver, but so too is risks that inflation forces them to hike even more and further damage GDP. Further stagflation risks from higher gas prices or CPI prints could trigger bearish reactions. Politics is also in focus, where any attempts to oust PM Johnson by changing no-confidence laws could trigger bearish reactions. GBP is usually sensitive to political uncertainty and anything that raises odds of a snap election should be negative. With UK threats of triggering Article 16 and EU threats to terminate the Brexit deal if they do Brexit is in focus again. For now, markets have rightly ignored this as posturing, but any actual escalation can see sharp GBP downside. We have BoE’s Bailey and Cunliffe up next week, any overly dovish comments signalling less aggressive policy than what markets are currently pricing in (see our Rate Tracker for STIR expectations) could trigger bearish GBP reactions. BIGGER PICTURE The fundamental outlook for the GBP remains fairly bleak right now with the economic prospects and risk of stagflation keeping the currency pressured. Anything that exacerbates stagflation fears is expected to weigh on the Pound and anything that alleviates some of that pressure should be positive. Tactically the GBP has been stretched to the downside, so any new shorts do need to be weary of the risk of some mean reversion as we saw after this past week’s BoE meeting.
by thunderpips
1
GBP USD - FUNDAMENTAL DRIVERSGBP FUNDAMENTAL OUTLOOK: WEAK BEARISH BASELINE The overall bleak economic outlook for the UK, with exceptionally high Inflation and rapidly falling growth have been the biggest negative driver for Sterling. With rising price pressures and falling demand, the risks of stagflation has risen substantially, so much so that the BoE have forecasted a possible recession for the UK economy heading into 2023. At their June meeting the bank followed through with their more moderate approach by hiking 25bsp instead of growing calls of a potential 50bsp hike. The BoE is stuck between a rock and a hard place, right now they have to hike rates to try and fight inflation but by doing so they risk further damaging economic growth as a result. Even though the June statement was dovish, it wasn’t materially more dovish compared to their previous meeting. The price action was a clear warning sign that a lot of negatives has been priced in for Sterling in recent weeks so chasing lower is very risky right now. It also means we would favour upside opportunities on solid bullish short-term catalysts. POSSIBLE BULLISH SURPRISES Stagflation fears are very high for the UK, with probabilities of recession growing by the week. With so much bad news priced in, incoming news risk is asymmetrical, meaning positive surprises in growth data could trigger bullish reactions. Furthermore, as the UK is facing one of its biggest cost of living squeezes in history, lower-than-expected inflation could counterintuitively be a positive driver for the currency (lower CPI means less stagflation risk). The economy needs help right now, which means any help from the fiscal side will be a positive. Any major fiscal support measures to help consumers (subsidies for energy or tax cuts) could trigger bullish reactions for the Pound. We have BoE’s Bailey and Cunliffe up next week, any overly hawkish comments signalling more aggressive policy than what markets are currently pricing in (see our Rate Tracker for STIR expectations) could trigger bullish GBP reactions. POSSIBLE BEARISH SURPRISES Monetary policy is a double-edged sword for the GBP. Odds that the BoE has limited hikes left has been a negative driver, but so too is risks that inflation forces them to hike even more and further damage GDP. Further stagflation risks from higher gas prices or CPI prints could trigger bearish reactions. Politics is also in focus, where any attempts to oust PM Johnson by changing no-confidence laws could trigger bearish reactions. GBP is usually sensitive to political uncertainty and anything that raises odds of a snap election should be negative. With UK threats of triggering Article 16 and EU threats to terminate the Brexit deal if they do Brexit is in focus again. For now, markets have rightly ignored this as posturing, but any actual escalation can see sharp GBP downside. We have BoE’s Bailey and Cunliffe up next week, any overly dovish comments signalling less aggressive policy than what markets are currently pricing in (see our Rate Tracker for STIR expectations) could trigger bearish GBP reactions. BIGGER PICTURE The fundamental outlook for the GBP remains fairly bleak right now with the economic prospects and risk of stagflation keeping the currency pressured. Anything that exacerbates stagflation fears is expected to weigh on the Pound and anything that alleviates some of that pressure should be positive. Tactically the GBP has been stretched to the downside, so any new shorts do need to be weary of the risk of some mean reversion as we saw after this past week’s BoE meeting. USD FUNDAMENTAL OUTLOOK: BULLISH BASELINE Hawkish Fed policy remains a key driver for Dollar strength. With headline inflation >8%, the Fed has been pressured to tighten policy aggressively, hiking rates by 75bsp at their June meeting, and continuing with Quantitative Tightening. STIR markets suggests aggressive policy action pricing a terminal rate of >3.6% by 2Q23 which have been a positive input for the US Dollar . Safe haven flows have also supported the USD as it’s usually inversely correlated to the global economy and global trade, appreciating when growth & inflation slows (disinflation) and depreciates when growth & inflation accelerates (reflation). Expectations of a cyclical slowdown, accompanied by multi-decade high inflation and synchronized removal of monetary policy stimulus from major economies has seen investors shun risk assets and even bonds (usually considered a safe haven), and the USD has been a key benefactor of the rush to safety as economic prospects have deteriorated. Even though US bonds are considered safe havens, the current high inflation has seen a strong stock-to-bond correlation and has caused big bond outflows. With bonds not fulfilling its usual save haven role the USD has benefited from the rush to safety. POSSIBLE BULLISH SURPRISES As aggressive Fed policy has been supporting the USD, any incoming data (especially inflation ) that sparks further hike expectations, or additionally any comments from FOMC members that signals even more aggressive policy could trigger bullish reactions in the USD. As the cyclical outlook for the global economy is very bleak, and the USD is considered a safe haven, it means any incoming data that exacerbates fears of recession and triggers a big rush to safety could trigger bullish USD reactions. Further outflows in US bonds means more USD safe haven appeal. So, watching key triggers for further upside in bond yields like rising commodity prices, rising inflation expectations and upside surprises in CPI and PCE data could also trigger further USD bullish reactions. POSSIBLE BEARISH SURPRISES More recently the USD has reacted more cyclically to incoming data which could suggest markets is shifting from safe haven focus to the rising risks of recession. The worse growth data slows, the higher likelihood of a ‘Fed Put’ in the months ahead. Thus, extremely bad ISM Manufacturing PMI data on Friday could trigger bearish reactions in the USD. Tactically the USD is trading at cycle highs, and aggregate CFTC positioning is close prior highs which acted as local tops for the USD. Thus, stretched positioning could make the USD vulnerable to mean reversion in the short-term. With a lot already priced for the Fed, it won’t take much for the Fed to disappoint markets on the dovish side. Thus, any FOMC comments that suggests more concern about the economy than inflation could trigger bearish reactions in the USD BIGGER PICTURE The fundamental outlook for the USD remains bullish as long as the Fed stays aggressive and cyclical concerns put pressure on risk assets. But we do want to be mindful that lots has been priced for the USD, and as growth deteriorates, we are expecting that the weigh on the USD if markets start pricing in a higher likelihood of a less hawkish Fed due to higher recession risks. Furthermore, given tactical and CFTC positioning, we would prefer much deeper pullbacks for new med-term USD longs, and would look for short-term catalyst that offer shorter bearish sentiment trades against the current strong bull trend.
