EUR
FUNDAMENTAL BIAS: NEUTRAL
1. Monetary Policy
The ECB used the April meeting as a place holder meeting for the most part by not announcing any additional policy tweaks. The plans to phase out the APP into Q3 remained intact by reducing purchases from 40bln to 30bln in May and then down to 20bln in June. Markets were leaning towards a slightly more hawkish take from the bank (given recent inflation pressures), but the lack of conviction to remove the conditionality regarding the APP removal was seen as dovish. President Lagarde added to this dovish tone by explaining that Q3 has three months and IF the bank stops the APP, it could happen July, August or September. This was an important statement as the difference between a July and September end could mean the difference between a Q3 or Q4 rate hike. The president also added to the dovish tone by stressing that risks for the economic outlook are tilted to the downside and have recently intensified with geopolitical and virus-related challenges. When asked about policy normalization, the president made a strange comment by saying it is premature to think about monpol normalisation. As the bank is currently embarking on normalization this comment seemed out of place and reaffirmed the overall dovish take from the meeting. There were the usual sources releases after the presser which said policymakers see a July hike as still possible after Thursday's meeting, which provided some reprieve. With inflation >7% and growth slowing, the June meeting which accompanies staff economic projections will be critical for markets to solidify whether expectations of 1 or 2 hikes this year is correct or not.
2. Economic & Health Developments
Growth differentials still favour the US over EU capital flows, but differentials have turned positive and remain positive against the UK. Given growing stagflation fears the ECB is in a tough spot, being forced to normalize policy to try and combat inflation but could as a result damage growth. Ongoing EU fiscal discussions to possibly allow ‘green bonds’ NOT to count against budget deficits remains in focus, alongside debt issuance for energy purchases. If approved, it will offer a flood of fiscal support which would be positive for the EUR and EU equities.
3. Geopolitics
The EUR pushed lower aggressively after initial geopolitical scares but have been trying to carve out a base. Proximity to the war and the impact of sanctions remains a risk if the situation deteriorates. With lots of negatives already priced, chasing lows on bad news is not as attractive as chasing the EUR higher on good news.
4. CFTC Analysis
Very bullish signal from recent positioning update as all three major categories saw sizeable net-long weekly changes, especially for Large Specs and Asset Managers. But, looking at the price action it seems these participants increased long EUR exposure at the worst possible time with price dipping below key support at 1.05. Technically the momentum points lower but given how much bad news has been priced and recent hawkish ECB comments, we would prefer chasing long on good news as opposed to chasing lower on bad news.
5. The Week Ahead
Very light calendar with Flash GDP and Final CPI data the only main data events, and they are not expected to offer many fireworks in terms of volatility . That means overall risk sentiment and geopolitics will be in focus for the EUR. With it’s 57% weighting in the Dollar Index , the Dollar flows this incoming week will be an important factor for the EUR, where any overdue pullbacks in the Greenback as a result of better risk sentiment should be supportive for the EUR and other majors. Risk sentiment staged quite an impressive recovery on Friday, and given a very light economic calendar, any continuation of that could be negative for the USD and should support the EUR. It’s important to keep in mind that any recovery in risk sentiment is also expected to support other majors which means caution for EURGBP where a tactically stretched Sterling could still see minor downside for the pair despite overall support from USD weakness. Geopolitics will also be eyed, both on the Russian and Brexit fronts. On the Russia side, it seems that most of the negativity from a possible oil embargo might have been priced, but any negative developments or retaliation from Russia against Finland and Sweden’s bid to join NATO can cause an increase in EUR risk premium and weigh on the single currency. For now the increased threats of terminating the Brexit deal has been rightly seen as posturing, but if any side actually goes through with their recent threats that could open up a decent EURGBP buy opportunity.
