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GBP USD - FUNDAMENTAL DRIVERSGBP FUNDAMENTAL BIAS: WEAK BULLISH 1. Monetary Policy Hawkish surprise with a hint of dovish undertones sums up the Feb BoE decision. The bank announced the start of passive QT and also hiked rates by 25bsp as expected, but the vote split was unanimous (9-0) but with a big hawkish surprise being 4 MPC members voting for a 50bsp hike. Inflation forecasts saw a big upward revision to a 7.25% peak by April (prev. 6.0%) & 5.21% in 1-year (prev. 3.40%). This initial hawkish statement saw immediate strength for GBP but during the press conference the BoE tried their best to get a dovish landing. Gov Bailey started his opening remarks by noting that the MPC’s decision to hike was not because the economy was strong but only because higher rates were necessary to return inflation to target, and even though he opened the door for further hikes he added that markets should not assume rates are on a long march higher. He also acknowledged the stagflation fears recently voiced by some market participants by saying that policy faces a trade off between weakening growth and higher inflation. Despite the dovish nuances, STIR markets still price an implied cash rate of 1.0% by May which would mean a 25bsp in both March and May (1.0% is the level the BoE previously said they would being outright Gilt selling). Overall, the statement was hawkish, but the clear dovish undertones from the BoE was a bit surprising and also a bit worrisome for the future outlook. 2. Economic & Health Developments There is a growing chorus of participants calling for a very tough road ahead for UK growth, and most recent Retail Sales data gave more confirmation to this expectation. Forecasts by the IMF/OECB still sees decent growth differentials, but not everyone shares that optimism (Refinitiv polling data). Even though the solid econ data going into Dec was enough to see the BoE hike, the overall rate expectations already priced in by markets are too ambitious. As long incoming data stay solid it should keep odds for additional tightening alive, but we should be mindful of repricing if the incoming data starts confirming a bleaker picture for growth. 3. Political Developments The political uncertainty surrounding PM Johnson mean a higher risk premium for GBP. The fallout from the heavily redacted Sue Gray report was limited but reports over the weekend show a growing distrust for the PM from within his own party. The question remains whether enough MPs opt for a vote of no-confidence (if so, that could see short-term downside), but after that the focus will be on whether the PM can survive an actual vote of no-confidence, where a win is expected to be GBP positive and negative for Sterling if he loses. The North Ireland protocol is still in focus in the background with the UK threatening to trigger Article 16 and the EU threatening to terminate the Brexit deal if they do. For now, markets have rightly ignored this as political posturing, but of course any actual escalation could see sharp risk premium built into the GBP 4. CFTC Analysis The CFTC data for GBP was very surprising. Recall that the downside in the GBP only started later during last week, which means that the very big increase in net-short positioning occurred while Sterling was still flying high. The question here is whether this was some political risk premiums building up or part of a bigger change in sentiment as concerns over the UK’s growth outlook continues to surface. 5. The Week Ahead Just like the EUR, the biggest focus for the week ahead for Sterling will be on BoE talk. The bank tried really hard to get a dovish landing on Thursday, and any additional info and clarity from them will be keenly watched by market participants. With STIR markets pricing in an implied rate of 1.0% by May, one would have thought more upside is warranted for Sterling, but after the dovish undertones as well as the ongoing political challenges things are looking a bit messy for the GBP right now. If we see a similar divergence between ECB and BoE language like we saw at the press conferences that should put further upside pressure on EURGBP. USD FUNDAMENTAL BIAS: BULLISH 1. Monetary Policy The Jan FOMC decision was hawkish on multiple fronts. The statement signalled a March hike as expected, but Chair Powell portrayed a very hawkish tone. Even