by thunderpips
1
GBP USD - FUNDAMENTAL DRIVERSGBP FUNDAMENTAL OUTLOOK: WEAK BEARISH BASELINE The overall bleak economic outlook for the UK, with exceptionally high Inflation and rapidly falling growth have been the biggest negative driver for Sterling. With rising price pressures and falling demand, the risks of stagflation has risen substantially, so much so that the BoE have forecasted a possible recession for the UK economy heading into 2023. At their June meeting the bank followed through with their more moderate approach by hiking 25bsp instead of growing calls of a potential 50bsp hike. The BoE is stuck between a rock and a hard place, right now they have to hike rates to try and fight inflation but by doing so they risk further damaging economic growth as a result. Even though the June statement was dovish, it wasn’t materially more dovish compared to their previous meeting. The price action was a clear warning sign that a lot of negatives has been priced in for Sterling in recent weeks so chasing lower is very risky right now. It also means we would favour upside opportunities on solid bullish short-term catalysts. POSSIBLE BULLISH SURPRISES Stagflation fears are very high for the UK, with probabilities of recession growing by the week. With so much bad news priced in, incoming news risk is asymmetrical, meaning positive surprises in growth data could trigger bullish reactions. Furthermore, as the UK is facing one of its biggest cost of living squeezes in history, lower-than-expected inflation could counterintuitively be a positive driver for the currency (lower CPI means less stagflation risk). The economy needs help right now, which means any help from the fiscal side will be a positive. Any major fiscal support measures to help consumers (subsidies for energy or tax cuts) could trigger bullish reactions for the Pound. We have BoE’s Bailey and Cunliffe up next week, any overly hawkish comments signalling more aggressive policy than what markets are currently pricing in (see our Rate Tracker for STIR expectations) could trigger bullish GBP reactions. POSSIBLE BEARISH SURPRISES Monetary policy is a double-edged sword for the GBP. Odds that the BoE has limited hikes left has been a negative driver, but so too is risks that inflation forces them to hike even more and further damage GDP. Further stagflation risks from higher gas prices or CPI prints could trigger bearish reactions. Politics is also in focus, where any attempts to oust PM Johnson by changing no-confidence laws could trigger bearish reactions. GBP is usually sensitive to political uncertainty and anything that raises odds of a snap election should be negative. With UK threats of triggering Article 16 and EU threats to terminate the Brexit deal if they do Brexit is in focus again. For now, markets have rightly ignored this as posturing, but any actual escalation can see sharp GBP downside. We have BoE’s Bailey and Cunliffe up next week, any overly dovish comments signalling less aggressive policy than what markets are currently pricing in (see our Rate Tracker for STIR expectations) could trigger bearish GBP reactions. BIGGER PICTURE The fundamental outlook for the GBP remains fairly bleak right now with the economic prospects and risk of stagflation keeping the currency pressured. Anything that exacerbates stagflation fears is expected to weigh on the Pound and anything that alleviates some of that pressure should be positive. Tactically the GBP has been stretched to the downside, so any new shorts do need to be weary of the risk of some mean reversion as we saw after this past week’s BoE meeting. USD FUNDAMENTAL OUTLOOK: BULLISH BASELINE Hawkish Fed policy remains a key driver for Dollar strength. With headline inflation >8%, the Fed has been pressured to tighten policy aggressively, hiking rates by 75bsp at their June meeting, and continuing with Quantitative Tightening. STIR markets suggests aggressive policy action pricing a terminal rate of >3.6% by 2Q23 which have been a positive input for the US Dollar. Safe haven flows have also supported the USD as it’s usually inversely correlated to the global economy and global trade, appreciating when growth & inflation slows (disinflation) and depreciates when growth & inflation accelerates (reflation). Expectations of a cyclical slowdown, accompanied by multi-decade high inflation and synchronized removal of monetary policy stimulus from major economies has seen investors shun risk assets and even bonds (usually considered a safe haven), and the USD has been a key benefactor of the rush to safety as economic prospects have deteriorated. Even though US bonds are considered safe havens, the current high inflation has seen a strong stock-to-bond correlation and has caused big bond outflows. With bonds not fulfilling its usual save haven role the USD has benefited from the rush to safety. POSSIBLE BULLISH SURPRISES As aggressive Fed policy has been supporting the USD, any incoming data (especially inflation) that sparks further hike expectations, or additionally any comments from FOMC members that signals even more aggressive policy could trigger bullish reactions in the USD. As the cyclical outlook for the global economy is very bleak, and the USD is considered a safe haven, it means any incoming data that exacerbates fears of recession and triggers a big rush to safety could trigger bullish USD reactions. Further outflows in US bonds means more USD safe haven appeal. So, watching key triggers for further upside in bond yields like rising commodity prices, rising inflation expectations and upside surprises in CPI and PCE data could also trigger further USD bullish reactions. POSSIBLE BEARISH SURPRISES More recently the USD has reacted more cyclically to incoming data which could suggest markets is shifting from safe haven focus to the rising risks of recession. The worse growth data slows, the higher likelihood of a ‘Fed Put’ in the months ahead. Thus, extremely bad ISM Manufacturing PMI data on Friday could trigger bearish reactions in the USD. Tactically the USD is trading at cycle highs, and aggregate CFTC positioning is close prior highs which acted as local tops for the USD. Thus, stretched positioning could make the USD vulnerable to mean reversion in the short-term. With a lot already priced for the Fed, it won’t take much for the Fed to disappoint markets on the dovish side. Thus, any FOMC comments that suggests more concern about the economy than inflation could trigger bearish reactions in the USD BIGGER PICTURE The fundamental outlook for the USD remains bullish as long as the Fed stays aggressive and cyclical concerns put pressure on risk assets. But we do want to be mindful that lots has been priced for the USD, and as growth deteriorates, we are expecting that the weigh on the USD if markets start pricing in a higher likelihood of a less hawkish Fed due to higher recession risks. Furthermore, given tactical and CFTC positioning, we would prefer much deeper pullbacks for new med-term USD longs, and would look for short-term catalyst that offer shorter bearish sentiment trades against the current strong bull trend.
