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 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. 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.
3. CFTC Analysis
Very bearish signal from recent positioning update as all three major categories saw sizeable net-short weekly changes. The price action throughout the week has reflected this change in sentiment quite well.
4. The Week Ahead
The data is extremely light for the Eurozone next week with no major data events to take note of apart from final PMI data (which is unlikely to create a lot of volatility ). Thus, the biggest drivers for the EUR in the week ahead will be ECB speak, Geopolitics and of course the outcome of the FOMC. For the FOMC, the reaction in the USD will largely impact G10 FX across the board, and since the DXY is close to 60% weighted to the EUR that means any big USD moves will be important to watch for the EUR. For ECB speak, markets will be looking for any further comments about the possibility of a July rate hike by the ECB (STIR markets pricing in a 94%
probability of a July hike already). Any comments, especially from dovish ECB members could see some upside, but with a hike almost fully priced there might not be much more miles left in that tank. With a hike almost fully priced, the biggest risk from ECB speak in the week ahead is comments that sees markets pricing out a hike for July and could see some downside if that’s the case. For Geopolitics, the Eurogroup meetings will be watched closely for any further news on a potential oil embargo (with Germany reportedly warming up to the idea this week). It’s important to see the details of any embargo to assess the likely impact to the EUR. For example, will it be an immediate stop or gradual (if gradual how long), will it be specific amounts or a more phased approach, have the EZ already sourced alternative supply or not, what type of premium are they expected to pay if they have sourced from other suppliers. All these details will be necessary to be able to quantify how negative any embargo will be and how that will likely then impact the EUR.
GBP
FUNDAMENTAL BIAS: NEUTRAL
1. Monetary Policy
In March the BoE hiked rates by 25bsp as expected but delivered a bearish hike with BoE’s Cunliffe dissenting by voting to leave rates unchanged. This was a stark change from February where 4 members voted for a 50bsp hike. Cunliffe noted the negative impacts of higher commodity prices on real household incomes and economic activity as the main reason for his dissention, while remaining members thought a 25bsp hike was appropriate given the tight labour market and risks of second round effects. Even though inflation forecasts were upgraded to 8% in Q2 (previous 7.25%), the negative view that GDP was expected to slow to subdued rates showed growing concern of stagflation. The most bearish element of the statement was a change in language regarding incoming rates where the bank said they judge that some further modest tightening MIGHT be appropriate where previous guidance said more tightening was ‘LIKELY TO BE’ appropriate (a clear push against overly aggressive rate expectations). They further pushed back by noting the current implied rate path would see inflation would be below target in 3 years’ time, in other words saying they won’t hike as much, and confirms our estimates that policy reached peak hawkishness in February. The 100% odds of a 25bsp in May drifted to just above 80% on Friday, and markets will pay close attention to incoming BoE speak, where further push back against rates could be enough to see markets pricing out some of the >5 hikes still priced for 2022. As a result of the clear dovish tilt, we have adjusted our assessment of the bank’s policy stance to NEUTRAL.
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
Very bearish signal from all three participant categories with the aggregate positioning (non-commercials, leveraged funds and asset managers) pushing below 1 standard dev from the 15-year mean. It’s important to note that this sentiment was clearly reflected given the big drop in Sterling this week.
5. The Week Ahead
For Sterling in the week ahead it’ll be all eyes on the upcoming Bank of England meeting. Recall at the last meeting that we saw quite a dramatic change in sentiment among the MPC with only 8 voting for a hike and 1 dissenter voting to leave rates unchanged. This was a big change from the meeting before that where all 9 voted for a hike and 4 voted for a 50bsp hike. A 25bsp hike is fully priced in for the May meeting (as well as an additional 5 by year end after that), so markets will be keenly watching the vote split to get a clue whether the overall sentiment for hikes among MPC members are changing (will anyone join Cunliffe to dissent this time). There are reasons to believe that more MPC members could be leaning to the dovish side as recent growth data has deteriorated much more and faster than expected. Especially with recent commentary from Gov Bailey cautioning that they are walking on a tightrope between trying to fight high inflation whilst trying to avoid a recession. That means with a 25bsp hike 100% priced, the focus will be on any signals the bank provides with regard to the rate path going forward (whether they push back against the overly aggressive hike expectations or not). The balance sheet will also be in focus as the bank’s has previously suggested that they will look to actively start selling Gilts once the cash rate reaches 1.0%. By following through with a 25bsp hike next week will put them at 1.0% so any announcement of sales or of a path forward will be important.