though Powell said they can’t predict the rate path with certainty, he stressed the economy is in much better shape compared to the 2015 cycle and that will have implications for the pace of hikes (more and faster). Furthermore, he explained that there is ‘quite a bit of room’ to raise rates without damaging employment, which suggests upside risks to the rate path. A big question going into the meeting was how concerned the Fed was about recent equity market volatility . But the Chair explained that markets and financial conditions are reflecting policy changes in advance and that in aggregate the measures they look at isn’t showing red lights. Thus, any ‘Fed Put’ is much further away and inflation is the Fed’s biggest concern right now. The Chair also didn’t rule out the possibility of a 50bsp hike in March or possibly hiking at every meeting this year, which was hawkish as it means the Fed wants optionality to move more aggressive if they need to. We didn’t get new info on the balance sheet and Powell reiterated that they’re contemplating a start of QT after hiking has begun and they’ll discuss this in coming meetings. Overall, the tone and language was lot more hawkish than the Dec meeting and more hawkish than consensus was expecting. 2. Global & Domestic Economy As the reserve currency, the USD’s global usage means it’s usually inversely correlated to the global economy and global trade. Thus, USD usually appreciates when growth & inflation slow (disinflation) and depreciates when growth & inflation accelerates (reflation). With expectations that growth and inflation will decelerate this year that should be a positive input for the USD. However, incoming data will also be important in relation to the ‘Fed Put’. There are many similarities between now and 4Q18, where the Fed were also tightening aggressively going into an economic slowdown. As long as growth data slows and the Fed stays aggressive that is a positive for the USD, but if it causes a dovish Fed pivot and lower rate repricing it would be a negative input for the USD. 3. CFTC Analysis The USD came under some pressure this week, mainly due to overdue mean reversion, recovery in risk assets and of course the surprise hawkish actions by the BoE and more specifically the ECB. Keep in mind that half of the USD’s drop this week occurred outside the CFTC reference period which would explain more limited unwinding in net-longs, and we would expect this number to be much bigger next week. With positioning still in net-long territory for leveraged funds and large specs, and with leveraged funds sitting on a sizeable net-short in the EUR the recent hawkish pivot from the ECB could see some further damage for the USD in the short-term. 4. The Week Ahead After last week’s much better than expected Average Hourly Earnings data out of the US, the main event for the USD as well as markets in general will be the January CPI print for the US scheduled for Wednesday. With another month of upside surprises for inflation data in other global economies, the markets will be watching the US CPI for Jan very closely. Right now, Fed policy has tunnel vision for inflation , and with the surprise beat in Friday’s NFP as well as the surprise punchy upward revisions, the labour market won’t deter the Fed from going all-in to fight inflation . The big dynamic to watch for is wages. Friday’s Average Hourly Earnings print of 5.7% was much higher than expected and saw an immediate jolt higher in US bond yields, with Fed Fund Futures now comfortably pricing in well over 5 hikes by the end of the year. Starting the new year, the biggest reason for expecting a deceleration in inflation was firstly due to base effects, secondly due to expectations that supply chain disruptions ease, and very importantly that commodity prices being cooling down. Out of these three, the last one has not happened yet with oil prices continuing their grind higher (which adds upside risks to headline numbers). Two important components to keep on the radar is wages and shelter prices, which for some means there is very little downside risk to this week’s CPI . How will the USD likely react? Recently the USD has reaction cyclically towards inflation data, which means a solid beat should be supportive, but at the same time a miss would be a far more attractive shorting opportunity, especially against the EUR after the ECB’s pivot .