by thunderpips
1
EUR GBP - FUNDAMENTAL DRIVERSEUR FUNDAMENTAL OUTLOOK: NEUTRAL BASELINE The EUR has had a bumpy ride over the past few months. At the onset of the war in Ukraine the EUR tumbled across the board. However, in recent weeks, the persistently high inflation has seen the ECB take a more hawkish turn with the bank confirming at least a 25bsp hike for July and possibility of a 50bsp hike in September. Despite the hawkish policy shift, the concerns over fragmentation in bond spreads like the BTP\Bund spread as well as fears of growing stagflation risks has seen the EUR struggled to hold onto any real hawkish ECB momentum. The ECB did try to comfort spread concerns last week with an ad-hoc meeting and decided to use PEPP reinvestments as a way to calm fragmentation. But this wasn’t enough to calm concerns as reinvestment would amount to about €20 billion per month. However, the bank’s decision was enough to push the BTP\Bund down 50bsp, and if that trend can continue lower it should be supportive for the EUR. The bank did back up their attempts at calming fragmentation fears after their ad-hoc meeting by saying they are looking at introducing an additional ‘tool’ as quick as possible, so markets will be focused on any insights into what that tool might be. Even though growth data has been surprisingly resilient in the past few months, the recession fears ramped up this past week when EU Flash PMIs showed a material deceleration in growth. Incoming growth data will be watched carefully after this and any further signs that the deterioration in growth is gaining momentum should weigh on the EUR. POSSIBLE BULLISH SURPRISES Geopolitics remains a focus for the EUR, where any possible de-escalation or cease fire in the Ukraine war would open up a lot of appreciation for the EUR. Stagflation fears are high right now for the Eurozone, with growth expected to slow while inflation stays persistently high. Recent PMI data has invigorated recession fears, which means any materially better-than-expected growth data could spark some upside for the single currency. Inflation remains a key focus, which means the incoming Flash PMI prints on Friday will be important for interest rate expectations. A big upside surprise should be positive for the EUR, but there are risks that further upside in inflation which leads to higher rates also leads to further fragmentation risks. POSSIBLE BEARISH SURPRISES Spread fragmentation remains in focus, and if ECB speak in the week ahead fails to calm fears or walks back on recent hawkish comments it could trigger bearish reactions in the EUR. Flash PMIs confirmed growth risks in the EU is very much alive, we expect growth concerns to continue weighing on the EUR and means German & French retail sales will be in focus for the week ahead. Even though we expect EUR upside on big upside surprises for Friday’s flash CPI data, the secondary reaction might be negative. A CPI surprise that sparks further stagflation or spread fragmentation fears could see an initial upside reaction followed by immediate downside afterwards (which means be careful with this one) BIGGER PICTURE The fundamental outlook for the EUR remains neutral with positive and negative forces in play. On the negative side we have geopolitics, stagflation and spread fragmentation acting as negative drivers. But we also have hawkish ECB policy as a supportive driver. That means our preferred way of trading the EUR right now is taking short-term plays which are driven by clear shortterm bearish or bullish catalysts. The disappointing PMI data does open up a potential narrative change for EURGBP and we are currently positioned for some potential downside in the pair. GBP FUNDAMENTAL OUTLOOK: WEAK BEARISH BASELINE The overall bleak economic outlook for the UK, with exceptionally high Inflation and rapidly falling growth have been the biggest negative driver for Sterling. With rising price pressures and falling demand, the risks of stagflation has risen substantially, so much so that the BoE have forecasted a possible recession for the UK economy heading into 2023. At their June meeting the bank followed through with their more moderate approach by hiking 25bsp instead of growing calls of a potential 50bsp hike. The BoE is stuck between a rock and a hard place, right now they have to hike rates to try and fight inflation but by doing so they risk further damaging economic growth as a result. Even though the June statement was dovish, it wasn’t materially more dovish compared to their previous meeting. The price action was a clear warning sign that a lot of negatives has been priced in for Sterling in recent weeks so chasing lower is very risky right now. It also means we would favour upside opportunities on solid bullish short-term catalysts. POSSIBLE BULLISH SURPRISES Stagflation fears are very high for the UK, with probabilities of recession growing by the week. With so much bad news priced in, incoming news risk is asymmetrical, meaning positive surprises in growth data could trigger bullish reactions. Furthermore, as the UK is facing one of its biggest cost of living squeezes in history, lower-than-expected inflation could counterintuitively be a positive driver for the currency (lower CPI means less stagflation risk). The economy needs help right now, which means any help from the fiscal side will be a positive. Any major fiscal support measures to help consumers (subsidies for energy or tax cuts) could trigger bullish reactions for the Pound. We have BoE’s Bailey and Cunliffe up next week, any overly hawkish comments signalling more aggressive policy than what markets are currently pricing in (see our Rate Tracker for STIR expectations) could trigger bullish GBP reactions. POSSIBLE BEARISH SURPRISES Monetary policy is a double-edged sword for the GBP. Odds that the BoE has limited hikes left has been a negative driver, but so too is risks that inflation forces them to hike even more and further damage GDP. Further stagflation risks from higher gas prices or CPI prints could trigger bearish reactions. Politics is also in focus, where any attempts to oust PM Johnson by changing no-confidence laws could trigger bearish reactions. GBP is usually sensitive to political uncertainty and anything that raises odds of a snap election should be negative. With UK threats of triggering Article 16 and EU threats to terminate the Brexit deal if they do Brexit is in focus again. For now, markets have rightly ignored this as posturing, but any actual escalation can see sharp GBP downside. We have BoE’s Bailey and Cunliffe up next week, any overly dovish comments signalling less aggressive policy than what markets are currently pricing in (see our Rate Tracker for STIR expectations) could trigger bearish GBP reactions. BIGGER PICTURE The fundamental outlook for the GBP remains fairly bleak right now with the economic prospects and risk of stagflation keeping the currency pressured. Anything that exacerbates stagflation fears is expected to weigh on the Pound and anything that alleviates some of that pressure should be positive. Tactically the GBP has been stretched to the downside, so any new shorts do need to be weary of the risk of some mean reversion as we saw after this past week’s BoE meeting.
