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GBPUSD 8th SEPTEMBER 2022The poundsterling fell nearly 1% to US$ 1.1403 which was the lowest level in March 1985, based on Refinitiv data. So far this year the pound sterling has fallen by 15%. Inflation in the UK which skyrocketed 10.1% year-on-year (yoy) in July triggered the poundstelring's decline. With the value of the pound sterling falling, there is a risk that inflation will get higher. The Bank of England (BoE) will certainly continue to aggressively raise interest rates. Currently, the BoE interest rate is 1.75%. Many analysts see that the interest rate will continue to be raised until it reaches 4% in the first half of 2023.
Short
by DNP-FX
GBP/USD weekly chart: falling wedge headed to 37-year support?The British pound ( GBP/USD ) hit an intraday low of 1.1406, temporarily breaking below Covid-20 lows and hitting the lowest level in 37 years, before recovering to 1.147 as of this writing. The GBPUSD weekly chart reveals intriguing long-term patterns: The major long-term trend is represented by a falling wedge, with the lower support line set by January 2009's and October 2016's lows and upper resistance line by November 2007's and May 2021's highs. The ultra-ten-year falling wedge contains two lateral ranges (May 2009-June 2016 and July 2016-September 2022), both characterised by a similar 20% width. The long-run falling wedge's direction collides with the all-time low and support level of 1.051 hit in February 1985. If 1.14 defines a new multi-year resistance level and a new 20% side range is established, the next long-term support could be as lows as 0.95. Idea written by Piero Cingari, forex and commodity analyst at Capital.com
by Capitalcom
1
GBP USD - FUNDAMENTAL DRIVERSGBP FUNDAMENTAL OUTLOOK: WEAK BEARISH BASELINE The outlook for the UK economy remains bleak, with CPI above 10% and recession expecting to hit in 4Q22 and last for 5 quarters, it has kept pressure on Sterling despite ongoing BoE rate hikes. Even though the bank followed through with a 50bsp hike in July, it wasn’t enough to offset the recession forecasts. With inflation expected to reach close to 20% by some IB estimates (due to the rapid rise in energy prices and expected rise in the energy price caps) the bank is stuck between a rock and a hard place as they are forced to keep hiking rates to try and fight inflation expectations going unanchored, but by doing so they also risk further damaging economic growth as a result. Right now, it seems like fiscal policy is the only way to avoid a much deeper recession. ING research suggests an additional £65 billion of support for households and more support for small businesses are required to offset the expected rise in energy costs. Even though the bias for the GBP remains bearish , a lot of bad news has been priced in for Sterling in a relatively short space of time. With CFTC positioning still giving bullish signals, chasing it lower seems too big of a risk right now. POSSIBLE BULLISH SURPRISES Stagflation fears remain high for the UK, and the BoE is now projecting 5 quarters of recession starting 4Q22. With a recession now the base assumption, any incoming data that surprises meaningfully higher could trigger some relief. With focus on stagflation, any downside surprises in CPI or factors that decrease inflation pressures are expected to support the GBP and not pressure it. The economy needs help, which means any help from the fiscal side will be a positive. Any major fiscal support measures from the incoming PM to help consumers (subsidies or tax cuts) could trigger bullish reactions for the Pound. With UK threats of triggering Article 16 and EU threats to terminate the Brexit deal if they do Brexit is in focus. For now, markets have rightly ignored this as posturing, but any major de-escalation can see some upside for Sterling. POSSIBLE BEARISH SURPRISES Stagflation fears remain high for the UK, and the BoE is now projecting 5 quarters of recession starting 4Q22. Even with recession now the base assumption, any material downside surprises in growth data can still trigger further pressure. With focus on stagflation, any upside surprises in CPI or factors that increase more inflation pressures are expected to weigh on the GBP and not support it. The economy needs help, which means any help from the fiscal side should be a positive, but any fiscal measures from the incoming PM that fails to address the expected impact on consumers and businesses could keep the GBP under pressure. With UK threats of triggering Article 16 and EU threats to terminate the Brexit deal if they do Brexit is in focus. For now, markets have rightly ignored this as posturing, but any actual escalation can see sharp GBP downside. BIGGER PICTURE The fundamentals for Sterling remain bearish , especially after the BoE’s recent forecasts of a 5-quarter recession in the UK. Furthermore, given the risks to growth, there is growing speculation that the BoE might not be too far away from pausing their current hiking cycle. Anything that exacerbates stagflation fears is expected to weigh on the Pound and anything that alleviates some pressure could see some reprieve. Since Sterling is trading at fresh new cycle lows, the risk to reward for chasing it lower looks unattractive, and we could see asymmetric reactions skewed to the upside on positive data & news. USD FUNDAMENTAL OUTLOOK: BULLISH BASELINE With headline CPI above 8%, the Fed is under pressure to continue hiking rates and ramping up QT in September to try and tame price pressures. They hiked rates by 75bsp in July, and odds between a 50bsp or 75bsp in September are too close to call. At the Jackson Hole Symposium they took a further hawkish shift by pushing back against the idea of rate cuts in 2023 by stressing that they not only envision hiking rates to close to 4% by early 2023 but also expect to keep rates high throughout 2023. However, the Fed did announce a data-dependent (meeting-by-meeting) stance at the July meeting, explaining that the pace of hikes is likely to slow as rates get more restrictive and as more data becomes available. This means the incoming growth, inflation and jobs data will be a key driver for short-term USD price action where we expect a cyclical reaction to incoming data (good data being good for the USD and US10Y and bad data being bad for the USD and US10Y). The USD’s safe haven status is important to keep in mind. Uncomfortably high inflation and a Fed that is resolute at pushing rates higher and keeping them high does put possible further downside pressure on long bonds, and if we see further cyclicalinspired downside in bonds and equities the USD is expected to gain in that environment on safe haven demand. POSSIBLE BULLISH SURPRISES With the Fed signalling a data dependent policy stance, we expect a cyclical reaction from the USD with incoming US data. Thus, extremely good growth, inflation or jobs data is expected to trigger short-term bullish reactions in the USD. As the cyclical outlook continues to weaken, the USD’s safe haven status still matters. Any incoming data that exacerbates fears of recession and triggers strong moves lower in risk assets & bonds can trigger safe haven flows into the USD. Any further outflows in US bonds means more USD safe haven appeal. So, watching key triggers for further upside in bond yields (commodity prices, inflation and inflation expectations, more aggressive hike rhetoric from Fed, very good growth data) could also trigger further USD bullish reactions. POSSIBLE BEARISH SURPRISES With the Fed signalling a data dependent policy stance, we expect a cyclical reaction from the USD with incoming US data. Thus, extremely bad growth, inflation or jobs data is expected to trigger short-term bearish reactions in the USD. The USD is trading close to cycle highs while aggregate CFTC positioning is close to levels that previously acted as local tops. Positioning does make the USD vulnerable to short-term corrections, especially with bad US data points. With a lot priced in for the Fed and the USD, it won’t take much to disappoint on the dovish side. Any FOMC comments that suggests more concern about growth than inflation could trigger bearish reactions in the USD, but with inflation so high any major dovish pivots seem still far away. BIGGER PICTURE The fundamental outlook for the USD remains bullish as long as the Fed stays hawkish and cyclical concerns put pressure on risk assets. The data dependence stance from the Fed means we do want to be mindful that lots has been priced for the USD, and as growth deteriorates (as is currently our expectation), it’s expected to impact the USD negatively in the short-term, even though current inflation suggests any dovish pivot is still far away. As the safe haven of choice, any further recession focused downside in risk assets and bonds (due to sticky inflation and an aggressive Fed) could continue to prove supportive for the USD. In the short-term, with positioning in mind, and a dual-growth narrative (one being good for the USD and the other being bad for the USD) we prefer short-term catalysts that offer short-term sentiment-based trades as opposed to med-term positions.
