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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. 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 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 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 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, alongside expectations that the BoE might not be too far away from pausing their hiking cycle. 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 the risk to reward favours short-term upside on strong bullish catalysts. USD FUNDAMENTAL OUTLOOK: BULLISH BASELINE Hawkish Fed policy remains a key driver for Dollar strength. With headline inflation >9%, 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 3.5% (versus >4% before the June FOMC meeting). Even though lower STIR pricing should be negative for the USD, the growth concerns has sparked further risk off concerns and have seen safe haven flows into 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. 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. The current high inflation has meant that bonds have not been sought as a safe haven with a strong stock-to-bond correlation, and this has caused big bond outflows. With bonds not fulfilling its usual save haven role the USD has been the haven of choice. The bias remains bullish , but with stretched tactical and CFTC positioning we don’t want to chase the USD higher right now. POSSIBLE BULLISH SURPRISES As aggressive Fed policy has been supporting the USD, any incoming data ( S&P Flash PMI this week) that sparks further aggressive hike expectations, or 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 The USD has been reacting as a safe haven with recent US data, but the worse growth data gets, the higher likelihood of a ‘Fed Put’ in the months ahead. Thus, extremely bad growth data could trigger bearish reactions in the USD. Tactically the USD is trading at fresh cycle highs, and aggregate CFTC positioning is close to prior highs which acted as local tops. Thus, stretched positioning could make the USD vulnerable to mean reversion in the short-term, but finding strong enough bearish catalysts has been tricky recently. With a lot already priced for the Fed, it won’t take much for them 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, but with inflation so high any dovish pivots seem unlikely for now. 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. We do also want to be mindful that lots has been priced for the USD, and as growth deteriorates, it could start to weigh on the USD if markets start pricing in a ‘Fed Put’, but based on where inflation is sitting any pivot seems still a while away and as the safe haven of choice any further recession focused downside in risk assets will likely continue to prove supportive for the USD. In the short-term though, with positioning looking stretched, we prefer much deeper pullbacks for new med-term USD longs and would look for short-term catalysts that offer shorter bearish sentiment trades against the current strong bull trend.
by thunderpips
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 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 spreads 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. However, with a material energy crisis facing the EZ due to the war in Ukraine, the economic prospects look bleak. Even though growth data was surprisingly resilient in Q2, fresh recession fears ramped up as recent forward-looking growth data surprised materially lower for key members like Germany and France. Based on the forward-looking signals from leading indicators we think recession is likely in the EZ and that the narrative has turned more bearish for the EUR until that improves. POSSIBLE BULLISH SURPRISES Geopolitics remains a focus, and any possible de-escalation or cease fire in Ukraine would open up a lot of EUR upside. Also keep Italian politics in mind where any successful attempt by PM Draghi to stay in power should ease spread concerns. Stagflation fears are high, with growth expected to slow while inflation stays high. Recent PMI data has invigorated recession fears, which means any materially better-than-expected growth data (Flash PMIs this week) could spark upside. Even though the ECB’s recent communication has been enough to push BTP/ Bund spreads from their recent highs the concerns remain, especially with Italian politics further exacerbating the problem. Thus, any insights or clarity regarding their new tool that convinces markets it can solve fragmentation should be supportive for the EUR. Energy concerns are still in focus, which means watching the Nord Stream 1 pipeline closely, if Russia resumes gas flows after maintenance ends this week it could see EUR upside. POSSIBLE BEARISH SURPRISES Geopolitics remain in focus, any escalation in the Ukraine war that risks including NATO would be big negative risks. Also keep Italian politics in mind, where any triggers of general elections risk further spread concerns & pressure the EUR. Spread fragmentation remains in focus, and if the ECB fail to calm fears or even walks back on recent hawkish comments it could trigger bearish reactions in the EUR. Growth concerns continue weighing on the EUR and means incoming growth data (Flash PMIs this week) will be in focus, where any major negative surprises could trigger downside. We've seen a chunky repricing in hike expectations over the past three weeks, and any further lower repricing is expected to weigh on the EUR. Energy concerns are still in focus, which means watching the Nord Stream 1 pipeline closely, if Russia keeps gas flows closed after maintenance ends this week it could see EUR downside. BIGGER PICTURE The fundamental outlook for the EUR has shifted to bearish with recent leading indicators pointing to a much faster economic slowdown than markets had previously expected. There are bearish and bullish factors in play right now though. On the bearish side we have geopolitics, stagflation, spread fragmentation and energy concerns acting as negative drivers. But we also have hawkish ECB policy as a possible supportive driver. Recession risks does open up a narrative change for the EUR which will require markets to change their forecasts to reflect higher recession risks which should continue to weigh on the EUR. 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. 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 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 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 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, alongside expectations that the BoE might not be too far away from pausing their hiking cycle. 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 the risk to reward favours short-term upside on strong bullish catalysts.