by thunderpips
GBP CAD - FUNDAMENTAL DRIVERSGBP FUNDAMENTAL OUTLOOK: WEAK BEARISH BASELINE The overall bleak economic outlook for the UK, with exceptionally high Inflation and rapidly falling growth have been the biggest negative driver for Sterling. With rising price pressures and falling demand, the risks of stagflation has risen substantially, so much so that the BoE have forecasted a possible recession for the UK economy heading into 2023. At their June meeting the bank followed through with their more moderate approach by hiking 25bsp instead of growing calls of a potential 50bsp hike. The BoE is stuck between a rock and a hard place, right now they have to hike rates to try and fight inflation but by doing so they risk further damaging economic growth as a result. Even though the June statement was dovish, it wasn’t materially more dovish compared to their previous meeting. the price action was a clear warning sign that a lot of negatives has been priced in for Sterling in recent weeks so chasing lower in risky. POSSIBLE BULLISH SURPRISES Stagflation fears are very high for the UK, with probabilities of recession growing by the week. With so much bad news priced in, incoming news risk is asymmetrical, meaning positive surprises in growth data (like incoming flash PMIs) could trigger bullish reactions for Sterling. Furthermore, as the UK is facing one of its biggest cost of living squeezes in history, lower-than-expected inflation prints (coming up Wednesday) could counterintuitively be a positive driver for the currency (lower CPI means less stagflation risk). The economy needs help right now, which means any help from the fiscal side will be a positive. Any major fiscal support measures to help consumers (subsidies for energy or tax cuts) could trigger bullish reactions for the Pound. We have lots of BoE speak coming up this week, any overly hawkish comments signalling more aggressive policy than what markets are currently pricing in could trigger bullish GBP reactions. POSSIBLE BEARISH SURPRISES Monetary policy is a double-edged sword for the GBP. Odds that the BoE has limited hikes left has been a negative driver, but so too is risks that inflation forces them to hike even more and further damage GDP. Further stagflation risks from higher gas prices or CPI prints could trigger bearish reactions. Politics is also in focus, where any attempts to oust PM Johnson by changing no-confidence laws could trigger bearish reactions. GBP is usually sensitive to political uncertainty and anything that raises odds of a snap election should be negative. With UK threats of triggering Article 16 and EU threats to terminate the Brexit deal if they do Brexit is in focus again. For now, markets have rightly ignored this as posturing, but any actual escalation can see sharp GBP downside. We have lots of BoE speak coming up this week, any overly dovish comments signalling less aggressive policy than what markets are currently pricing in could trigger bearish GBP reactions. BIGGER PICTURE The fundamental outlook for the GBP remains fairly bleak right now with the economic prospects and risk of stagflation keeping the currency pressured. Anything that exacerbates stagflation fears is expected to weigh on the Pound and anything that alleviates some of that pressure should be positive. Tactically the GBP has been stretched to the downside, so any new shorts do need to be weary of the risk of some mean reversion as we saw after this past week’s BoE meeting. CAD FUNDAMENTAL OUTLOOK: NEUTRAL BASELINE The CAD has enjoyed far more upside in the past few weeks than we anticipated. We’ve been cautious on the currency given Canada’s dependency on the US (>70% of exports) where the clear signs of a faster than expected slowdown and possible recession should deteriorate the growth outlook for Canada. Apart from that, the risks to the Canadian housing market can negatively impact consumer spending as interest rates rise higher at aggressive speed. Potentially damaging the wealth effect created by the rapid rise in house prices since covid. However, despite the risks to the economy and the outlook, markets still price in a very favourable growth environment for Canada, also supported by a big push higher in terms of trade due to the rise in commodity prices. Furthermore, despite clear warning signals, the BoC has chosen to ignore the negatives and has stayed surprisingly optimistic and hawkish. We’ve missed most of the move higher in the CAD as our bias has kept us cautious, but the risks are still present and with the currency close to 9-year highs (at the index level) we have very little appetite for chasing it higher from here and will be actively looking for opportunities to trade the CAD lower with the right type of bearish catalyst. POSSIBLE BULLISH SURPRISES As an oil exporter, oil prices are important for CAD. Catalyst that sees further upside Oil (deteriorating supply outlook, ease in demand fears) could trigger bullish CAD reactions. The correlation has been hit and miss in recent weeks though. As a risk sensitive currency, and catalyst that causes big bouts of risk on sentiment could trigger bullish reactions in the CAD. With more market participants noticing cracks in the housing markets, a very solid House Price Index print could ease some of those concerns and provide some upside. Even though a lot of tightening has been priced in for the BoC , a big enough surprise in CPI that triggers further hike expectations could provide some short-term support. POSSIBLE BEARISH SURPRISES As an oil exporter, oil prices are important for CAD. Any catalyst that triggers meaningful downside in oil (deteriorating demand outlook, ease in supply shortage, less supply constraints) 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. Since a lot of policy tightening has been priced into STIR markets, any negative catalysts that triggers less hawkish BoC expectations (faster deceleration in growth or inflation ) could trigger outsized downside for the CAD. In recent communication, Governor Macklem started to mention some hiccups in housing. A big miss in the House Price index could trigger more speculation of a less hawkish bank and could trigger some downside for the CAD. BIGGER PICTURE The bigger picture outlook for the CAD remains neutral for now. Given the clear risks to the growth outlook due to the slowdown in the US, as well as rising risks to the consumer and the housing market, we remain cautious on the currency, even though it’s move much higher than we anticipated. With a lot of upside priced into the CAD and Canadian yields, our preferred way of trading the CAD would be to look for short-term negative catalysts to trade the CAD lower instead of chasing it higher.
by thunderpips
GBP USD - FUNDAMENTAL DRIVERSGBP FUNDAMENTAL OUTLOOK: WEAK BEARISH BASELINE The overall bleak economic outlook for the UK, with exceptionally high Inflation and rapidly falling growth have been the biggest negative driver for Sterling. With rising price pressures and falling demand, the risks of stagflation has risen substantially, so much so that the BoE have forecasted a possible recession for the UK economy heading into 2023. At their June meeting the bank followed through with their more moderate approach by hiking 25bsp instead of growing calls of a potential 50bsp hike. The BoE is stuck between a rock and a hard place, right now they have to hike rates to try and fight inflation but by doing so they risk further damaging economic growth as a result. Even though the June statement was dovish, it wasn’t materially more dovish compared to their previous meeting. the price action was a clear warning sign that a lot of negatives has been priced in for Sterling in recent weeks so chasing lower in risky. POSSIBLE BULLISH SURPRISES Stagflation fears are very high for the UK, with probabilities of recession growing by the week. With so much bad news priced in, incoming news risk is asymmetrical, meaning positive surprises in growth data (like incoming flash PMIs) could trigger bullish reactions for Sterling. Furthermore, as the UK is facing one of its biggest cost of living squeezes in history, lower-than-expected inflation prints (coming up Wednesday) could counterintuitively be a positive driver for the currency (lower CPI means less stagflation risk). The economy needs help right now, which means any help from the fiscal side will be a positive. Any major fiscal support measures to help consumers (subsidies for energy or tax cuts) could trigger bullish reactions for the Pound. We have lots of BoE speak coming up this week, any overly hawkish comments signalling more aggressive policy than what markets are currently pricing in could trigger bullish GBP reactions. POSSIBLE BEARISH SURPRISES Monetary policy is a double-edged sword for the GBP. Odds that the BoE has limited hikes left has been a negative driver, but so too is risks that inflation forces them to hike even more and further damage GDP. Further stagflation risks from higher gas prices or CPI prints could trigger bearish reactions. Politics is also in focus, where any attempts to oust PM Johnson by changing no-confidence laws could trigger bearish reactions. GBP is usually sensitive to political uncertainty and anything that raises odds of a snap election should be negative. With UK threats of triggering Article 16 and EU threats to terminate the Brexit deal if they do Brexit is in focus again. For now, markets have rightly ignored this as posturing, but any actual escalation can see sharp GBP downside. We have lots of BoE speak coming up this week, any overly dovish comments signalling less aggressive policy than what markets are currently pricing in could trigger bearish GBP reactions. BIGGER PICTURE The fundamental outlook for the GBP remains fairly bleak right now with the economic prospects and risk of stagflation keeping the currency pressured. Anything that exacerbates stagflation fears is expected to weigh on the Pound and