by thunderpips
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GBP / USD 1.34970 - 0.03 % SHORT IDEA * CONTINUATION PTTNSHELLO EVERYONE HOPE EVERYONE IS DOING GOOD HAVING A GOOD ONE. NEW WEEK, NEW OPPORTUNITIES. LOOKING AT THE POUND / DOLLAR * The PAIR has been trading in a possible descending channel , A break of structure possibly signals continuation to the down side. - Short term the pair is in a down trend on the 4h chart this should it respect structure looking for continuation. - Looking for short entries on the THE PAIR this week should all the rules of the formation be met. lets see how it goes IF THIS IDEA ASSISTS IN ANY OR IF YOU LIKE THIS ONE SMASH THAT LIKE BUTTON & LEAVE A COMMENT. ALWAYS APPRECIATED ____________________________________________________________________________________________________________________ * Kindly follow your entry rules on entries & stops. |* Some of The idea's may be predictive yet are not financial advice or signals. | *Trading plans can change at anytime reactive to the market. | * Many stars must align with the plan before executing the trade, kindly follow your rules & RISK MANAGEMENT. _____________________________________________________________________________________________________________________ | * ENTRY & SL -KINDLY FOLLOW YOUR RULES | * RISK-MANAGEMENT | *PERIOD - SWING TRADE
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by PULEMokhothu
GBP USD - FUNDAMENTAL DRIVERSGBP FUNDAMENTAL BIAS: WEAK BULLISH 1. Monetary Policy They did it again! After leading markets to believe that a Dec hike was unlikely, the BoE wrong footed markets again with their 15bsp hike. Recall that BoE’s Saunders (who voted for a Nov hike) suggested there could be benefits in waiting before moving on rates, and BoE’s Mann said it was premature to even talk about the timing of hikes let alone the magnitude, but of course both of them ended up voting for a hike with a surprising 8-1 vote split (BoE’s Tenreyro only dissenter). The BoE lost even more of the little credibility it had left, but they did the right thing (in my opinion at least) as they stayed data dependent and hiked given a flurry of much better-than-expected econ data. The consensus view among the MPC was that inflation warranted tighter policy in the near-term, but still expects CPI to peak close to 6% in April (up from prev. projections). One negative was with growth, which is expected to push lower given the Omicron wave. 2. Economic & Health Developments There is a growing chorus of participants calling for a very tough road ahead for UK growth, and most recent Retail Sales data gave more confirmation to this expectation. Forecasts by the IMF/OECB still sees decent growth differentials, but not everyone shares that optimism (Refinitiv polling data). Even though the solid econ data going into Dec was enough to see the BoE hike, the overall rate expectations already priced in by markets are too ambitious and we think the BoE risks disappointing. As long incoming data stays solid it should keep odds for additional tightening alive, but we should be mindful of a potential unwinding and repricing if the incoming data starts confirming a bleaker picture. 3. Political Developments Even though Brexit isn’t in focus as it used to be (thank goodness), there are some remaining issues such as the Northern Ireland protocol. For now, the 2 sides have not budged with punchy rhetoric from both sides with the UK threatening to trigger Article 16 and the EU threatening to terminate the Brexit deal if they do. For now, markets have ignored this as political posturing, but of course any actual escalation could see sharp risk premium built into the GBP. Political uncertainty for PM Johnson opens up further caution as GBP usually struggles with domestic political uncertainty. Thus, the Sue Gray report and fallout from it is in focus, where damaging results for the PM could prove GBP negative and vice versa if it shows the PM is not at fault. Apart from that, the question remains whether enough MP’s opt for a vote of no-confidence (if so, that could see short-term downside), but after that the focus will be on whether the PM can survive an actual vote of noconfidence, where a win is expected to be GBP positive and negative for Sterling if he loses. 4. CFTC Analysis Latest CFTC data showed a positioning change of -7516 with a net non-commercial position of -7763. Leveraged funds (net-long) and large specs (net-short) are at odds with recent positioning update. However, with both still relatively close to neutral territory it does not tell us much about overall sentiment for Sterling. 