GBP
FUNDAMENTAL BIAS: WEAK BEARISH
1. Monetary Policy
At their May meeting, the BoE delivered on expectations by raising the bank rate by 25bsp to 1.0%. There was an initial hawkish surprise as the vote split was 9-0 (no dissent from Cunliffe) and 3 of the 9 MPC members voted for a 50bsp move at the meeting. However, the hawkish reaction soon faded as it was also revealed that 2 of the 6 members who voted for a hike thought that this marked the end of the current hiking cycle. The dovishness didn’t stop there though as the BoE revised up their forecasts for peak inflation to >10% which added to the stagflation fears as the bank also saw possible GDP contraction in 2023. Furthermore, the bank took their first real stab at overly aggressive STIR pricing for the 2022 rate path by saying the current path would imply a big undershoot of their 2% inflation target in 2023 and was later backed up by Governor Bailey who said even though he thought rates should continue to rise he didn’t agree with those who think the MPC should be raising interest rates by a lot more. As the bank rate was raised to 1.0%, the markets expected some clarity from the bank on their plans to reduce the balance sheet . However, the bank decided to play for more time and said the bank will provide an update on their plans at the August meeting, pushing back expectations of active QT from Q2 to Q3. As a result of the overall dovish tone, Sterling fell to its lowest levels since 1Q21. The meeting confirmed market calls that the bank would look to hold rates steady after reaching 1.50%.
2. Economic & Health Developments
With inflation the main reason for the BoE’s recent rate hikes, there is a concern that the UK economy faces stagflation risk, as price pressures stay sticky while growth decelerates. That also means that current market expectations for rates continues to look too aggressive even after the BoE’s recent push back. This means downside risks for GBP if growth data push lower and/or the BoE continue to push their recent dovish tone.
3. Political Developments
Political uncertainty is usually GBP negative, so the PM’s future remains a risk. If distrust grows question remains on whether a no-confidence vote can happen (if so, short-term downside is likely), and whether he can survive the vote (a win should be GBP positive and a loss GBP negative). The Northern Ireland protocol remains a focus, with previous UK threats to trigger Article 16 and EU threats to terminate the Brexit deal if they do. Markets have rightly ignored this as posturing, but any actual escalation can see sharp GBP downside.
4. CFTC Analysis
Overall bearish signal as aggregate net-short positioning increased, pushing aggregate positioning (large specs, leveraged funds & asset managers) further below 1 standard dev from the 15-year mean. Even though the outlook for Sterling shifted to weak bearish from Neutral following the recent BoE meeting, we don’t want to chase the GBP lower from here. Not with both price action and positioning looking tactically stretched.
5. The Week Ahead
It’s a busy week for Sterling with the Monetary Policy hearings on Monday, Employment data on Tuesday, CPI on Wednesday and Retail Sales on Friday. The question markets want answered from all of these events are how bad the stagflation risks are getting. At the BoE meeting, the MPC forecasted a recession in the quarters ahead and also pushed back against STIR market expectations for the rate path, thus the tone for the hearings is expected to carry a similar dovish undertone. Between the data points, the CPI will be the most important with consensus expecting a more than 2% jump from prior on headline YY due to the 54% risk in household energy prices from the start of April. However, it’s important to realize that a lot of this has been priced in, and with the forecast distribution firmly skewed to the upside, it will arguably take something closer towards 9.5% on the headline or 7.0% on the core to really surprise and add even more stagflation angst. With inflation in mind, the main focus for the jobs print on Tuesday will be the wage components, to see whether further signs of second round effects are materializing. For Retail Sales, the question is how bad the cost-of-living squeeze has affected consumer spending. By the looks of it, consensus thinks quite a lot, with Core Retail Sales expected to contract by -8.4% from the prior of -0.6%. Just like inflation , it seems like the forecast distribution is firmly skewed lower, which means it would arguably take some seriously bad prints to surprise. Brexit will also be in focus, where recent threats of terminating the Brexit deal has been rightly seen as posturing, but if any side goes through with their recent threats that could open up a decent EURGBP buy opportunity.