anything that alleviates some of that pressure should be positive. Tactically the GBP has been stretched to the downside, so any new shorts do need to be weary of the risk of some mean reversion as we saw after this past week’s BoE meeting. USD FUNDAMENTAL OUTLOOK: BULLISH BASELINE Hawkish Fed policy remains a key driver for Dollar strength. With headline inflation >8%, the Fed has been pressured to tighten policy aggressively, hiking rates by 75bsp at their June meeting, and continuing with Quantitative Tightening. STIR markets suggests aggressive policy action pricing a terminal rate of >3.8% by 2Q23 which should be a positive input for the US Dollar . Safe haven flows have also supported the USD as it’s usually inversely correlated to the global economy and global trade, appreciating when growth & inflation slows (disinflation) and depreciates when growth & inflation accelerates (reflation). Expectations of a cyclical slowdown, accompanied by multi-decade high inflation and synchronized removal of monetary policy stimulus from major economies has seen investors shun risk assets and even bonds (usually considered a safe haven), and the USD has been a key benefactor of the rush to safety as economic prospects have deteriorated. Even though US bonds are considered safe havens, the current high inflation has seen a strong stock-to-bond correlation and has caused big bond outflows. With bonds not fulfilling its usual save haven role the USD has benefited from the rush to safety. POSSIBLE BULLISH SURPRISES As aggressive Fed policy has been supporting the USD, any incoming data (especially inflation ) that sparks further hike expectations, or additionally any comments from FOMC members that signals even more aggressive policy could trigger bullish reactions in the USD. As the cyclical outlook for the global economy is very bleak, and the USD is considered a safe haven, it means any incoming data that exacerbates fears of recession and triggers a big rush to safety could trigger bullish USD reactions. Further outflows in US bonds means more USD safe haven appeal. So, watching key triggers for further upside in bond yields like rising commodity prices and inflation expectations could also trigger further USD bullish reactions. POSSIBLE BEARISH SURPRISES More recently the USD has reacted more cyclically to incoming data which could suggest markets is shifting from safe haven focus to the rising risks of recession. The worse growth data slows, the higher likelihood of a ‘Fed Put’ in the months ahead. Thus, extremely bad growth data could trigger bearish reactions in the USD despite its safe haven appeal. Tactically the USD is trading at cycle highs, and aggregate CFTC positioning is still close prior highs which acted aslocal tops for the USD. Thus, stretched positioning could make the USD vulnerable to mean reversion in the short-term. With a lot already priced for the Fed, it won’t take much for the Fed to disappoint markets on the dovish side. Thus, any FOMC comments that suggests more concern about the economy than inflation could trigger bearish reactions in the USD BIGGER PICTURE The fundamental outlook for the USD remains bullish as long as the Fed stays aggressive and cyclical concerns put pressure on risk assets. But we do want to be mindful that lots has been priced for the USD, and growth deteriorates, we are expecting that the weigh on the USD if markets start pricing in a higher likelihood of a less hawkish Fed as a result of higher risks of recession. Furthermore, given tactical and CFTC positioning, we would prefer deeper pullbacks for new med-term USD longs, but shortterm catalyst can still offer shorter bearish sentiment trades against the current strong bull trend.
by thunderpips
1
Today’s Notable Sentiment ShiftsEUR – The euro slid across the board on Thursday as weaker-than expected German and French PMI data showed that the eurozone economy is struggling to gain traction, prompting traders to trim bets on big rate-hike moves from the European Central Bank. Commenting on the outlook for EURUSD with respect to today’s data, analysts at Reuters explained that “the (PMI) manufacturing/services ratio tends to be a good barometer for pro-cyclical currencies. The ratio has sharply dropped relative to the US. This dynamic is typically consistent with further US dollar resilience. This could be bolstered as recession fears mount.”
by thunderpips
1
GBPUSD: Cable woes continue?!GBPUSD Intraday - We look to Sell at 1.2310 (stop at 1.2375) Buying pressure from 1.2161 resulted in prices rejecting the dip. Although the bulls are in control, the stalling positive momentum indicates a turnaround is possible. The bias is still for lower levels and we look for any gains to be limited. The hourly chart technicals suggests further upside before the downtrend returns. Preferred trade is to sell into rallies. Our profit targets will be 1.2130 and 1.2015 Resistance: 1.2275 / 1.2410 / 1.2545 Support: 1.2155 / 1.2015 / 1.1840 Please be advised that the information presented on TradingView is provided to Vantage (‘Vantage Global Limited’, ‘we’) by a third-party provider (‘Signal Centre’). Please be reminded that you are solely responsible for the trading decisions on your account. There is a very high degree of risk involved in trading. Any information and/or content is intended entirely for research, educational and informational purposes only and does not constitute investment or consultation advice or investment strategy. The information is not tailored to the investment needs of any specific person and therefore does not involve a consideration of any of the investment objectives, financial situation or needs of any viewer that may receive it. Kindly also note that past performance is not a reliable indicator of future results. Actual results may differ materially from those anticipated in forward-looking or past performance statements. We assume no liability as to the accuracy or completeness of any of the information and/or content provided herein and the Company cannot be held responsible for any omission, mistake nor for any loss or damage including without limitation to any loss of profit which may arise from reliance on any information supplied by Signal Centre.
Short
by VantageMarkets
GBP USD - FUNDAMENTAL DRIVERSGBP FUNDAMENTAL OUTLOOK: WEAK BEARISH BASELINE The overall bleak economic outlook for the UK, with exceptionally high Inflation and rapidly falling growth have been the biggest negative driver for Sterling. With rising price pressures and falling demand, the risks of stagflation has risen substantially, so much so that the BoE have forecasted a possible recession for the UK economy heading into 2023. At their June meeting the bank followed through with their more moderate approach by hiking 25bsp instead of growing calls of a potential 50bsp hike. The BoE is stuck between a rock and a hard place, right now they have to hike rates to try and fight inflation but by doing so they risk further damaging economic growth as a result. Even though the June statement was dovish, it wasn’t materially more dovish compared to their previous meeting. the price action was a clear warning sign that a lot of negatives has been priced in for Sterling in recent weeks so chasing lower in risky. POSSIBLE BULLISH SURPRISES Stagflation fears are very high for the UK, with probabilities of recession growing by the week. With so much bad news priced in, incoming news risk is asymmetrical, meaning positive surprises in growth data (like incoming flash PMIs) could trigger bullish reactions for Sterling. Furthermore, as the UK is facing one of its biggest cost of living squeezes in history, lower-than-expected inflation prints (coming up Wednesday) could counterintuitively be a positive driver for the currency (lower CPI means less stagflation risk). The economy needs help right now, which means any help from the fiscal side will be a positive. Any major fiscal support measures to help consumers (subsidies for energy or tax cuts) could trigger bullish reactions for the Pound. We have lots of BoE speak coming up this week, any overly hawkish comments signalling more aggressive policy than what markets are currently pricing in could trigger bullish GBP reactions. POSSIBLE BEARISH SURPRISES Monetary policy is a double-edged sword for the GBP. Odds that the BoE has limited hikes left has been a negative driver, but so too is risks that inflation forces them to hike even more and further damage GDP. Further stagflation risks from higher gas prices or CPI prints could trigger bearish reactions. Politics is also in focus, where any attempts to oust PM Johnson by changing no-confidence laws could trigger bearish reactions. GBP is usually sensitive to political uncertainty and anything that raises odds of a snap election should be negative. With UK threats of triggering Article 16 and EU threats to terminate the Brexit deal if they do Brexit is in focus again. For now, markets have rightly ignored this as posturing, but any actual escalation can see sharp GBP downside. We have lots of BoE speak coming up this week, any overly dovish comments signalling less aggressive policy than what markets are currently pricing in could trigger bearish GBP reactions. BIGGER PICTURE The fundamental outlook for the GBP remains fairly bleak right now with the economic prospects and risk of stagflation keeping the currency pressured. Anything that exacerbates stagflation fears is expected to weigh on the Pound and anything that alleviates some of that pressure should be positive. Tactically the GBP has been stretched to the downside, so any new shorts do need to be weary of the risk of some mean reversion as we saw after this past week’s BoE meeting. USD FUNDAMENTAL OUTLOOK: BULLISH BASELINE Hawkish Fed policy remains a key driver for Dollar strength. With headline inflation >8%, the Fed has been pressured to tighten policy aggressively, hiking rates by 75bsp at their June meeting, and