5. The Week Ahead Thursday’s BoE meeting will be the biggest focus for the GBP this week. A recent Reuters Poll showed that 29/45 (>60%) of economists surveyed expect a 25bsp hike, while STIR market odds are close to 90%. Even though recent Retail Sales data were disappointing, headline CPI YY rose to 5.4% (0.9bsp above MPR projections) and Unemployment fell to 4.1% and showed that the phase out of the furlough scheme had a very small impact on the labour market. Thus, on the data front alone a hike seems reasonable. We also had comments from Gov Bailey who noted concerns about possible second-round effects from inflation on wages and comments from BoE’s Mann that noted monetary policy needs to temper 2022 inflation and wage expectations to prevent them from becoming embedded in the decision-making for firms and consumers, both of these comments added to the odds of a hike. Apart from a hike though, expectations of slower-thanexpected growth will be in focus as well as a much bleaker outlook could see doubt of the current rate path brought into focus. The APF will also be in focus as the BoE said they will halt reinvestments under the APF once they reach a cash rate of 0.50% so comments on that will also be important to watch. USD FUNDAMENTAL BIAS: BULLISH 1. Monetary Policy The Jan FOMC decision was hawkish on multiple fronts. The statement signalled a March hike as expected, but the press conference from Chair Powell portrayed a very hawkish message. Even though Powell said they can’t predict the rate path with certainty, he stressed the economy is in much better shape compared to the 2015 cycle and that will have implications for the pace of hikes. Furthermore, the Chair explained that there is ‘quite a bit of room’ to raise rates without dampening employment, which suggests upside risks to the rate path, especially coming from Powell. A big question markets wanted an answer for was whether the Fed was concerned about recent equity market volatility . However, the Chair explained that markets and financial conditions are reflecting policy in advance and stressed that in aggregate their measures they look at is not showing red lights. This was a clear message to markets that any ‘Fed Put’ is much further away and that inflation is the biggest focus point for the Fed right now. The Chair also didn’t rule out the possibility of hiking 50bsp in March or possibly hiking at every meeting this year, which was seen as hawkish as it means the Fed is looking for optionality to move more aggressive if they need to. On the balance sheet , we didn’t really get new info and the Chair reiterated that they are contemplating a start of QT after the hiking cycle has begun but also reiterated that they will discuss this in coming meetings. Overall, the tone and language used by the Chair were a lot more hawkish than the Dec meeting and more hawkish than some were hoping for. 2. Global & Domestic Economy As the reserve currency, the USD’s usage around the world means it usually has an inverse correlation to the health of the global economy and global trade. The USD usually gains strength when growth & inflation both slow (disinflation) and loses ground when growth & inflation accelerates (reflation). Thus, with expectations that both growth and inflation will decelerate this year, both in the US and the globe, that should be a positive input for the USD in the med-term . However, incoming data will also be important in relation to the ‘Fed Put’. There are many similarities between now and 4Q18, where the Fed were also tightening aggressively going into an economic slowdown. So, incoming data will be crucial to watch. As long as growth data slows and the Fed stays aggressive that would be a positive environment for the USD, but if it causes the Fed to pivot more dovish and causes a rate repricing in money markets it would be seen as a negative input for the USD. 3. CFTC Analysis Latest CFTC data showed a positioning change of +427 with a net non-commercial position of +36861. The shortterm unwinding of stretched USD longs played out as expected at the start of the year but was also short-lived in the midst of the recent strong risk off sentiment in certain parts of the market and of course the continued hawkish stance from the Fed. 4. The Week Ahead In the week ahead the party starts all over again with a new month which means we’ll get new ISM PMI releases as well as the Jan NFP report. It’s important to keep the current economic climate in mind when looking at possible reaction functions for the USD. Usually, positive data should be USD positive and negative data USD negative when the Fed is busy with a hiking cycle, but right now there are growing fears that economic data has been slowing much faster than expected and means the Fed could be on its way to make the same mistake it did back in the end of 2018. As long as those fears persist, we might see the USD having two different reaction functions to growth and inflation data. Reacting inverse to growth data but acting correlated to inflation data. That makes this week’s incoming ISM data very interesting as the Dec data decelerated much faster than expected on the growth side, and a further miss might spark more fears about a faster slowdown. The tricky part for the USD in the week ahead is that both the ISM prints as well as the NFP report has inflation components with the ISM priced paid components and the Average Hourly Earnings on the NFP side. If growth data slows very fast that could be USD positive, but if inflation data starts decelerating much faster that could also be USD negative as it means less need for aggressive Fed policy. A tricky one for the week ahead.