by thunderpips
2
Dominant Currency Sentiment - GBP Leads FX Majors Strength in GBP is largely the result of media reports that incoming UK Prime Minister Liz Truss could announce a freeze on energy bills which could otherwise increase by 80% for UK households in October. The European session also saw the release of UK Construction PMI. Despite indicating contraction for the industry at 49.2, the print still beat expectations of 48.0 and the prior release of 48.9. Looking ahead, today’s US session will see PMI data once again come into focus with the release of US ISM Services PMI and Markit’s Final Services PMI.
by thunderpips
1
EUR GBP - FUNDAMENTAL DRIVERSEUR FUNDAMENTAL OUTLOOK: WEAK BEARISH BASELINE Persistently high inflation has seen the ECB tilt more hawkish by hiking rates 50bsp in July. Additional pressure on inflation from gas supply shortages and drought-linked supply constraints has seen ECB members get more uneasy about price pressures, with recent comments suggesting growing support among the GC for a 75bsp hike at their September meeting. Going into this week’s policy decision, it’s worth remembering that the bank quelled hawkish excitement in July by saying that frontloading hikes are not a signal of a higher terminal rate. Even if the bank delivers on a 75bsp this week, unless they also revise up terminal rate expectations any hike will unlikely be enough to see support for the EUR due to bigger hikes. Spread fragmentation, even though largely moving into the background, is still a concern, with the ECB failing to ease concerns with their new Transmission Protection Instrument (TPI) as the eligibility criteria means countries like Italy and Spain that will need the support the most might have a tough time qualifying. Even though policy is important, the main driver for the EUR is the economic outlook. Recent data has continued to flag recession risks, and Friday’s Gazprom announcements of an indefinite suspension of the Nord Stream pipeline to Europe in retaliation to the planned energy price cap has opened up a whole new pressure point. POSSIBLE BULLISH SURPRISES De-escalation or cease fire in Ukraine would open up a lot of EUR upside. Stagflation risks remains, but with lots of bad news priced any materially better-than-expected data could spark some relief. Any TPI comments that convinces markets it can solve spread fragmentation issues should be supportive for the EUR. Energy supply is a problem. If Russia does re-open Nord Stream gas flows, it should be a positive catalyst for EUR upside. If gas storage levels, see Europe through winter that could ease some of the pressure so storage levels will be watched. With a 75bsp hike expected, it won’t be enough to trigger EUR upside, but if the bank also increases their terminal rate projections it could trigger upside in the EUR. POSSIBLE BEARISH SURPRISES Any escalation in the Ukraine war that risks including NATO would be big negative risks. Stagflation risks remains, even with lots of bad news priced any materially worse-than-expected data could see more pressure. If ECB fails to act on the TPI when we see big jolts higher in the BTP/ Bund spread could trigger bearish reactions in the EUR. Energy supply is a problem. If Russia keeps Nord Stream one shut, it should add downside risks to the EUR. If gas storage levels are not enough to see Europe through the winter that should increase energy supply concerns for the EUR. With a 75bsp hike expected, it won’t be enough to trigger EUR upside, and if the ECB does not increase their terminal rate projections it could trigger downside for the EUR. BIGGER PICTURE The fundamental outlook remains bearish with recent leading indicators pointing to a much faster economic slowdown than markets previously expected. The current bearish drivers (geopolitics, stagflation, spread fragmentation, energy supply concerns) far outweigh the positives from a hawkish ECB. Recession risks have opened up a narrative change for the EUR which have seen markets adjust forecasts to reflect higher recession probabilities which has continued to weigh on the EUR. With lots of bad news priced in there is risks in chasing the EUR lower, but the fundamental outlook remains bleak. GBP FUNDAMENTAL OUTLOOK: WEAK BEARISH BASELINE The outlook for the UK economy remains bleak, with CPI above 10% and recession expecting to hit in 4Q22 and last for 5 quarters, it has kept pressure on Sterling despite ongoing BoE rate hikes. Even though the bank followed through with a 50bsp hike in July, it wasn’t enough to offset the recession forecasts. With inflation expected to reach close to 20% by some IB estimates (due to the rapid rise in energy prices and expected rise in the energy price caps) the bank is stuck between a rock and a hard place as they are forced to keep hiking rates to try and fight inflation expectations going unanchored, but by doing so they also risk further damaging economic growth as a result. Right now, it seems like fiscal policy is the only way to avoid a much deeper recession. ING research suggests an additional £65 billion of support for households and more support for small businesses are required to offset the expected rise in energy costs. Even though the bias for the GBP remains bearish, a lot of bad news has been priced in for Sterling in a relatively short space of time. With CFTC positioning still giving bullish signals, chasing it lower seems too big of a risk right now. POSSIBLE BULLISH SURPRISES Stagflation fears remain high for the UK, and the BoE is now projecting 5 quarters of recession starting 4Q22. With a recession now the base assumption, any incoming data that surprises meaningfully higher could trigger some relief. With focus on stagflation, any downside surprises in CPI or factors that decrease inflation pressures are expected to support the GBP and not pressure it. The economy needs help, which means any help from the fiscal side will be a positive. Any major fiscal support measures from the incoming PM to help consumers (subsidies or tax cuts) could trigger bullish reactions for the Pound. With UK threats of triggering Article 16 and EU threats to terminate the Brexit deal if they do Brexit is in focus. For now, markets have rightly ignored this as posturing, but any major de-escalation can see some upside for Sterling. POSSIBLE BEARISH SURPRISES Stagflation fears remain high for the UK, and the BoE is now projecting 5 quarters of recession starting 4Q22. Even with recession now the base assumption, any material downside surprises in growth data can still trigger further pressure. With focus on stagflation, any upside surprises in CPI or factors that increase more inflation pressures are expected to weigh on the GBP and not support it. The economy needs help, which means any help from the fiscal side should be a positive, but any fiscal measures from the incoming PM that fails to address the expected impact on consumers and businesses could keep the GBP under pressure. With UK threats of triggering Article 16 and EU threats to terminate the Brexit deal if they do Brexit is in focus. For now, markets have rightly ignored this as posturing, but any actual escalation can see sharp GBP downside. BIGGER PICTURE The fundamentals for Sterling remain bearish, especially after the BoE’s recent forecasts of a 5-quarter recession in the UK. Furthermore, given the risks to growth, there is growing speculation that the BoE might not be too far away from pausing their current hiking cycle. Anything that exacerbates stagflation fears is expected to weigh on the Pound and anything that alleviates some pressure could see some reprieve. Since Sterling is trading at fresh new cycle lows, the risk to reward for chasing it lower looks unattractive, and we could see asymmetric reactions skewed to the upside on positive data & news.