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. 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 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 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 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, alongside expectations that the BoE might not be too far away from pausing their hiking cycle. 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 the risk to reward favours short-term upside on strong bullish catalysts. USD FUNDAMENTAL OUTLOOK: BULLISH BASELINE Hawkish Fed policy remains a key driver for Dollar strength. With headline inflation >9%, 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 3.5% (versus >4% before the June FOMC meeting). Even though lower STIR pricing should be negative for the USD, the growth concerns has sparked further risk off concerns and have seen safe haven flows into 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. 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. The current high inflation has meant that bonds have not been sought as a safe haven with a strong stock-to-bond correlation, and this has caused big bond outflows. With bonds not fulfilling its usual save haven role the USD has been the haven of choice. The bias remains bullish , but with stretched tactical and CFTC positioning we don’t want to chase the USD higher right now. POSSIBLE BULLISH SURPRISES As aggressive Fed policy has been supporting the USD, any incoming data ( S&P Flash PMI this week) that sparks further aggressive hike expectations, or 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 The USD has been reacting as a safe haven with recent US data, but the worse growth data gets, the higher likelihood of a ‘Fed Put’ in the months ahead. Thus, extremely bad growth data could trigger bearish reactions in the USD. Tactically the USD is trading at fresh cycle highs, and aggregate CFTC positioning is close to prior highs which acted as local tops. Thus, stretched positioning could make the USD vulnerable to mean reversion in the short-term, but finding strong enough bearish catalysts has been tricky recently. With a lot already priced for the Fed, it won’t take much for them 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, but with inflation so high any dovish pivots seem unlikely for now. 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. We do also want to be mindful that lots has been priced for the USD, and as growth deteriorates, it could start to weigh on the USD if markets start pricing in a ‘Fed Put’, but based on where inflation is sitting any pivot seems still a while away and as the safe haven of choice any further recession focused downside in risk assets will likely continue to prove supportive for the USD. In the short-term though, with positioning looking stretched, we prefer much deeper pullbacks for new med-term USD longs and would look for short-term catalysts that offer shorter bearish sentiment trades against the current strong bull trend.
by thunderpips
5
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 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 spreads 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. However, with a material energy crisis facing the EZ due to the war in Ukraine, the economic prospects look bleak. Even though growth data was surprisingly resilient in Q2, fresh recession fears ramped up as recent forward-looking growth data surprised materially lower for key members like Germany and France. Based on the forward-looking signals from leading indicators we think recession is likely in the EZ and that the narrative has turned more bearish for the EUR until that improves. POSSIBLE BULLISH SURPRISES Geopolitics remains a focus, and any possible de-escalation or cease fire in Ukraine would open up a lot of EUR upside. Also keep Italian politics in mind where any successful attempt by PM Draghi to stay in power should ease spread concerns. Stagflation fears are high, with growth expected to slow while inflation stays high. Recent PMI data has invigorated recession fears, which means any materially better-than-expected growth data (Flash PMIs this week) could spark upside. Even though the ECB’s recent communication has been enough to push BTP/ Bund spreads from their recent highs the concerns remain, especially with Italian politics further exacerbating the problem. Thus, any insights or clarity regarding their new tool that convinces markets it can solve fragmentation should be supportive for the EUR. Energy concerns are still in focus, which means watching the Nord Stream 1 pipeline closely, if Russia resumes gas flows after maintenance ends this week it could see EUR upside. POSSIBLE BEARISH SURPRISES Geopolitics remain in focus, any escalation in the Ukraine war that risks including NATO would be big negative risks. Also keep Italian politics in mind, where any triggers of general elections risk further spread concerns & pressure the EUR. Spread fragmentation remains in focus, and if the ECB fail to calm fears or even walks back on recent hawkish comments it could trigger bearish reactions in the EUR. Growth concerns continue weighing on the EUR and means incoming growth data (Flash PMIs this week) will be in focus, where any major negative surprises could trigger downside. We've seen a chunky repricing in hike expectations over the past three weeks, and any further