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 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. 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.
3. CFTC Analysis
Very bearish signal from recent positioning update as all three major categories saw sizeable net-short weekly changes. The price action throughout the week has reflected this change in sentiment quite well.
4. The Week Ahead
The data is extremely light for the Eurozone next week with no major data events to take note of apart from final PMI data (which is unlikely to create a lot of volatility ). Thus, the biggest drivers for the EUR in the week ahead will be ECB speak, Geopolitics and of course the outcome of the FOMC. For the FOMC, the reaction in the USD will largely impact G10 FX across the board, and since the DXY is close to 60% weighted to the EUR that means any big USD moves will be important to watch for the EUR. For ECB speak, markets will be looking for any further comments about the possibility of a July rate hike by the ECB (STIR markets pricing in a 94%
probability of a July hike already). Any comments, especially from dovish ECB members could see some upside, but with a hike almost fully priced there might not be much more miles left in that tank. With a hike almost fully priced, the biggest risk from ECB speak in the week ahead is comments that sees markets pricing out a hike for July and could see some downside if that’s the case. For Geopolitics, the Eurogroup meetings will be watched closely for any further news on a potential oil embargo (with Germany reportedly warming up to the idea this week). It’s important to see the details of any embargo to assess the likely impact to the EUR. For example, will it be an immediate stop or gradual (if gradual how long), will it be specific amounts or a more phased approach, have the EZ already sourced alternative supply or not, what type of premium are they expected to pay if they have sourced from other suppliers. All these details will be necessary to be able to quantify how negative any embargo will be and how that will likely then impact the EUR.
GBP
FUNDAMENTAL BIAS: NEUTRAL
1. Monetary Policy
In March the BoE hiked rates by 25bsp as expected but delivered a bearish hike with BoE’s Cunliffe dissenting by voting to leave rates unchanged. This was a stark change from February where 4 members voted for a 50bsp hike. Cunliffe noted the negative impacts of higher commodity prices on real household incomes and economic activity as the main reason for his dissention, while remaining members thought a 25bsp hike was appropriate given the tight labour market and risks of second round effects. Even though inflation forecasts were upgraded to 8% in Q2 (previous 7.25%), the negative view that GDP was expected to slow to subdued rates showed growing concern of stagflation. The most bearish element of the statement was a change in language regarding incoming rates where the bank said they judge that some further modest tightening MIGHT be appropriate where previous guidance said more tightening was ‘LIKELY TO BE’ appropriate (a clear push against overly aggressive rate expectations). They further pushed back by noting the current implied rate path would see inflation would be below target in 3 years’ time, in other words saying they won’t hike as much, and confirms our estimates that policy reached peak hawkishness in February. The 100% odds of a 25bsp in May drifted to just above 80% on Friday, and markets will pay close attention to incoming BoE speak, where further push back against rates could be enough to see markets pricing out some of the >5 hikes still priced for 2022. As a result of the clear dovish tilt, we have adjusted our assessment of the bank’s policy stance to NEUTRAL.
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
Very bearish signal from all three participant categories with the aggregate positioning (non-commercials, leveraged funds and asset managers) pushing below 1 standard dev from the 15-year mean. It’s important to note that this sentiment was clearly reflected given the big drop in Sterling this week.
5. The Week Ahead
For Sterling in the week ahead it’ll be all eyes on the upcoming Bank of England meeting. Recall at the last meeting that we saw quite a dramatic change in sentiment among the MPC with only 8 voting for a hike and 1 dissenter voting to leave rates unchanged. This was a big change from the meeting before that where all 9 voted for a hike and 4 voted for a 50bsp hike. A 25bsp hike is fully priced in for the May meeting (as well as an additional 5 by year end after that), so markets will be keenly watching the vote split to get a clue whether the overall sentiment for hikes among MPC members are changing (will anyone join Cunliffe to dissent this time). There are reasons to believe that more MPC members could be leaning to the dovish side as recent growth data has deteriorated much more and faster than expected. Especially with recent commentary from Gov Bailey cautioning that they are walking on a tightrope between trying to fight high inflation whilst trying to avoid a recession. That means with a 25bsp hike 100% priced, the focus will be on any signals the bank provides with regard to the rate path going forward (whether they push back against the overly aggressive hike expectations or not). The balance sheet will also be in focus as the bank’s has previously suggested that they will look to actively start selling Gilts once the cash rate reaches 1.0%. By following through with a 25bsp hike next week will put them at 1.0% so any announcement of sales or of a path forward will be important.
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.