FUNDAMENTAL BIAS: NEUTRAL
1. Monetary Policy
The ECB used the April meeting as a place holder meeting for the most part by not announcing any additional policy tweaks. The plans to phase out the APP into Q3 remained intact by reducing purchases from 40bln to 30bln in May and then down to 20bln in June. Markets were leaning towards a slightly more hawkish take from the bank (given recent inflation pressures), but the lack of conviction to remove the conditionality regarding the APP removal was seen as dovish. President Lagarde added to this dovish tone by explaining that Q3 has three months and IF the bank stops the APP, it could happen July, August or September. This was an important statement as the difference between a July and September end could mean the difference between a Q3 or Q4 rate hike. The president also added to the dovish tone by stressing that risks for the economic outlook are tilted to the downside and have recently intensified with geopolitical and virus-related challenges. When asked about policy normalization, the president made a strange comment by saying it is premature to think about monpol normalisation. As the bank is currently embarking on normalization this comment seemed out of place and reaffirmed the overall dovish take from the meeting. There were the usual sources releases after the presser which said policymakers see a July hike as still possible after Thursday's meeting, which provided some reprieve. With inflation >7% and growth slowing, the June meeting which accompanies staff economic projections will be critical for markets to solidify whether expectations of 1 or 2 hikes this year is correct or not.
2. Economic & Health Developments
Growth differentials still favour the US over EU capital flows, but differentials have turned positive and remain positive against the UK. Given growing stagflation fears the ECB is in a tough spot, being forced to normalize policy to try and combat inflation but could as a result damage growth. Ongoing EU fiscal discussions to possibly allow ‘green bonds’ NOT to count against budget deficits remains in focus, alongside debt issuance for energy purchases. If approved, it will offer a flood of fiscal support which would be positive for the EUR and EU equities.
3. Geopolitics
The EUR pushed lower aggressively after initial geopolitical scares but have been trying to carve out a base. Proximity to the war and the impact of sanctions remains a risk if the situation deteriorates. With lots of negatives already priced, chasing lows on bad news is not as attractive as chasing the EUR higher on good news.
4. CFTC Analysis
Very bullish signal from recent positioning update as all three major categories saw sizeable net-long weekly changes, especially for Large Specs and Asset Managers. But, looking at the price action it seems these participants increased long EUR exposure at the worst possible time with price dipping below key support at 1.05. Technically the momentum points lower but given how much bad news has been priced and recent hawkish ECB comments, we would prefer chasing long on good news as opposed to chasing lower on bad news.
5. The Week Ahead
Very light calendar with Flash GDP and Final CPI data the only main data events, and they are not expected to offer many fireworks in terms of volatility . That means overall risk sentiment and geopolitics will be in focus for the EUR. With it’s 57% weighting in the Dollar Index , the Dollar flows this incoming week will be an important factor for the EUR, where any overdue pullbacks in the Greenback as a result of better risk sentiment should be supportive for the EUR and other majors. Risk sentiment staged quite an impressive recovery on Friday, and given a very light economic calendar, any continuation of that could be negative for the USD and should support the EUR. It’s important to keep in mind that any recovery in risk sentiment is also expected to support other majors which means caution for EURGBP where a tactically stretched Sterling could still see minor downside for the pair despite overall support from USD weakness. Geopolitics will also be eyed, both on the Russian and Brexit fronts. On the Russia side, it seems that most of the negativity from a possible oil embargo might have been priced, but any negative developments or retaliation from Russia against Finland and Sweden’s bid to join NATO can cause an increase in EUR risk premium and weigh on the single currency. For now the increased threats of terminating the Brexit deal has been rightly seen as posturing, but if any side actually goes through with their recent threats that could open up a decent EURGBP buy opportunity.