by thunderpips
3
EUR GBP - FUNDAMENTAL DRIVERSEUR FUNDAMENTAL OUTLOOK: WEAK BEARISH BASELINE Persistently high inflation has seen the ECB tilt more hawkish by hiking rates 50bsp in July. Additional pressure on inflation from gas supply shortages and drought-linked supply constraints has seen ECB members get more uneasy about price pressures, with comments last week suggesting that there is growing support for a 75bsp hike in September. This saw some initial upside in the EUR, but it’s important to remember that the bank quelled hawkish excitement at the July meeting by saying that frontloading hikes are not a signal of a higher terminal rate. Until that changes, higher rate expectations are likely only going to have short-lived upside potential for the Euro . Spread fragmentation, even though largely moving into the background, is still a concern, with the ECB failing to ease the market’s spread concerns with their new Transmission Protection Instrument (TPI) as the eligibility criteria means countries like Italy and Spain that will need the support the most might have a tough time qualifying. Even though policy is important, the main driver for the EUR is the economic outlook. Recent growth data has continued to flag recession risks and as energy concerns increase so too does the likelihood of stagflation. Even though the bias remains lower, a lot of negatives have been priced in from a tactical point of view so worth keeping that in mind. POSSIBLE BULLISH SURPRISES De-escalation or cease fire in Ukraine would open up a lot of EUR upside. Stagflation risks remains, but with lots of bad news priced any materially better-than-expected data could spark some relief. Spread fragmentation remains a concern, thus, any TPI comments that convinces markets it can solve fragmentation issues should be supportive for the EUR. Energy supply is a problem. If Russia does re-opens gas flows after the planned shutdown it should ease some pressure. Any good news on Rhine water levels and resumption of normal transport could be a bullish catalyst for the EUR. POSSIBLE BEARISH SURPRISES Any escalation in the Ukraine war that risks including NATO would be big negative risks. Stagflation risks remains, even with lots of bad news priced any materially worse-than-expected data could see more pressure. Spread fragmentation remains in focus, and if the ECB fails to act when we see big jolts higher in the BTP/ Bund spread could trigger bearish reactions in the EUR. Energy supply is a problem. If Russia does not re-open gas flows after the planned shutdown it should add downside risks. Any bad news on Rhine water levels and continued breakdown in transportation could be a bearish catalyst for the EUR. BIGGER PICTURE The fundamental outlook remains bearish with recent leading indicators pointing to a much faster economic slowdown than markets previously expected. The current bearish drivers (geopolitics, stagflation, spread fragmentation, energy supply concerns) far outweigh the positives from a hawkish ECB. Recession risks have opened up a narrative change for the EUR which have seen markets adjust forecasts to reflect higher recession probabilities which has continued to weigh on the EUR. With lots of bad news priced in there is risks in chasing the EUR lower, but the fundamental outlook remains bleak. GBP FUNDAMENTAL OUTLOOK: WEAK BEARISH BASELINE The outlook for the UK economy remains bleak, with CPI above 10% and recession expecting to hit in 4Q22 and last for 5 quarters, it has kept pressure on Sterling despite ongoing BoE rate hikes. Even though the bank followed through with a 50bsp hike in July, it wasn’t enough to offset the recession forecasts. With inflation expected to reach close to 13%, and some participants calling for as high as 18% by next year (due to the rapid rise in energy prices) the bank is stuck between a rock and a hard place as they are forced to keep hiking rates to try and fight inflation but by doing so, they risk further damaging economic growth as a result. The post-BoE price action in Sterling did not reflect a market that was pricing in a 5-quarter recession in the UK, and the price action we saw in the past two weeks made a lot of sense with Sterling catching up to the downside to reflect the growth situation. Even though the bias remains titled lower, a lot of bad news has once again been priced in for the Pound in a relatively short space of time, and with positioning continuing to give bullish signals, chasing lower seems like a bit of a risk right now. POSSIBLE BULLISH SURPRISES Stagflation fears remain high for the UK, and the BoE is now projecting 5 quarters of recession starting 4Q22. With a recession now the base assumption, any incoming data that surprises meaningfully higher could trigger some relief. With focus on stagflation, any downside surprises in CPI or factors that decrease inflation pressures are expected to support the GBP and not pressure it. The economy needs help, which means any help from the fiscal side will be a positive. Any major fiscal support measures from the incoming PM to help consumers (subsidies or tax cuts) could trigger bullish reactions for the Pound. With UK threats of triggering Article 16 and EU threats to terminate the Brexit deal if they do Brexit is in focus. For now, markets have rightly ignored this as posturing, but any major de-escalation can see some upside for Sterling. POSSIBLE BEARISH SURPRISES Stagflation fears remain high for the UK, and the BoE is now projecting 5 quarters of recession starting 4Q22. Even with recession now the base assumption, any material downside surprises in growth data can trigger further downside. With focus on stagflation, any upside surprises in CPI or factors that increase more inflation pressures are expected to weigh on the GBP and not support it. The economy needs help, which means any help from the fiscal side should be a positive, but any fiscal measures from the incoming PM that could exacerbate inflation pressures could trigger bearish reactions for the Pound. With UK threats of triggering Article 16 and EU threats to terminate the Brexit deal if they do Brexit is in focus. 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 bleak, especially after the BoE’s recent forecasts of a 5-quarter recession in the UK. Furthermore, given the risks to growth, there is growing speculation that the BoE might not be too far away from pausing their current hiking cycle. Anything that exacerbates stagflation fears is expected to weigh on the Pound and anything that alleviates some of that pressure could see some reprieve since the currency is trading at fresh new cycle lows. Even though the bias remains bleak, there is a lot of bad news priced for Sterling, so choose your trades carefully.
by thunderpips
Today’s Notable Sentiment ShiftsGBP – Sterling edged lower on Tuesday and was set for its biggest monthly fall against USD in 16 months as the UK’s energy crisis renewed recession fears in Britain. Commenting on GBP, Commerzbank explains that “the continued rise in gas prices entails the risk that the recession will be more pronounced and longer than previously expected. Strikes are already regularly paralyzing parts of public life due to the significant decline in real wages and the resulting loss of purchasing power. “The bank adds that other headwinds weighing on sterling included the shortage of labour because of Brexit, the leadership contest in the governing Conservative Party and the resulting uncertainties around the next prime minister’s fiscal policy on economic challenges.
by thunderpips
2
EUR GBP - FUNDAMENTAL DRIVERSEUR FUNDAMENTAL OUTLOOK: WEAK BEARISH BASELINE Persistently high inflation has seen the ECB tilt more hawkish by hiking rates 50bsp in July. Additional pressure on inflation from gas supply shortages and drought-linked supply constraints has seen ECB members get more uneasy about price pressures, with comments last week suggesting that there is growing support for a 75bsp hike in September. This saw some initial upside in the EUR, but it’s important to remember that the bank quelled hawkish excitement at the July meeting by saying that frontloading hikes are not a signal of a higher terminal rate. Until that changes, higher rate expectations are likely only going to have short-lived upside potential for the Euro. Spread fragmentation, even though largely moving into the background, is still a concern, with the ECB failing to ease the market’s spread concerns with their new Transmission Protection Instrument (TPI) as the eligibility criteria means countries like Italy and Spain that will need the support the most might have a tough time qualifying. Even though policy is important, the main driver for the EUR is the economic outlook. Recent growth data has continued to flag recession risks and as energy concerns increase so too does the likelihood of stagflation. Even though the bias remains lower, a lot of negatives have been priced in from a tactical point of view so worth keeping that in mind. POSSIBLE BULLISH SURPRISES De-escalation or cease fire in Ukraine would open up a lot of EUR upside. Stagflation risks remains, but with lots of bad news priced any materially better-than-expected data could spark some relief. Spread fragmentation remains a concern, thus, any TPI comments that convinces markets it can solve fragmentation issues should be supportive for the EUR. Energy supply is a problem. If Russia does re-opens gas flows after the planned shutdown it should ease some pressure. Any good news on Rhine water levels and resumption of normal transport could be a bullish catalyst for the EUR. POSSIBLE BEARISH SURPRISES Any escalation in the Ukraine war that risks including NATO would be big negative risks. Stagflation risks remains, even with lots of bad news priced any materially worse-than-expected data could see more pressure. Spread fragmentation remains in focus, and if the ECB fails to act when we see big jolts higher in the BTP/Bund spread could trigger bearish reactions in the EUR. Energy supply is a problem. If Russia does not re-open gas flows after the planned shutdown it should add downside risks. Any bad news on Rhine water levels and continued breakdown in transportation could be a bearish catalyst for the EUR. BIGGER PICTURE The fundamental outlook remains bearish with recent leading indicators pointing to a much faster economic slowdown than markets previously expected. The current bearish drivers (geopolitics, stagflation, spread fragmentation, energy supply concerns) far outweigh the positives from a hawkish ECB. Recession risks have opened up a narrative change for the EUR which have seen markets adjust forecasts to reflect higher recession probabilities which has continued to weigh on the