continuing with Quantitative Tightening. STIR markets suggests aggressive policy action pricing a terminal rate of >3.8% by 2Q23 which should be a positive input for the US Dollar . Safe haven flows have also supported the USD as it’s usually inversely correlated to the global economy and global trade, appreciating when growth & inflation slows (disinflation) and depreciates when growth & inflation accelerates (reflation). Expectations of a cyclical slowdown, accompanied by multi-decade high inflation and synchronized removal of monetary policy stimulus from major economies has seen investors shun risk assets and even bonds (usually considered a safe haven), and the USD has been a key benefactor of the rush to safety as economic prospects have deteriorated. Even though US bonds are considered safe havens, the current high inflation has seen a strong stock-to-bond correlation and has caused big bond outflows. With bonds not fulfilling its usual save haven role the USD has benefited from the rush to safety. POSSIBLE BULLISH SURPRISES As aggressive Fed policy has been supporting the USD, any incoming data (especially inflation ) that sparks further hike expectations, or additionally any comments from FOMC members that signals even more aggressive policy could trigger bullish reactions in the USD. As the cyclical outlook for the global economy is very bleak, and the USD is considered a safe haven, it means any incoming data that exacerbates fears of recession and triggers a big rush to safety could trigger bullish USD reactions. Further outflows in US bonds means more USD safe haven appeal. So, watching key triggers for further upside in bond yields like rising commodity prices and inflation expectations could also trigger further USD bullish reactions. POSSIBLE BEARISH SURPRISES More recently the USD has reacted more cyclically to incoming data which could suggest markets is shifting from safe haven focus to the rising risks of recession. The worse growth data slows, the higher likelihood of a ‘Fed Put’ in the months ahead. Thus, extremely bad growth data could trigger bearish reactions in the USD despite its safe haven appeal. Tactically the USD is trading at cycle highs, and aggregate CFTC positioning is still close prior highs which acted aslocal tops for the USD. Thus, stretched positioning could make the USD vulnerable to mean reversion in the short-term. With a lot already priced for the Fed, it won’t take much for the Fed to disappoint markets on the dovish side. Thus, any FOMC comments that suggests more concern about the economy than inflation could trigger bearish reactions in the USD BIGGER PICTURE The fundamental outlook for the USD remains bullish as long as the Fed stays aggressive and cyclical concerns put pressure on risk assets. But we do want to be mindful that lots has been priced for the USD, and growth deteriorates, we are expecting that the weigh on the USD if markets start pricing in a higher likelihood of a less hawkish Fed as a result of higher risks of recession. Furthermore, given tactical and CFTC positioning, we would prefer deeper pullbacks for new med-term USD longs, but shortterm catalyst can still offer shorter bearish sentiment trades against the current strong bull trend.
by thunderpips
2
GBP CAD - FUNDAMENTAL DRIVERSGBP FUNDAMENTAL OUTLOOK: WEAK BEARISH BASELINE The overall bleak economic outlook for the UK, with exceptionally high Inflation and rapidly falling growth have been the biggest negative driver for Sterling. With rising price pressures and falling demand, the risks of stagflation has risen substantially, so much so that the BoE have forecasted a possible recession for the UK economy heading into 2023. At their June meeting the bank followed through with their more moderate approach by hiking 25bsp instead of growing calls of a potential 50bsp hike. The BoE is stuck between a rock and a hard place, right now they have to hike rates to try and fight inflation but by doing so they risk further damaging economic growth as a result. Even though the June statement was dovish, it wasn’t materially more dovish compared to their previous meeting. the price action was a clear warning sign that a lot of negatives has been priced in for Sterling in recent weeks so chasing lower in risky. POSSIBLE BULLISH SURPRISES Stagflation fears are very high for the UK, with probabilities of recession growing by the week. With so much bad news priced in, incoming news risk is asymmetrical, meaning positive surprises in growth data (like incoming flash PMIs) could trigger bullish reactions for Sterling. Furthermore, as the UK is facing one of its biggest cost of living squeezes in history, lower-than-expected inflation prints (coming up Wednesday) could counterintuitively be a positive driver for the currency (lower CPI means less stagflation risk). The economy needs help right now, which means any help from the fiscal side will be a positive. Any major fiscal support measures to help consumers (subsidies for energy or tax cuts) could trigger bullish reactions for the Pound. We have lots of BoE speak coming up this week, any overly hawkish comments signalling more aggressive policy than what markets are currently pricing in could trigger bullish GBP reactions. POSSIBLE BEARISH SURPRISES Monetary policy is a double-edged sword for the GBP. Odds that the BoE has limited hikes left has been a negative driver, but so too is risks that inflation forces them to hike even more and further damage GDP. Further stagflation risks from higher gas prices or CPI prints could trigger bearish reactions. Politics is also in focus, where any attempts to oust PM Johnson by changing no-confidence laws could trigger bearish reactions. GBP is usually sensitive to political uncertainty and anything that raises odds of a snap election should be negative. With UK threats of triggering Article 16 and EU threats to terminate the Brexit deal if they do Brexit is in focus again. For now, markets have rightly ignored this as posturing, but any actual escalation can see sharp GBP downside. We have lots of BoE speak coming up this week, any overly dovish comments signalling less aggressive policy than what markets are currently pricing in could trigger bearish GBP reactions. BIGGER PICTURE The fundamental outlook for the GBP remains fairly bleak right now with the economic prospects and risk of stagflation keeping the currency pressured. Anything that exacerbates stagflation fears is expected to weigh on the Pound and anything that alleviates some of that pressure should be positive. Tactically the GBP has been stretched to the downside, so any new shorts do need to be weary of the risk of some mean reversion as we saw after this past week’s BoE meeting. CAD FUNDAMENTAL OUTLOOK: NEUTRAL BASELINE The CAD has enjoyed far more upside in the past few weeks than we anticipated. We’ve been cautious on the currency given Canada’s dependency on the US (>70% of exports) where the clear signs of a faster than expected slowdown and possible recession should deteriorate the growth outlook for Canada. Apart from that, the risks to the Canadian housing market can negatively impact consumer spending as interest rates rise higher at aggressive speed. Potentially damaging the wealth effect created by the rapid rise in house prices since covid. However, despite the risks to the economy and the outlook, markets still price in a very favourable growth environment for Canada, also supported by a big push higher in terms of trade due to the rise in commodity prices. Furthermore, despite clear warning signals, the BoC has chosen to ignore the negatives and has stayed surprisingly optimistic and hawkish. We’ve missed most of the move higher in the CAD as our bias has kept us cautious, but the risks are still present and with the currency close to 9-year highs (at the index level) we have very little appetite for chasing it higher from here and will be actively looking for opportunities to trade the CAD lower with the right type of bearish catalyst. POSSIBLE BULLISH SURPRISES As an oil exporter, oil prices are important for CAD. Catalyst that sees further upside Oil (deteriorating supply outlook, ease in demand fears) could trigger bullish CAD reactions. The correlation has been hit and miss in recent weeks though. As a risk sensitive currency, and catalyst that causes big bouts of risk on sentiment could trigger bullish reactions in the CAD. With more market participants noticing cracks in the housing markets, a very solid House Price Index print could ease some of those concerns and provide some upside. Even though a lot of tightening has been priced in for the BoC , a big enough surprise in CPI that triggers further hike expectations could provide some short-term support. POSSIBLE BEARISH SURPRISES As an oil exporter, oil prices are important for CAD. Any catalyst that triggers meaningful downside in oil (deteriorating demand outlook, ease in supply shortage, less supply constraints) 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. Since a lot of policy tightening has been priced into STIR markets, any negative catalysts that triggers less hawkish BoC expectations (faster deceleration in growth or inflation ) could trigger outsized downside for the CAD. In recent communication, Governor Macklem started to mention some hiccups in housing. A big miss in the House Price index could trigger more speculation of a less hawkish bank and could trigger some downside for the CAD. BIGGER PICTURE The bigger picture outlook for the CAD remains neutral for now. Given the clear risks to the growth outlook due to the slowdown in the US, as well as rising risks to the consumer and the housing market, we remain cautious on the currency, even though it’s move much higher than we anticipated. With a lot of upside priced into the CAD and Canadian yields, our preferred way of trading the CAD would be to look for short-term negative catalysts to trade the CAD lower instead of chasing it higher.