GBP
FUNDAMENTAL BIAS: WEAK BEARISH
1. Monetary Policy
At their May meeting, the BoE delivered on expectations by raising the bank rate by 25bsp to 1.0%. There was an initial hawkish surprise as the vote split was 9-0 (no dissent from Cunliffe) and 3 of the 9 MPC members voted for a 50bsp move at the meeting. However, the hawkish reaction soon faded as it was also revealed that 2 of the 6 members who voted for a hike thought that this marked the end of the current hiking cycle. The dovishness didn’t stop there though as the BoE revised up their forecasts for peak inflation to >10% which added to the stagflation fears as the bank also saw possible GDP contraction in 2023. Furthermore, the bank took their first real stab at overly aggressive STIR pricing for the 2022 rate path by saying the current path would imply a big undershoot of their 2% inflation target in 2023 and was later backed up by Governor Bailey who said even though he thought rates should continue to rise he didn’t agree with those who think the MPC should be raising interest rates by a lot more. As the bank rate was raised to 1.0%, the markets expected some clarity from the bank on their plans to reduce the balance sheet . However, the bank decided to play for more time and said the bank will provide an update on their plans at the August meeting, pushing back expectations of active QT from Q2 to Q3. As a result of the overall dovish tone, Sterling fell to its lowest levels since 1Q21. The meeting confirmed market calls that the bank would look to hold rates steady after reaching 1.50%.
2. Economic & Health Developments
With inflation the main reason for the BoE’s recent rate hikes, there is a concern that the UK economy faces stagflation risk, as price pressures stay sticky while growth decelerates. That also means that current market expectations for rates continues to look too aggressive even after the BoE’s recent push back. This means downside risks for GBP if growth data push lower and/or the BoE continue to push their recent dovish tone.
3. Political Developments
Political uncertainty is usually GBP negative, so the PM’s future remains a risk. If distrust grows question remains on whether a no-confidence vote can happen (if so, short-term downside is likely), and whether he can survive the vote (a win should be GBP positive and a loss GBP negative). The Northern Ireland protocol remains a focus, with previous UK threats to trigger Article 16 and EU threats to terminate the Brexit deal if they do. Markets have rightly ignored this as posturing, but any actual escalation can see sharp GBP downside.
4. CFTC Analysis
Overall bearish signal as aggregate net-short positioning increased, pushing aggregate positioning (large specs, leveraged funds & asset managers) further below 1 standard dev from the 15-year mean. Even though the outlook for Sterling shifted to weak bearish from Neutral following the recent BoE meeting, we don’t want to chase the GBP lower from here. Not with both price action and positioning looking tactically stretched.
5. The Week Ahead
It’s a busy week for Sterling with the Monetary Policy hearings on Monday, Employment data on Tuesday, CPI on Wednesday and Retail Sales on Friday. The question markets want answered from all of these events are how bad the stagflation risks are getting. At the BoE meeting, the MPC forecasted a recession in the quarters ahead and also pushed back against STIR market expectations for the rate path, thus the tone for the hearings is expected to carry a similar dovish undertone. Between the data points, the CPI will be the most important with consensus expecting a more than 2% jump from prior on headline YY due to the 54% risk in household energy prices from the start of April. However, it’s important to realize that a lot of this has been priced in, and with the forecast distribution firmly skewed to the upside, it will arguably take something closer towards 9.5% on the headline or 7.0% on the core to really surprise and add even more stagflation angst. With inflation in mind, the main focus for the jobs print on Tuesday will be the wage components, to see whether further signs of second round effects are materializing. For Retail Sales, the question is how bad the cost-of-living squeeze has affected consumer spending. By the looks of it, consensus thinks quite a lot, with Core Retail Sales expected to contract by -8.4% from the prior of -0.6%. Just like inflation , it seems like the forecast distribution is firmly skewed lower, which means it would arguably take some seriously bad prints to surprise. Brexit will also be in focus, where recent threats of terminating the Brexit deal has been rightly seen as posturing, but if any side goes through with their recent threats that could open up a decent EURGBP buy opportunity.
Disclaimer
The information and publications are not meant to be, and do not constitute, financial, investment, trading, or other types of advice or recommendations supplied or endorsed by TradingView. Read more in the Terms of Use.
Disclaimer
The information and publications are not meant to be, and do not constitute, financial, investment, trading, or other types of advice or recommendations supplied or endorsed by TradingView. Read more in the Terms of Use.