by thunderpips
GBP USD - FUNDAMENTAL DRIVERSGBP FUNDAMENTAL BIAS: WEAK BULLISH 1. Monetary Policy They did it again! After leading markets to believe that a Dec rate hike was unlikely, the BoE wrong footed markets again by announcing a 15bsp hike. Recall we had external member Saunders (who voted for a hike in Nov) suggest there could be benefits in waiting before moving on rates BoE’s Mann a few days before the meeting saying it was premature to even talk about the timing of hikes let alone the magnitude, but of course both of them ended up voting for a hike in the end with a surprising 8-1 vote split (BoE’s Tenreyro the only dissenter). The bank lost even more of the little credibility it had left, but in the end, they did the right thing (in my opinion at least) as they stayed data dependent and hiked given a flurry of much better-than-expected econ data in the run up to the meeting. The consensus view among the MPC was that current price pressures warranted tighter policy in the near-term, with inflation expected to peak close to 6% in April (up from previous projections). One negative was of course growth, which is expected to push lower given the new Omicron wave. The Dec decision was a hawkish development for the GBP, but of course Omicron and incoming econ data will be key considerations for the rate outlook going forward (25bsp hike fully priced for March). 2. Economic & Health Developments Even though activity data has been slowing, the economy is not expected to fall off a cliff by any means. Growth expectations by the IMF/OECB still sees solid growth differentials, but not everyone shares that optimism (as polling data from Refinitiv reveals). Even though we think the solid economic data running into Dec were enough to convince the BoE to hike, the overall rate trajectory already priced into money markets seem very overambitious. As long as the incoming data remains firm it should keep the odds of additional tightening on the table, but we should be mindful of potential unwinding if data starts painting a bleaker picture. 3. Political Developments Even though Brexit isn’t the focus it used to be, some issues, such as the Northern Ireland protocol, remains in the loop with neither side willing to budge. As usual, we’ve had heated rhetoric from both sides with the UK threatening to trigger Article 16 and the EU threatening to terminate the Brexit deal if they do. For now, markets have ignored this as political posturing, but of course any actual escalation (such as an actual triggering of Article 16) could drastically see some sharp risk premium built into the GBP. Furthermore, political uncertainty surrounding PM Johnson opens up another can of worms as GBP usually doesn’t like domestic political uncertainty. That means the upcoming Sue Gray report this week will be a key focus, where damaging results for the PM could prove GBP negative and vice versa if it shows the PM was not at fault. Apart from the report, the question remains on whether there will be enough MP’s who opt for a vote of no-confidence (if so that could see short-term downside), but after that the question will be on whether the PM can survive an actual vote of no-confidence, where a win for the PM is expected to the GBP positive and negative if he loses. 4. CFTC Analysis Latest CFTC data showed a positioning change of +28919 with a net non-commercial position of -247. Short bets continue to be unwound for Sterling as large speculators have seen a huge reduction in net-shorts and pushing GBP to neutral. Even though that’s a positive, this week’s political developments will be front of mind and close to neutral positioning means it’s a fair fight higher and lower depending on the outcome. 5. The Week Ahead As always, the FOMC will be in focus for most major currencies given its potential impact on global asset classes and will thus be in focus for Sterling. Apart from that, the biggest focus point will be the political developments, which means attention will be placed on the findings of the Sue Gray report, and after that any subsequent actions against the PM (whether he has to face a vote of no confidence, and of course if he does whether he will have enough support to survive it). As Sterling is usually sensitive to domestic pollical uncertainty, any quick resolution will arguably be the best outcome for Sterling, while a messy and uncertain outcome could see some risk premium built into the Pound. USD FUNDAMENTAL BIAS: BULLISH 1. Monetary Policy The Fed turned a lot more hawkish than expected in Dec. They doubled the pace of tapering to $30 billion per month which will see QE concluded by March 2022 as was widely expected. Surprisingly though the Summary of Econ Projections showed the median dot plot pencilled in 3 hikes for 2022 (up from the previous 1), confirming Fed Fund Future expectations. Fed Chair Powell explained they hadn’t decided whether to pause between the end of tapering and a first hike but