lower repricing is expected to weigh on the EUR. Energy concerns are still in focus, which means watching the Nord Stream 1 pipeline closely, if Russia keeps gas flows closed after maintenance ends this week it could see EUR downside. BIGGER PICTURE The fundamental outlook for the EUR has shifted to bearish with recent leading indicators pointing to a much faster economic slowdown than markets had previously expected. There are bearish and bullish factors in play right now though. On the bearish side we have geopolitics, stagflation, spread fragmentation and energy concerns acting as negative drivers. But we also have hawkish ECB policy as a possible supportive driver. Recession risks does open up a narrative change for the EUR which will require markets to change their forecasts to reflect higher recession risks which should continue to weigh on the EUR. 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. 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 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 comments signalling more aggressive policy than what markets are currently pricing in (see our Rate Tracker for STIR expectations) 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 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, alongside expectations that the BoE might not be too far away from pausing their hiking cycle. 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 the risk to reward favours short-term upside on strong bullish catalysts.
Editors' picks
by thunderpips
20
EUR GBP - FUNDAMENTAL DRIVERSEUR FUNDAMENTAL OUTLOOK: WEAK BEARISH 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 as recent growth data surprised meaningfully lower for key members like Germany and France. Based on the forward-looking signals from leading indicators we think recession is likely in the EZ and that the narrative has turned more bearish for the EUR until that improves. 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, with growth expected to slow while inflation stays high. Recent PMI data has invigorated recession fears, which means any materially better-than-expected growth data (ZEW data this week) could spark upside. 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 or clarity regarding their new tool that convinces markets it can solve fragmentation should be supportive for the EUR. POSSIBLE BEARISH SURPRISES Spread fragmentation remains in focus, and if the ECB fail to calm fears or even walks back on recent hawkish comments it could trigger bearish reactions in the EUR. Flash PMIs confirmed fears of possible recession. We expect growth concerns to continue weighing on the EUR and means incoming growth data (ZEW data this week) will be in focus, where any major negative surprises could trigger downside. Watch those hike expectations. With a lot of froth recently baked into STIR markets for the ECB, we've seen a chunky repricing in hike expectations over the past three weeks, and any further lower repricing is expected to weigh on the EUR. BIGGER PICTURE The fundamental outlook for the EUR has shifted to bearish with recent leading indicators pointing to a much faster economic slowdown than markets had previously expected. There are bearish and bullish factors in play right now though. On the bearish side we have geopolitics, stagflation and spread fragmentation acting as negative drivers. But we also have hawkish ECB policy as a possible supportive driver. We do think the disappointing data does open up a narrative change for the EUR which will require more market participants to change their forecasts to reflect higher risk of recession, and that should weigh on the EUR. 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. 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 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. Politics is also in 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 comments signalling less aggressive policy than what markets are currently pricing in. 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, alongside expectations that the BoE might not be too far away from pausing their hiking cycle. 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 in the very short-term
by thunderpips
2
GBP will either triple bottom or fall out of the sky - WeeklyChtLooking at long term trends for GBP-USD we are coming to a level that is almost underheard of in forex GBP being low to the dollar. Right now looking at the weekly unless something happens we see a continuation to 1.165xx range from there it could be anyone's game. We expect a lot of volatility around this number and range In fact if you draw a box from the top to the bottom there is a lot of wiggle room for trades but they will be volatile. Trade carefully but watch this 1.65xxx level as a large support.
Short
by swimmax
GBPJPY: Who from the weak will prevail?GBPJPY Intrada y - We look to Buy at 161.30 (stop at 160.00) Selling pressure from 163.56 resulted in all the initial daily gains being overturned. The current move lower is expected to continue. The bias is still for higher levels and we look for any dips to be limited. We therefore, prefer to fade into the dip with a tight stop in anticipation of a move back higher. Our profit targets will be 165.00 and 165.65 Resistance: 165.65 / 168.70 / 171.90 Support: 162.15 / 160.60 / 158.70 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.