EUR. With lots of bad news priced in there is risks in chasing the EUR lower, but the fundamental outlook remains bleak. GBP FUNDAMENTAL OUTLOOK: WEAK BEARISH BASELINE The outlook for the UK economy remains bleak, with CPI above 10% and recession expecting to hit in 4Q22 and last for 5 quarters, it has kept pressure on Sterling despite ongoing BoE rate hikes. Even though the bank followed through with a 50bsp hike in July, it wasn’t enough to offset the recession forecasts. With inflation expected to reach close to 13%, and some participants calling for as high as 18% by next year (due to the rapid rise in energy prices) the bank is stuck between a rock and a hard place as they are forced to keep hiking rates to try and fight inflation but by doing so, they risk further damaging economic growth as a result. The post-BoE price action in Sterling did not reflect a market that was pricing in a 5-quarter recession in the UK, and the price action we saw in the past two weeks made a lot of sense with Sterling catching up to the downside to reflect the growth situation. Even though the bias remains titled lower, a lot of bad news has once again been priced in for the Pound in a relatively short space of time, and with positioning continuing to give bullish signals, chasing lower seems like a bit of a risk right now. POSSIBLE BULLISH SURPRISES Stagflation fears remain high for the UK, and the BoE is now projecting 5 quarters of recession starting 4Q22. With a recession now the base assumption, any incoming data that surprises meaningfully higher could trigger some relief. With focus on stagflation, any downside surprises in CPI or factors that decrease inflation pressures are expected to support the GBP and not pressure it. The economy needs help, which means any help from the fiscal side will be a positive. Any major fiscal support measures from the incoming PM to help consumers (subsidies or tax cuts) could trigger bullish reactions for the Pound. With UK threats of triggering Article 16 and EU threats to terminate the Brexit deal if they do Brexit is in focus. For now, markets have rightly ignored this as posturing, but any major de-escalation can see some upside for Sterling. POSSIBLE BEARISH SURPRISES Stagflation fears remain high for the UK, and the BoE is now projecting 5 quarters of recession starting 4Q22. Even with recession now the base assumption, any material downside surprises in growth data can trigger further downside. With focus on stagflation, any upside surprises in CPI or factors that increase more inflation pressures are expected to weigh on the GBP and not support it. The economy needs help, which means any help from the fiscal side should be a positive, but any fiscal measures from the incoming PM that could exacerbate inflation pressures could trigger bearish reactions for the Pound. With UK threats of triggering Article 16 and EU threats to terminate the Brexit deal if they do Brexit is in focus. 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 bleak, especially after the BoE’s recent forecasts of a 5-quarter recession in the UK. Furthermore, given the risks to growth, there is growing speculation that the BoE might not be too far away from pausing their current hiking cycle. Anything that exacerbates stagflation fears is expected to weigh on the Pound and anything that alleviates some of that pressure could see some reprieve since the currency is trading at fresh new cycle lows. Even though the bias remains bleak, there is a lot of bad news priced for Sterling, so choose your trades carefully.
by thunderpips
GBP JPY - FUNDAMENTAL DRIVERSGBP FUNDAMENTAL OUTLOOK: WEAK BEARISH BASELINE The outlook for the UK economy remains bleak, with CPI above 10% and recession expecting to hit in 4Q22 and last for 5 quarters, it has kept pressure on Sterling despite ongoing BoE rate hikes. Even though the bank followed through with a 50bsp hike in July, it wasn’t enough to offset the recession forecasts. With inflation expected to reach close to 13%, and some participants calling for as high as 18% by next year (due to the rapid rise in energy prices) the bank is stuck between a rock and a hard place as they are forced to keep hiking rates to try and fight inflation but by doing so, they risk further damaging economic growth as a result. The post-BoE price action in Sterling did not reflect a market that was pricing in a 5-quarter recession in the UK, and the price action we saw in the past two weeks made a lot of sense with Sterling catching up to the downside to reflect the growth situation. Even though the bias remains titled lower, a lot of bad news has once again been priced in for the Pound in a relatively short space of time, and with positioning continuing to give bullish signals, chasing lower seems like a bit of a risk right now. POSSIBLE BULLISH SURPRISES Stagflation fears remain high for the UK, and the BoE is now projecting 5 quarters of recession starting 4Q22. With a recession now the base assumption, any incoming data that surprises meaningfully higher could trigger some relief. With focus on stagflation, any downside surprises in CPI or factors that decrease inflation pressures are expected to support the GBP and not pressure it. The economy needs help, which means any help from the fiscal side will be a positive. Any major fiscal support measures from the incoming PM to help consumers (subsidies or tax cuts) could trigger bullish reactions for the Pound. With UK threats of triggering Article 16 and EU threats to terminate the Brexit deal if they do Brexit is in focus. For now, markets have rightly ignored this as posturing, but any major de-escalation can see some upside for Sterling. POSSIBLE BEARISH SURPRISES Stagflation fears remain high for the UK, and the BoE is now projecting 5 quarters of recession starting 4Q22. Even with recession now the base assumption, any material downside surprises in growth data can trigger further downside. With focus on stagflation, any upside surprises in CPI or factors that increase more inflation pressures are expected to weigh on the GBP and not support it. The economy needs help, which means any help from the fiscal side should be a positive, but any fiscal measures from the incoming PM that could exacerbate inflation pressures could trigger bearish reactions for the Pound. With UK threats of triggering Article 16 and EU threats to terminate the Brexit deal if they do Brexit is in focus. 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 bleak, especially after the BoE’s recent forecasts of a 5-quarter recession in the UK. Furthermore, given the risks to growth, there is growing speculation that the BoE might not be too far away from pausing their current hiking cycle. Anything that exacerbates stagflation fears is expected to weigh on the Pound and anything that alleviates some of that pressure could see some reprieve since the currency is trading at fresh new cycle lows. Even though the bias remains bleak, there is a lot of bad news priced for Sterling, so choose your trades carefully. JPY FUNDAMENTAL OUTLOOK: BEARISH BASELINE In recent weeks, yield differentials have been the biggest negative driver for the JPY with the BoJ keeping 10-year JGB yields capped at 0.25% with yield curve control while other central banks are hiking rates aggressively. Thus, the BoJ’s reluctance to shift on policy even with inflation starting to push higher remains a negative driver for the JPY. Even though the JPY is considered a safe haven, inflows has been limited in the current bear market compared to other cycles. The reason is Japan’s current account surplus (a main reason for safe haven appeal) has deteriorated due to the rise in commodity prices. Japan imports the bulk of their commodities, so very high energy prices has added to downside. The BoJ and MoF’s reluctance to intervene to stop the rapid depreciation in the JPY in recent weeks has been noticeable. As long as they just voice their dislike but fail to act, the market will keep testing them. Having said that, US10Y and commodities have been reacting more and more negative to the current negative cyclical growth outlook, and as a result has seen big players trim their massive JPY shorts. But this past week’s push higher in yields was a friendly reminder that inflation and yield differentials remain a major downside risk for the JPY, despite the negative cyclical outlook. POSSIBLE BULLISH SURPRISES Catalyst that triggers speculation that the BoJ could drop YCC or hike rates or both (big upside surprises in inflation) could trigger upside in JPY, which means inflation data will be important to keep on the radar. Catalysts that trigger meaningful corrections in US10Y (less hawkish Fed, faster deceleration in US inflation, faster deceleration in US growth) or 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. 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 BEARISH 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 inflation, 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, and further reluctance from the BoJ to pivot away from very dovish policy is a continued negative driver for the JPY to keep on the radar. If the BoJ pushes back against calls for a policy shift despite upside surprise in CPI could trigger further JPY downside. BIGGER PICTURE The fundamental outlook remains bearish for the JPY, especially after the BoJ once again stuck to the same overly dovish script at their July meeting. As long as US10Y remain elevated and the BoJ stays stubbornly dovish and no push back is made against the JPY weakness from the BoJ or MoF, the bias remainslower. But take note of positioning which means we don’t want to chase the JPY lower and bullish reactions can see outsized upside on big drops in US10Y & commodities (which means keeping cyclical developments in the US in mind as a key influence on US10Y and thus the JPY as well). It also means watching incoming CPI data closely as any huge upside surprises could trigger speculation of a possible policy shift.
by thunderpips
1
GBP/USD - AN UPDATE FROM MY SIGNAL YESTERDAYexited my trade when this candle appeared on H1. My indicator for a bullish exhaustion or also known as 'shooting star' RSI has also formed a bearish divergence on H1 indicating a lost of momentum to the upside. Looking at the structure, price has also formed a double top - bearish price structure Overall, this was a pretty solid trade that we took from yesterday's signal. If you have followed this you would have gotten 2.06RR (70pips) FOR REFERENCE: CLICK ON THE LINK TO RELATED IDEAS DOWN BELOW IF YOU WANT TO SEE THE TRADE SETUP FROM YESTERDAY HELLO, TRADERS! IF YOU LIKE THIS ANALYSIS, PLEASE LEAVE A LIKE AND FOLLOW MY CHANNEL AND LET ME KNOW YOUR THOUGHTS BY COMMENTING DOWN BELOW.