reiterated that rates will likely only rise when QE has concluded. Another positive shift was Powell’s comments that they could raise rates before full employment has been met due to high inflation , and stated that with inflation above target, they cannot wait too long to get to maximum employment as current inflation levels is seen as a threat to max employment. The hawkish tilt went further to note that the bank started discussing the balance sheet but said no decisions were made on when QT might commence. Even though the dots projected 3 hikes for 2022, the updated rate trajectory only showed 1 additional hike over the forecast horizon, which combined with a lower terminal rate was less hawkish than some had feared. Nonetheless, the meeting marked a material hawkish shift from the Fed, putting it on par with the likes of the RBNZ. The meeting minutes also revealed that the QT discussion saw majority of members thinking it appropriate to start QT soon after rate lift off and another more hawkish tilt than expected from the Fed. 2. Global Risk Outlook The growth & inflation outlook for the US and the globe will be key for the USD. The USD is often inversely correlated to global growth & inflation , doing bad during reflationary environments (growth and inflation accelerating), while the USD usually does well in disinflationary environments (growth and inflation decelerating). Thus, with expectations that both growth and inflation will decelerate this year, both in the US and the globe, that should be a positive input for the USD in the med-term . However, incoming data will also be important to see how the Fed responds to it, where a worsening outlook that deteriorates much faster than expected could see a dovish pivot from the Fed which could mean downside for the USD if money markets start pricing out hikes (especially with markets now expected just over 4 hikes for 2022). 3. CFTC Analysis Latest CFTC data showed a positioning change of -1458 with a net non-commercial position of +36434. The shortterm unwinding of stretched USD longs played out exactly as expected but was also short-lived in the midst of the recent strong risk off moves in certain parts of the market. Surprisingly, the big flush lower in the USD has not showed up in the CFTC data as expected with very little change to the overall positioning. In the current context, the stretched long positioning makes the USD vulnerable in the event that the Fed does not deliver the very hawkish tone expected of them in this week’s upcoming FOMC meeting. 4. The Week Ahead For the USD the big focus this week will be overall risk sentiment and the first FOMC meeting for 2022 on Wednesday, followed by Friday’s Core PCE and Employment Cost index prints. The latter will of course be important given the inflation outlook with more emphasis recently on the odds of a possible wage spiral affect. However, the main event will be the FOMC, where the meeting is expected to serve as a signalling meeting to pave the way for a 25bsp hike in March and to provide more clarity on the bank’s balance sheet plans. With a March hike sitting close to a 90% probability, and markets already fully pricing in 4 hikes this year, the bar has been set quite high for a hawkish surprise. However, there are also some participants that think the recent econ data ( CPI YY >7% and Unemployment <4%) justifies an early end to the Fed’s QE program instead of allowing tapering to run it’s planned course until March. That would certainly give a more hawkish feel to the meeting and could see markets pricing in an even earlier and faster pace of QT if confirmed. But, if the Fed does not deliver on an early end to QE , and does not offer a strong enough signal that the 4 hikes priced by the market is justified, we could be in store for some moderation in the rise in yields and the USD and could also prove to be supportive for equities which ended last week in quite bad shape.
by thunderpips
1
Today’s Notable Sentiment ShiftsGBP – Sterling edged up on Wednesday, hitting a 23-month high against EUR after higher-than-expected inflation data added to pressure on the Bank of England to raise interest rates next month. Commenting on GBP price action and its outlook. Bank of America notes that “an awful lot is priced for the BoE cycle – yet we think it is too early to ‘fade’ the GBP rally on a fully-priced BoE cycle – just in the same way it is too early to fade the dollar rally.” CAD – The Canadian dollar edged higher on Wednesday as oil prices rose and CPI data showed a 30-year high for inflation, supporting the growing argument for the BoC to hike interest rates as soon as next week. Commenting on the report, one of TD Securities chief analysts noted that “the increase in the core metrics does catch my eye… This probably does incrementally ratchet up pressure on the BoC to start lifting rates sooner than later.”
by thunderpips
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