EUR
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
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
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.