Long
by JuanCrlsTrades
EUR GBP- FUNDAMENTAL DRIVERSEUR FUNDAMENTAL OUTLOOK: WEAK BEARISH BASELINE In recent weeks, the persistently high inflation has seen the ECB take a more hawkish turn with the bank hiking rates by 50bsp at their July meeting. Additional pressure on inflation from gas supply shortages and Rhine River levels in Germany means the ECB will be forced to continue hiking rates. But the bank quelled any hawkish excitement at their July meeting by explaining they are frontloading hikes and not signalling a higher terminal rate with their bigger than expected July hike. The bank also failed to ease spread fragmentation concerns with their new Transmission Protection Instrument (TPI) as the eligibility criteria means countries like Italy and Spain that will need the support the most might have a tough time qualifying. Combined with political concerns and additional inflation pressures, further spread widening looks likely for now. Right now, even though policy and spreads are important, the main story and driver for the EUR is the economic outlook. Recent growth data continues to surprise to the downside at a rapid pace and further stoking recession fears for the Eurozone. Even though the bias remains lower, a lot of negatives have been priced in from a tactical point of view so worth keeping that in mind. POSSIBLE BULLISH SURPRISES De-escalation or cease fire in Ukraine would open up a lot of EUR upside. Also keep Italian politics in mind where successful attempts to avoid a snap election could ease spread widening & support the EUR. Stagflation risks remains high and recent data has invigorated recession fears, but with lots of bad news priced any materially better-than-expected growth data could spark some relief. Spread fragmentation remains a concern, especially with Italian politics and the ECB’s failed attempt to reassure markets. Any TPI comments that convinces markets it can solve fragmentation issues should be supportive for the EUR. Energy supply is also in focus, which means watching gas flows from Russia. If Russia increases gas flows to more regular levels it should ease some supply concerns and see EUR upside. Rhine river concerns are one to watch, any good news on water levels and resumption of normal transport could be a bullish catalyst for the EUR. POSSIBLE BEARISH SURPRISES Any escalation in the Ukraine war that risks including NATO would be big negative risks. Also keep Italian politics in mind, where any failed attempts to avoid a snap election should add further pressure on the EUR. Recent data has invigorated recession fears. Even though lots of bad news is priced, any materially worse-than-expected growth data could spark further downside some relief. Spread fragmentation remains in focus, and if the ECB fails to act when we see big jolts higher in the BTP/ Bund spread, or if any TPI comment further concern markets about its effectiveness, it could trigger bearish reactions in the EUR. Energy supply is also in focus, which means watching gas flows from Russia. If Russia decreases gas flows even further, it should increase supply concerns and see EUR downside. Rhine river concerns are one to watch, any bad news on water levels and continued breakdown in transportation could be a bearish catalyst for the EUR. BIGGER PICTURE The fundamental outlook remains bearish with recent leading indicators pointing to a much faster economic slowdown than markets had previously expected. The current bearish drivers (geopolitics, stagflation, spread fragmentation, energy supply concerns) far outweigh the positives from a hawkish ECB. Recession risks have opened up a narrative change for the EUR which have seen markets adjust forecasts to reflect higher recession probabilities that continues to weigh on the EUR. With lots of bad news priced in there is risks in chasing the EUR lower, but the fundamental outlook remains bleak. 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. At their August meeting, the BoE confirmed this bleak outlook by forecasting the UK economy to fall into recession by 4Q22 and expects the recession to last for five quarters. Even though the bank followed through with a 50bsp hike, it wasn’t enough to offset the recession forecasts. With inflation expected to reach close to 13%, the bank is stuck between a rock and a hard place as they are forced to keep hiking rates to try and fight inflation but by doing so, they risk further damaging economic growth as a result. The post-BoE price action in Sterling did not reflect a market that was pricing in a 5-quarter recession in the UK, and the price action we saw in the past week made a lot of sense with Sterling catching up to the downside to reflect the growth situation. Headline CPI printing above 10% didn’t help the currency either, further exacerbating stagflation risks. POSSIBLE BULLISH SURPRISES Stagflation fears remain high for the UK, and the BoE is now projecting 5 quarters of recession starting 4Q22. With a recession now the base assumption, any incoming data that surprises meaningfully higher could trigger some relief. With focus on stagflation, any downside surprises in CPI or factors that decrease inflation pressures are expected to support the GBP and not pressure it. The economy needs help, which means any help from the fiscal side will be a positive. Any major fiscal support measures from the incoming PM to help consumers (subsidies or tax cuts) could trigger bullish reactions for the Pound. With UK threats of triggering Article 16 and EU threats to terminate the Brexit deal if they do Brexit is in focus. For now, markets have rightly ignored this as posturing, but any major de-escalation can see some upside for Sterling. POSSIBLE BEARISH SURPRISES Stagflation fears remain high for the UK, and the BoE is now projecting 5 quarters of recession starting 4Q22. Even with recession now the base assumption, any material downside surprises in growth data can trigger further downside. With focus on stagflation, any upside surprises in CPI or factors that increase more inflation pressures are expected to weigh on the GBP and not support it. The economy needs help, which means any help from the fiscal side should be a positive, but any fiscal measures from the incoming PM that could exacerbate inflation pressures could trigger bearish reactions for the Pound. With UK threats of triggering Article 16 and EU threats to terminate the Brexit deal if they do Brexit is in focus. 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 bleak, especially after the BoE’s recent forecasts of a 5-quarter recession in the UK. Furthermore, given the risks to growth, there is growing speculation that the BoE might not be too far away from pausing their current hiking cycle. Anything that exacerbates stagflation fears is expected to weigh on the Pound and anything that alleviates some of that pressure could see some reprieve since the currency is trading at fresh new cycle lows. Even though the bias remains bleak, there is a lot of bad news priced for Sterling, so choose your trades carefully.