by thunderpips
1
GBP USD - FUNDAMENTAL DRIVERSGBP FUNDAMENTAL OUTLOOK: WEAK BEARISH BASELINE The overall bleak economic outlook for the UK, with exceptionally high Inflation and rapidly falling growth have been the biggest negative driver for Sterling. With rising price pressures and falling demand, the risks of stagflation has risen substantially, so much so that the BoE have forecasted a possible recession for the UK economy heading into 2023. At their June meeting the bank followed through with their more moderate approach by hiking 25bsp instead of growing calls of a potential 50bsp hike. The BoE is stuck between a rock and a hard place, right now they have to hike rates to try and fight inflation but by doing so they risk further damaging economic growth as a result. Even though the June statement was dovish, it wasn’t materially more dovish compared to their previous meeting. the price action was a clear warning sign that a lot of negatives has been priced in for Sterling in recent weeks so chasing lower in risky. POSSIBLE BULLISH SURPRISES Stagflation fears are very high for the UK, with probabilities of recession growing by the week. With so much bad news priced in, incoming news risk is asymmetrical, meaning positive surprises in growth data (like incoming flash PMIs) could trigger bullish reactions for Sterling. Furthermore, as the UK is facing one of its biggest cost of living squeezes in history, lower-than-expected inflation prints (coming up Wednesday) could counterintuitively be a positive driver for the currency (lower CPI means less stagflation risk). The economy needs help right now, which means any help from the fiscal side will be a positive. Any major fiscal support measures to help consumers (subsidies for energy or tax cuts) could trigger bullish reactions for the Pound. We have lots of BoE speak coming up this week, any overly hawkish comments signalling more aggressive policy than what markets are currently pricing in could trigger bullish GBP reactions. POSSIBLE BEARISH SURPRISES Monetary policy is a double-edged sword for the GBP. Odds that the BoE has limited hikes left has been a negative driver, but so too is risks that inflation forces them to hike even more and further damage GDP. Further stagflation risks from higher gas prices or CPI prints could trigger bearish reactions. Politics is also in focus, where any attempts to oust PM Johnson by changing no-confidence laws could trigger bearish reactions. GBP is usually sensitive to political uncertainty and anything that raises odds of a snap election should be negative. With UK threats of triggering Article 16 and EU threats to terminate the Brexit deal if they do Brexit is in focus again. For now, markets have rightly ignored this as posturing, but any actual escalation can see sharp GBP downside. We have lots of BoE speak coming up this week, any overly dovish comments signalling less aggressive policy than what markets are currently pricing in could trigger bearish GBP reactions. BIGGER PICTURE The fundamental outlook for the GBP remains fairly bleak right now with the economic prospects and risk of stagflation keeping the currency pressured. Anything that exacerbates stagflation fears is expected to weigh on the Pound and anything that alleviates some of that pressure should be positive. Tactically the GBP has been stretched to the downside, so any new shorts do need to be weary of the risk of some mean reversion as we saw after this past week’s BoE meeting. USD FUNDAMENTAL OUTLOOK: BULLISH BASELINE Hawkish Fed policy remains a key driver for Dollar strength. With headline inflation >8%, the Fed has been pressured to tighten policy aggressively, hiking rates by 75bsp at their June meeting, and continuing with Quantitative Tightening. STIR markets suggests aggressive policy action pricing a terminal rate of >3.8% by 2Q23 which should be a positive input for the US Dollar . Safe haven flows have also supported the USD as it’s usually inversely correlated to the global economy and global trade, appreciating when growth & inflation slows (disinflation) and depreciates when growth & inflation accelerates (reflation). Expectations of a cyclical slowdown, accompanied by multi-decade high inflation and synchronized removal of monetary policy stimulus from major economies has seen investors shun risk assets and even bonds (usually considered a safe haven), and the USD has been a key benefactor of the rush to safety as economic prospects have deteriorated. Even though US bonds are considered safe havens, the current high inflation has seen a strong stock-to-bond correlation and has caused big bond outflows. With bonds not fulfilling its usual save haven role the USD has benefited from the rush to safety. POSSIBLE BULLISH SURPRISES As aggressive Fed policy has been supporting the USD, any incoming data (especially inflation ) that sparks further hike expectations, or additionally any comments from FOMC members that signals even more aggressive policy could trigger bullish reactions in the USD. As the cyclical outlook for the global economy is very bleak, and the USD is considered a safe haven, it means any incoming data that exacerbates fears of recession and triggers a big rush to safety could trigger bullish USD reactions. Further outflows in US bonds means more USD safe haven appeal. So, watching key triggers for further upside in bond yields like rising commodity prices and inflation expectations could also trigger further USD bullish reactions. POSSIBLE BEARISH SURPRISES More recently the USD has reacted more cyclically to incoming data which could suggest markets is shifting from safe haven focus to the rising risks of recession. The worse growth data slows, the higher likelihood of a ‘Fed Put’ in the months ahead. Thus, extremely bad growth data could trigger bearish reactions in the USD despite its safe haven appeal. Tactically the USD is trading at cycle highs, and aggregate CFTC positioning is still close prior highs which acted aslocal tops for the USD. Thus, stretched positioning could make the USD vulnerable to mean reversion in the short-term. With a lot already priced for the Fed, it won’t take much for the Fed to disappoint markets on the dovish side. Thus, any FOMC comments that suggests more concern about the economy than inflation could trigger bearish reactions in the USD BIGGER PICTURE The fundamental outlook for the USD remains bullish as long as the Fed stays aggressive and cyclical concerns put pressure on risk assets. But we do want to be mindful that lots has been priced for the USD, and growth deteriorates, we are expecting that the weigh on the USD if markets start pricing in a higher likelihood of a less hawkish Fed as a result of higher risks of recession. Furthermore, given tactical and CFTC positioning, we would prefer deeper pullbacks for new med-term USD longs, but shortterm catalyst can still offer shorter bearish sentiment trades against the current strong bull trend.