Long
by VantageMarkets
EUR GBP - FUNDAMENTAL DRIVERSEUR FUNDAMENTAL OUTLOOK: WEAK BEARISH 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 as recent growth data surprised meaningfully lower for key members like Germany and France. Based on the forward-looking signals from leading indicators we think recession is likely in the EZ and that the narrative has turned more bearish for the EUR until that improves. 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, with growth expected to slow while inflation stays high. Recent PMI data has invigorated recession fears, which means any materially better-than-expected growth data (ZEW data this week) could spark upside. 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 or clarity regarding their new tool that convinces markets it can solve fragmentation should be supportive for the EUR. POSSIBLE BEARISH SURPRISES Spread fragmentation remains in focus, and if the ECB fail to calm fears or even walks back on recent hawkish comments it could trigger bearish reactions in the EUR. Flash PMIs confirmed fears of possible recession. We expect growth concerns to continue weighing on the EUR and means incoming growth data (ZEW data this week) will be in focus, where any major negative surprises could trigger downside. Watch those hike expectations. With a lot of froth recently baked into STIR markets for the ECB, we've seen a chunky repricing in hike expectations over the past three weeks, and any further lower repricing is expected to weigh on the EUR. BIGGER PICTURE The fundamental outlook for the EUR has shifted to bearish with recent leading indicators pointing to a much faster economic slowdown than markets had previously expected. There are bearish and bullish factors in play right now though. On the bearish side we have geopolitics, stagflation and spread fragmentation acting as negative drivers. But we also have hawkish ECB policy as a possible supportive driver. We do think the disappointing data does open up a narrative change for the EUR which will require more market participants to change their forecasts to reflect higher risk of recession, and that should weigh on the EUR. 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. 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 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. Politics is also in 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 comments signalling less aggressive policy than what markets are currently pricing in. 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, alongside expectations that the BoE might not be too far away from pausing their hiking cycle. 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 in the very short-term
by thunderpips
4
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 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 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
1
EUR GBP - FUNDAMENTAL DRIVERSEUR FUNDAMENTAL OUTLOOK: WEAK BEARISH 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 growth data continuing to surprise lower for key EU countries like Germany and France. Based on the forward-looking signals from leading indicators we think recession is likely in the EZ and that the narrative will turn more bearish for the EUR in the weeks ahead. 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. 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 has shifted to bearish with recent leading indicators pointing to a much faster economic slowdown than markets had previously expected. On the bearish side we have geopolitics, stagflation and spread fragmentation acting as negative drivers. But we also have hawkish ECB policy as a possible supportive driver. The disappointing data does open up a potential narrative change for EURGBP as well as the EURJPY so key pairs to keep on the radar in weeks ahead. 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 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 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
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 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 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
Today’s Notable Sentiment ShiftsGBP – Sterling held on to its gains on Thursday after Boris Johnson announced he was resigning as prime minister following a rush of ministerial resignations and calls for him to step down. Commenting on the announcement, Rabobank stated: “Some of the sentiment we’ve seen in markets today is relief that some of the scandals of the past year will be behind us. But this is mostly on hope because if you look forward it is unclear who will replace him. Sterling remains vulnerable. The growth outlook is not good and the Bank of England is constrained.” They concluded that they “expect a recession in the next few quarters.”
by thunderpips
1
Today’s Notable Sentiment ShiftsGBP – Sterling traded at the lowest since March 2020 on Tuesday, as the resignation of Britain’s finance minister threw Prime Minister Boris Johnson’s government into a crisis. In a post on Twitter finance minister Sunak stated “The public rightly expect government to be conducted properly, competently and seriously. I recognize this may be my last ministerial job, but I believe these standards are worth fighting for and that is why I am resigning.” EUR – The single currency fell to twenty-year lows on Tuesday as the market’s focus tilted to the latest surge in European gas prices, fueling recession concerns. Commenting on EUR’s outlook, MUFG stated “it will continue to be very difficult for the EUR to rally in any meaningful way with the energy picture worsening and risks to economic growth increasing notably.”
by thunderpips
2
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