by thunderpips
3
GBP CHF - 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. At their August meeting, the BoE confirmed this bleak outlook by forecasting the UK economy to fall into recession by 4Q22 and expects the recession to last for five quarters. Even though the bank followed through with a 50bsp hike, it wasn’t enough to offset the recession forecasts. With inflation expected to reach close to 13%, the bank is stuck between a rock and a hard place as they are forced to keep hiking rates to try and fight inflation but by doing so, they risk further damaging economic growth as a result. The post-BoE price action in Sterling did not reflect a market that was pricing in a 5-quarter recession in the UK, and the price action we saw in the past week made a lot of sense with Sterling catching up to the downside to reflect the growth situation. Headline CPI printing above 10% didn’t help the currency either, further exacerbating stagflation risks. POSSIBLE BULLISH SURPRISES Stagflation fears remain high for the UK, and the BoE is now projecting 5 quarters of recession starting 4Q22. With a recession now the base assumption, any incoming data that surprises meaningfully higher could trigger some relief. With focus on stagflation, any downside surprises in CPI or factors that decrease inflation pressures are expected to support the GBP and not pressure it. The economy needs help, which means any help from the fiscal side will be a positive. Any major fiscal support measures from the incoming PM to help consumers (subsidies or tax cuts) could trigger bullish reactions for the Pound. With UK threats of triggering Article 16 and EU threats to terminate the Brexit deal if they do Brexit is in focus. For now, markets have rightly ignored this as posturing, but any major de-escalation can see some upside for Sterling. POSSIBLE BEARISH SURPRISES Stagflation fears remain high for the UK, and the BoE is now projecting 5 quarters of recession starting 4Q22. Even with recession now the base assumption, any material downside surprises in growth data can trigger further downside. With focus on stagflation, any upside surprises in CPI or factors that increase more inflation pressures are expected to weigh on the GBP and not support it. The economy needs help, which means any help from the fiscal side should be a positive, but any fiscal measures from the incoming PM that could exacerbate inflation pressures could trigger bearish reactions for the Pound. With UK threats of triggering Article 16 and EU threats to terminate the Brexit deal if they do Brexit is in focus. 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 bleak, especially after the BoE’s recent forecasts of a 5-quarter recession in the UK. Furthermore, given the risks to growth, there is growing speculation that the BoE might not be too far away from pausing their current hiking cycle. Anything that exacerbates stagflation fears is expected to weigh on the Pound and anything that alleviates some of that pressure could see some reprieve since the currency is trading at fresh new cycle lows. Even though the bias remains bleak, there is a lot of bad news priced for Sterling, so choose your trades carefully. CHF FUNDAMENTAL OUTLOOK: WEAK BULLISH BASELINE The CHF has been supported in recent months as STIR markets have steadily priced in higher interest rates for Switzerland, as well the SNB’s reluctance to intervene in the currency markets to try and weaken the CHF. At their June meeting, the SNB took a very aggressive policy step by hiking rates with 50bsp and removing their previous classification that the CHF is ‘highly valued’. Unlike other central banks, the SNB has chosen to try and tackle inflation before it runs rampant by hiking rates aggressively. Their hike in June was the first hike since 2007, and if the bank follows through with a hike in September it will mean Switzerland will have positive interest rates for the first time in almost a decade. There is scope for further CHF upside in the months ahead with 4 supporting drivers. SNB’s hawkish tilt, the bank’s acceptance of a stronger CHF with less intervention, negative underlying risk sentiment driven by the global cyclical slowdown, rising inflation. The SNB did note that they are willing to be active in the foreign exchange market to ensure appropriate monetary conditions which means too much CHF strength could get the wrong attention from the bank. POSSIBLE BULLISH SURPRISES Any incoming data (especially CPI on Wednesday) or SNB comments that causes markets to price in even more aggressive policy from the bank could trigger bullish reactions in the CHF. As a risk sensitive currency, and catalyst that causes big bouts of risk off sentiment could trigger bullish reactions in the CHF. The more aggressive markets think the ECB will be with incoming hikes, the more aggressive they will be for the SNB. Thus, data that trigger hawkish ECB expectations could also be supportive for the CHF. POSSIBLE BEARISH SURPRISES The SNB has not been as active in trying to devalue the CHF through sight deposits as they have been in recent years. With the bank now on a hiking cycle, any drastic appreciation could spark some intervention and would be a bearish catalyst. As a risk sensitive currency, and catalyst that causes big bouts of risk on sentiment could trigger bearish reactions in the CHF. Further lower repricing of ECB hikes could trigger downside in the CHF as well, and the biggest dovish risk for the currency is a big surprise miss on any incoming CPI data. BIGGER PICTURE The SNB surprised with a 50bsp hike and signalled, that unlike other central banks, they will not get behind the curve. Apart from a hawkish central bank, we also have the economy on a steady footing, as well as less risk of intervention as SNB’s Jordan said they no longer see the CHF as highly valued (there is of course risk that they could intervene if the CHF appreciates too much too fast). This means the bias for the CHF is bullish and we’re looking for dips as CHF for buying opportunities.
by thunderpips
1
EUR GBP - FUNDAMENTAL DRIVERSEUR FUNDAMENTAL OUTLOOK: WEAK BEARISH BASELINE In recent weeks, the persistently high inflation has seen the ECB take a more hawkish turn with the bank hiking rates by 50bsp at their July meeting. Additional pressure on inflation from gas supply shortages and Rhine River levels in Germany means the ECB will be forced to continue hiking rates. But the bank quelled any hawkish excitement at their July meeting by explaining they are frontloading hikes and not signalling a higher terminal rate with their bigger than expected July hike. The bank also failed to ease spread fragmentation concerns with their new Transmission Protection Instrument (TPI) as the eligibility criteria means countries like Italy and Spain that will need the support the most might have a tough time qualifying. Combined with political concerns and additional inflation pressures, further spread widening looks likely for now. Right now, even though policy and spreads are important, the main story and driver for the EUR is the economic outlook. Recent growth data continues to surprise to the downside at a rapid pace and further stoking recession fears for the Eurozone. Even though the bias remains lower, a lot of negatives have been priced in from a tactical point of view so worth keeping that in mind. POSSIBLE BULLISH SURPRISES De-escalation or cease fire in Ukraine would open up a lot of EUR upside. Also keep Italian politics in mind where successful attempts to avoid a snap election could ease spread widening & support the EUR. Stagflation risks remains high and recent data has invigorated recession fears, but with lots of bad news priced any materially better-than-expected growth data could spark some relief. Spread fragmentation remains a concern, especially with Italian politics and the ECB’s failed attempt to reassure markets. Any TPI comments that convinces markets it can solve fragmentation issues should be supportive for the EUR. Energy supply is also in focus, which means watching gas flows from Russia. If Russia increases gas flows to more regular levels it should ease some supply concerns and see EUR upside. Rhine river concerns are one to watch, any good news on water levels and resumption of normal transport could be a bullish catalyst for the EUR. POSSIBLE BEARISH SURPRISES Any escalation in the Ukraine war that risks including NATO would be big negative risks. Also keep Italian politics in mind, where any failed attempts to avoid a snap election should add further pressure on the EUR. Recent data has invigorated recession fears. Even though lots of bad news is priced, any materially worse-than-expected growth data could spark further downside some relief. Spread fragmentation remains in focus, and if the ECB fails to act when we see big jolts higher in the BTP/Bund spread, or if any TPI comment further concern markets about its effectiveness, it could trigger bearish reactions in the EUR. Energy supply is also in focus, which means watching gas flows from Russia. If Russia decreases gas flows even further, it should increase supply concerns and see EUR downside. Rhine river concerns are one to watch, any bad news on water levels and continued breakdown in transportation could be a bearish catalyst for the EUR. BIGGER PICTURE The fundamental outlook remains bearish with recent leading indicators pointing to a much faster economic slowdown than markets had previously expected. The current bearish drivers (geopolitics, stagflation, spread fragmentation, energy supply concerns) far outweigh the positives from a hawkish ECB. Recession risks have opened up a narrative change for the EUR which have seen markets adjust forecasts to reflect higher recession probabilities that continues to weigh on the EUR. With lots of bad news priced in there is risks in chasing the EUR lower, but the fundamental outlook remains bleak. 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. At their August meeting, the BoE confirmed this bleak outlook by forecasting the UK economy to fall into recession by 4Q22 and expects the recession to last for five quarters. Even though the bank followed through with a 50bsp hike, it wasn’t enough to offset the recession forecasts. With inflation expected to reach close to 13%, the bank is stuck between a rock and a hard place as they are forced to keep hiking rates to try and fight inflation but by doing so, they risk further damaging economic growth as a result. The post-BoE price action in Sterling did not reflect a market that was pricing in a 5-quarter recession in the UK, and the price action we saw in the past week made a lot of sense with Sterling catching up to the downside to reflect the growth situation. Headline CPI printing above 10% didn’t help the currency either, further exacerbating stagflation risks. POSSIBLE BULLISH SURPRISES Stagflation fears remain high for the UK, and the BoE is now projecting 5 quarters of recession starting 4Q22. With a recession now the base assumption, any incoming data that surprises meaningfully higher could trigger some relief. With focus on stagflation, any downside surprises in CPI or factors that decrease inflation pressures are expected to support the GBP and not pressure it. The economy needs help, which means any help from the fiscal side will be a positive. Any major fiscal support measures from the incoming PM to help consumers (subsidies or tax cuts) could trigger bullish reactions for the Pound. With UK threats of triggering Article 16 and EU threats to terminate the Brexit deal if they do Brexit is in focus. For now, markets have rightly ignored this as posturing, but any major de-escalation can see some upside for Sterling. POSSIBLE BEARISH SURPRISES Stagflation fears remain high for the UK, and the BoE is now projecting 5 quarters of recession starting 4Q22. Even with recession now the base assumption, any material downside surprises in growth data can trigger further downside. With focus on stagflation, any upside surprises in CPI or factors that increase more inflation pressures are expected to weigh on the GBP and not support it. The economy needs help, which means any help from the fiscal side should be a positive, but any fiscal measures from the incoming PM that could exacerbate inflation pressures could trigger bearish reactions for the Pound. With UK threats of triggering Article 16 and EU threats to terminate the Brexit deal if they do Brexit is in focus. 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 bleak, especially after the BoE’s recent forecasts of a 5-quarter recession in the UK. Furthermore, given the risks to growth, there is growing speculation that the BoE might not be too far away from pausing their current hiking cycle. Anything that exacerbates stagflation fears is expected to weigh on the Pound and anything that alleviates some of that pressure could see some reprieve since the currency is trading at fresh new cycle lows. Even though the bias remains bleak, there is a lot of bad news priced for Sterling, so choose your trades carefully.