by thunderpips
1
Today’s Notable Sentiment ShiftsCHF/SNB – The Swiss franc soared on Thursday after the Swiss National Bank delivered a surprise interest rate hike, increasing its policy Rate to -0.25% from -0.75%. Additionally, the SNB notes that based on their latest inflation forecasts, further rate hikes were likely in the coming meetings. The rate increase was the central bank’s first hike in 15 years. GBP/BoE – An overall volatile day for GBP, largely in part to the BoE’s June meeting, where the central bank increased interest rates by 25 basis points taking the Official Bank Rate to 1.25%. GBP initially weakened after the BoE’s announcement, which fell short of some participants’ expectations following the FOMC’s aggressive 75 basis point hike on Wednesday. However, GBP eventually pared its initial losses and continued to print fresh highs as the focus shifted to the BoE’s statement to act “forcefully” in response to “indications of more persistent inflationary pressures.”
by thunderpips
2
GBP JPY - FUNDAMENTAL DRIVERSGBP FUNDAMENTAL OUTLOOK: WEAK BEARISH Inflation and growth have been the biggest negative drivers for Sterling so far this year. Due to a very bleak outlook for growth and accompanied by inflation that is close to 5 times the BoE’s target, the real risks of stagflation have weighed on the GBP. As a result of the growing stagflation risks, it has also forced the BoE’s hand to more dovish at every meeting since February, with the previous one stopping just shy of forecasting a possible recession for the economy going into 2023. At this stage, the BoE is hiking rates reluctantly, not because the economy is doing great, but because of unacceptably high levels of inflation. The deteriorating economic outlook has also caused markets to doubt whether the bank will be able to deliver to the number of hikes that STIR has already priced in, with some participants expecting the bank to hike once or twice more and then pause. POSSIBLE HAWKISH SURPRISES Stagflation fears are very high for the UK, with the probability of a recession growing by the week. With so much bad news priced in, any materially positive surprises in growth data could trigger bullish reactions for Sterling. Furthermore, as the UK is facing one of its biggest cost of living squeezes in history, lower-than-expected inflation prints could counterintuitively be a positive driver for the currency. The economy needs help right now, which means any help from the fiscal side will be a positive. Thus, any major fiscal support measures to help consumers (like subsidies for energy or potential tax cuts) could trigger upside for Sterling. POSSIBLE DOVISH SURPRISES Monetary policy is a double-edged sword for the GBP. Odds that the BoE has limited hikes left has been a negative driver, but so too is risks that inflation forces them to hike even more and further damage GDP. Further stagflation risks from higher gas prices or CPI prints could trigger bearish reactions. Politics is also in focus, where any attempts to oust PM Johnson by changing no-confidence laws could trigger bearish reactions. GBP is usually sensitive to political uncertainty and anything that raises odds of a snap election should be negative. With UK threats of triggering Article 16 and EU threats to terminate the Brexit deal if they do Brexit is in focus again. For now, markets have rightly ignored this as posturing, but any actual escalation can see sharp GBP downside. BIGGER PICTURE The fundamental outlook for the GBP remains fairly bleak right now with the economic prospects and risk of stagflation keeping the currency pressured. Anything that exacerbates stagflation fears is expected to weigh on the Pound and anything that alleviates some of that pressure should be positive. Tactically the GBP has been stretched to the downside, so any new shorts do need to be weary of the risk of some mean reversion. JPY FUNDAMENTAL OUTLOOK: BEARISH The Yen has fallen off the proverbial cliff over the past few months, driven by very negative fundamentals. Yield differentials has by far had the biggest negative impact. With other major central banks starting aggressive hiking cycles, it has lifted yields quite dramatically, compared to the BoJ which has stubbornly kept their yields capped through continued Yield Curve Control. The inverse correlation to US10Y is usually important but has taken centre stage in recent months as the biggest driver of the JPY. Even though the JPY is considered a safe haven, the inflows has been more limited compared to other cycles. The main reason for that is that the bank’s current account surplus (a main reason for safe haven appeal) has deteriorated and expected to continue to deteriorate due to the rise in commodity prices. Japan imports over 90% of their energy commodities, so the continued rise in oil prices has added to the downside and also eroded some of the classic safe haven appeal. Monetary policy is the other negative driver. Despite inflation starting to push higher in Japan, and despite the lessons from other central banks now struggling with inflation last seen since the 70’s, and despite the market’s relentless attempts at testing the JGB 10-year yield cap at 0.25%, the bank has stayed stubbornly dovish. At this stage the bank is playing a very dangerous game by allowing the JPY to weaken, further adding to inflationary risks. Their dovish persistence remains a negative for the JPY. The BoJ and MoF’s reluctance to intervene to stop the rapid and violent depreciation in the JPY has been noticeable. As long as they just voice their dislike but fail to act and actually do something, the market will keep testing them and shorting the JPY. POSSIBLE HAWKISH SURPRISES Any catalysts that trigger meaningful downside in US10Y (less hawkish Fed, faster deceleration in US CPI, faster deceleration in US growth) or triggers meaningful bouts of risk off sentiment could trigger bullish reactions from the JPY. Any catalyst that triggers meaningful downside in key commodities like Oil (deteriorating demand outlook, ease in supply shortage) could trigger bullish JPY reactions. Monetary policy is stubbornly dovish. Any catalyst that triggers speculation that the BoJ would drop YCC or hike rates or both (big upside surprises in inflation) could trigger a big recovery in the JPY, especially with stretched short positioning. Any intervention from the BoJ or MoF to stop JPY depreciation (buying the JPY or giving firm and clear lines in the sand for USDJPY) could offer decent reprieve for the JPY. POSSIBLE DOVISH SURPRISES With yield differentials playing such a huge role for the JPY, any catalysts that push US10Y higher (more aggressive Fed, further acceleration in US CPI, better-than-expected US growth data) could trigger further bearish price action for the JPY. Any catalyst that creates further upside in oil prices (further supply concerns, geopolitical tensions) poses downside risks for Japan’s current account surplus and could trigger further bearish reactions in the JPY. Further reluctance from the BoJ and MoF to address the concerning depreciation in the JPY is a continued negative driver for the JPY to keep on the radar. BIGGER PICTURE The bigger picture looks bleak for the JPY right now, and as long as US10Y gain ground and as long as the BoJ stays unnecessarily dovish and as long as the BoJ and MoF does nothing to address JPY weakness, the bias remains lower. However, given stretched tactical and CFTC positioning, and given growth concerns in the US, we don’t want to chase the JPY lower from here.
by thunderpips