by thunderpips
GBP JPY - 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. At their August meeting, the BoE confirmed this bleak outlook by forecasting the UK economy to fall into recession by 4Q22 and expects the recession to last for five quarters. Even though the bank followed through with a 50bsp hike, it wasn’t enough to offset the recession forecasts. With inflation expected to reach close to 13%, the bank is stuck between a rock and a hard place as they are forced to keep hiking rates to try and fight inflation but by doing so, they risk further damaging economic growth as a result. Even though Sterling is still fairly close to recent lows (at the index level), the recent bounce was enough to short into, and we saw sizeable downside following the BoE decision. It seems unlikely that the post-BoE price action reflects a market that has already priced in a 5-quarter recession, so we expect sentiment to remain bearish on Sterling for now. POSSIBLE BULLISH SURPRISES Stagflation fears are very high for the UK, with probabilities of recession growing by the week. With a recession now the base assumption, any incoming news that surprises meaningfully higher could trigger some relief. The UK is facing a huge cost-of-living squeeze, which means lower-than-expected inflation could counterintuitively be a positive driver (as 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. Any overly hawkish fiscal promises from PM candidates which eases recession fears could be a positive trigger for Sterling. Any overly hawkish comments signalling more aggressive policy than what markets are currently pricing in could trigger bullish reactions. POSSIBLE BEARISH SURPRISES 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 could trigger bearish reactions. Politicsremain a focus, where any attempts by a new PM in the weeks or months ahead to call for a snap election should cause unnecessary uncertainty and could trigger GBP downside. 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. Any overly dovish fiscal promises from PM candidates that increase recession fears could be a negative trigger for Sterling 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 bleak, especially after the BoE’s recent forecasts of a 5-quarter recession in the UK. Furthermore, given the risks to growth, there is growing speculation that the BoE might not be too far away from pausing. Anything that exacerbates stagflation fears is expected to weigh on the Pound and anything that alleviates some of that pressure should be positive. The post-BoE price action was big, but not big enough for a market that has priced in a deep recession, which means we would expect sentiment to remain soft on Sterling after the most recent BoE meeting, but incoming data this week could trigger short-term sentiment reactions as always. JPY FUNDAMENTAL OUTLOOK: BEARISH BASELINE In recent weeks, yield differentials have been the biggest negative driver for the JPY with the BoJ keeping 10-year JGB yields capped at 0.25% with yield curve control while other central banks are hiking rates aggressively. Thus, the BoJ’s reluctance to shift on policy even with inflation starting to push higher remains a negative driver for the JPY. Even though the JPY is considered a safe haven, inflows has been limited in the current bear market compared to other cycles. The reason is Japan’s current account surplus (a main reason for safe haven appeal) has deteriorated due to the rise in commodity prices. Japan imports the bulk of their commodities , so very high energy prices has added to downside. The BoJ and MoF’s reluctance to intervene to stop the rapid depreciation in the JPY in recent weeks has been noticeable. As long as they just voice their dislike but fail to act, the market will keep testing them. Having said that, US10Y and commodities have been reacting more and more negative to the current negative cyclical growth outlook, and as a result has seen big players trim their massive JPY shorts. If this continues it should continue to support the currency on any negative data surprises from the US, especially given the size of current JPY short positions. POSSIBLE BULLISH SURPRISES Catalyst that triggers speculation that the BoJ could drop YCC or hike rates or both (big upside surprises in inflation ) could trigger upside in JPY, which means inflation data will be important to keep on the radar. Catalysts that trigger meaningful corrections in US10Y (less hawkish Fed, faster deceleration in US inflation , faster deceleration in US growth) or 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. 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 BEARISH 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 inflation , 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, and further reluctance from the BoJ to pivot away from very dovish policy is a continued negative driver for the JPY to keep on the radar. If the BoJ pushes back against calls for a policy shift despite upside surprise in CPI could trigger further JPY downside. BIGGER PICTURE The fundamental outlook remains bearish for the JPY, especially after the BoJ once again stuck to the same overly dovish script at their July meeting. As long as US10Y remain elevated and the BoJ stays stubbornly dovish and no push back is made against the JPY weakness from the BoJ or MoF, the biasremains lower. But take note of positioning which means we don’t want to chase the JPY lower and bullish reactions can see outsized upside on big drops in US10Y & commodities . It also means watching incoming CPI data closely as any huge upside surprises could trigger speculation of a possible policy shift.
by thunderpips
2
EUR GBP- FUNDAMENTAL DRIVERSEUR FUNDAMENTAL OUTLOOK: WEAK BEARISH BASELINE In recent weeks, the persistently high inflation has seen the ECB take a more hawkish turn with the bank hiking rates by 50bsp at their July meeting. But the bank quelled any hawkish excitement by explaining they are frontloading hikes and not signalling a higher terminal rate with their bigger than expected July hike. At their July meeting the bank also failed to ease spread fragmentation concerns with their new Transmission Protection Instrument (TPI) as the eligibility criteria means countries that will need the support the most might have a tough time qualifying. Combined with Italian political concerns, further spread widening looks likely. Right now, even though policy and spreads are important, the main story and driver for the EUR is the economic outlook. Recent growth data continues to surprise to the downside at a rapid pace further stoking recession fears for the Eurozone. Even though the bias remains lower, a lot of negatives have been priced in from a tactical point of view though. POSSIBLE BULLISH SURPRISES De-escalation or cease fire in Ukraine would open up a lot of EUR upside. Also keep Italian politics in mind where successful attempts to avoid a snap election could ease spread widening & support the EUR. Stagflation remain high and recent data has invigorated recession fears, but with lots of bad news priced any materially better-than-expected growth data could spark some relief. Spread fragmentation remains a concern, especially with Italian politics and the ECB’s failed attempt to reassure markets. Any TPI comments that convinces markets it can solve fragmentation issues should be supportive for the EUR. Energy concerns are still in focus, which means watching the Nord Stream 1 flows, if Russia increases gas flows to more regular levels it should ease some energy supply issues. Rhine river concerns are one to watch, any good news on water levels and resumption of normal transport could be a bullish catalyst for the EUR. POSSIBLE BEARISH SURPRISES Any escalation in the Ukraine war that risks including NATO would be big negative risks. Also keep Italian politics in mind, where any failed attempts to avoid a snap election should add further pressure on the EUR. Growth concerns continue to weigh on the EUR and means any major negative surprises in incoming growth data (German ZEW data next week) could trigger downside in the EUR. Spread fragmentation remains in focus, and if the ECB fails to act when we see big jolts higher in the BTP/ Bund spread it could trigger bearish reactions in the EUR. Energy concerns are still in focus, which means watching the Nord Stream 1 flows, if Russia decreases gas flows again it should increase concerns and weigh on the EUR. Rhine river concerns are one to watch, any bad news on water levels and continued breakdown in transportation could be a bearish catalyst for the EUR. BIGGER PICTURE The fundamental outlook remains bearish with recent leading indicators pointing to a much faster economic slowdown than markets had previously expected. The current bearish drivers (geopolitics, stagflation, spread fragmentation, energy supply concerns) far outweigh the positives from a hawkish ECB. Recession risks open up a narrative change for the EUR which will require markets to adjust forecasts to reflect higher recession probabilities which should weigh on the EUR. Having said that, with lots of bad news priced there is some asymmetric risk to incoming data which means chasing at the lows are dangerous. 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. At their August meeting, the BoE confirmed this bleak outlook by forecasting the UK economy to fall into recession by 4Q22 and expects the recession to last for five quarters. Even though the bank followed through with a 50bsp hike, it wasn’t enough to offset the recession forecasts. With inflation expected to reach close to 13%, the bank is stuck between a rock and a hard place as they are forced to keep hiking rates to try and fight inflation but by doing so, they risk further damaging economic growth as a result. Even though Sterling is still fairly close to recent lows (at the index level), the recent bounce was enough to short into, and we saw sizeable downside following the BoE decision. It seems unlikely that the post-BoE price action reflects a market that has already priced in a 5-quarter recession, so we expect sentiment to remain bearish on Sterling for now. POSSIBLE BULLISH SURPRISES Stagflation fears are very high for the UK, with probabilities of recession growing by the week. With a recession now the base assumption, any incoming news that surprises meaningfully higher could trigger some relief. The UK is facing a huge cost-of-living squeeze, which means lower-than-expected inflation could counterintuitively be a positive driver (as 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. Any overly hawkish fiscal promises from PM candidates which eases recession fears could be a positive trigger for Sterling. Any overly hawkish comments signalling more aggressive policy than what markets are currently pricing in could trigger bullish reactions. POSSIBLE BEARISH SURPRISES 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 could trigger bearish reactions. Politicsremain a focus, where any attempts by a new PM in the weeks or months ahead to call for a snap election should cause unnecessary uncertainty and could trigger GBP downside. 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. Any overly dovish fiscal promises from PM candidates that increase recession fears could be a negative trigger for Sterling 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 bleak, especially after the BoE’s recent forecasts of a 5-quarter recession in the UK. Furthermore, given the risks to growth, there is growing speculation that the BoE might not be too far away from pausing. Anything that exacerbates stagflation fears is expected to weigh on the Pound and anything that alleviates some of that pressure should be positive. The post-BoE price action was big, but not big enough for a market that has priced in a deep recession, which means we would expect sentiment to remain soft on Sterling after the most recent BoE meeting, but incoming data this week could trigger short-term sentiment reactions as always.
by thunderpips
2
GBP CHF - 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. At their August meeting, the BoE confirmed this bleak outlook by forecasting the UK economy to fall into recession by 4Q22 and expects the recession to last for five quarters. Even though the bank followed through with a 50bsp hike, it wasn’t enough to offset the recession forecasts. With inflation expected to reach close to 13%, the bank is stuck between a rock and a hard place as they are forced to keep hiking rates to try and fight inflation but by doing so, they risk further damaging economic growth as a result. Even though Sterling is still fairly close to recent lows (at the index level), the recent bounce was enough to short into, and we saw sizeable downside following the BoE decision. It seems unlikely that the post-BoE price action reflects a market that has already priced in a 5-quarter recession, so we expect sentiment to remain bearish on Sterling for now. POSSIBLE BULLISH SURPRISES Stagflation fears are very high for the UK, with probabilities of recession growing by the week. With a recession now the base assumption, any incoming news that surprises meaningfully higher could trigger some relief. The UK is facing a huge cost-of-living squeeze, which means lower-than-expected inflation could counterintuitively be a positive driver (as 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. Any overly hawkish fiscal promises from PM candidates which eases recession fears could be a positive trigger for Sterling. Any overly hawkish comments signalling more aggressive policy than what markets are currently pricing in could trigger bullish reactions. POSSIBLE BEARISH SURPRISES 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 could trigger bearish reactions. Politicsremain a focus, where any attempts by a new PM in the weeks or months ahead to call for a snap election should cause unnecessary uncertainty and could trigger GBP downside. 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. Any overly dovish fiscal promises from PM candidates that increase recession fears could be a negative trigger for Sterling 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 bleak, especially after the BoE’s recent forecasts of a 5-quarter recession in the UK. Furthermore, given the risks to growth, there is growing speculation that the BoE might not be too far away from pausing. Anything that exacerbates stagflation fears is expected to weigh on the Pound and anything that alleviates some of that pressure should be positive. The post-BoE price action was big, but not big enough for a market that has priced in a deep recession, which means we would expect sentiment to remain soft on Sterling after the most recent BoE meeting, but incoming data this week could trigger short-term sentiment reactions as always. CHF FUNDAMENTAL OUTLOOK: WEAK BULLISH BASELINE The CHF has been supported in recent months as STIR markets have steadily priced in higher interest rates for Switzerland, as well the SNB’s reluctance to intervene in the currency markets to try and weaken the CHF. At their June meeting, the SNB took a very aggressive policy step by hiking rates with 50bsp and removing their previous classification that the CHF is ‘highly valued’. Unlike other central banks, the SNB has chosen to try and tackle inflation before it runs rampant by hiking rates aggressively. Their hike in June was the first hike since 2007, and if the bank follows through with a hike in September it will mean Switzerland will have positive interest rates for the first time in almost a decade. There is scope for further CHF upside in the months ahead with 4 supporting drivers. SNB’s hawkish tilt, the bank’s acceptance of a stronger CHF with less intervention, negative underlying risk sentiment driven by the global cyclical slowdown, rising inflation . The SNB did note that they are willing to be active in the foreign exchange market to ensure appropriate monetary conditions which means too much CHF strength could get the wrong attention from the bank. POSSIBLE BULLISH SURPRISES Any incoming data (especially CPI on Wednesday) or SNB comments that causes markets to price in even more aggressive policy from the bank could trigger bullish reactions in the CHF. As a risk sensitive currency, and catalyst that causes big bouts of risk off sentiment could trigger bullish reactions in the CHF. The more aggressive markets think the ECB will be with incoming hikes, the more aggressive they will be for the SNB. Thus, data that trigger hawkish ECB expectations could also be supportive for the CHF. POSSIBLE BEARISH SURPRISES The SNB has not been as active in trying to devalue the CHF through sight deposits as they have been in recent years. With the bank now on a hiking cycle, any drastic appreciation could spark some intervention and would be a bearish catalyst. As a risk sensitive currency, and catalyst that causes big bouts of risk on sentiment could trigger bearish reactions in the CHF. Further lower repricing of ECB hikes could trigger downside in the CHF as well, and the biggest dovish risk for the currency is a big surprise miss on any incoming CPI data. BIGGER PICTURE The SNB surprised with a 50bsp hike and signalled, that unlike other central banks, they will not get behind the curve. Apart from a hawkish central bank , we also have the economy on a steady footing, as well as less risk of intervention as SNB’s Jordan said they no longer see the CHF as highly valued (there is of course risk that they could intervene if the CHF appreciates too much too fast). This means the bias for the CHF is bullish and we’re looking for dips as CHF for buying opportunities.
by thunderpips
2