EUR
FUNDAMENTAL BIAS: NEUTRAL
1. Monetary Policy
Accelerating policy normalization, but just don’t call it that. The March ECB meeting saw the ECB surprise markets by speeding up their normalization pace with the APP set to increase to EUR 40bln in April and then lowered to EUR 30bln in May and EUR 20bln in June, with an aim of ending APP in Q3. This was quite a shift, and alongside 2024 HICP expected at 1.9% it meant a hike for 2022 is still on the table. However, even though the statement was hawkish, the ECB tried very hard to come across as dovish as possible, no doubt trying to get a soft landing. The bank broke the link between APP and rates by saying hikes could take place ‘some time’ after purchases end (previously said ‘shortly’ after they end). President Lagarde also stressed that the Ukraine/Russia war introduced a material risk to activity and inflation (and it’s too early to know what the full impact of this will be). As a result, she stresses more than once that their actions with the APP should not be seen as accelerating but rather as normalizing (pretty sure going from open-ended QE to done in the next quarter is accelerating but maybe owls play by the different rules). To further add dovishness Lagarde also said that the war in Ukraine means risks are now again titled to the downside, compared to ‘broadly balanced’. After the meeting STIR markets and bund yields jumped to price in close to 2 hikes by year-end again, but the dovish push back from Lagarde saw the EUR come under pressure, failing to benefit from higher implied rates.
2. Economic & Health Developments
Recent activity data suggests the hit from lockdowns weren’t as bad as feared, but Omicron restrictions weighed on growth. Differentials still favour the US but interestingly has turned positive against the UK. The big focus is on the incoming data to offer further clues of possible stagflation, where the ECB could be forced to act on rates due to higher inflation but would negatively impact demand and growth as a result. There’s also focus on the fiscal side with ongoing discussions to potentially allow purchases of ‘green bonds’ NOT to count against budget deficits, and the possibility of major new debt issuance to finance energy purchases. If approved, this can drastically change the fiscal landscape and would be a positive for the EUR and EU equities. Geopolitics Even though the EUR, through Western sanctions, have dodged potential weakness from the CBR selling the EUR to prop up the RUB, the single currency was not immune for long. It held up okay initially, but as proximity risk to the war and economic risk from supply constraints and sanctions grew, the risk premium ballooned, sending EUR risk reversals sharply lower and implied volatility higher. Even though further geopolitical developments will be important to watch, the EUR already saw very big moves lower, which means right now chasing the lows on bad news aren’t as attractive as chasing highs on good news.
3. CFTC Analysis
Further bullish sentiment signals from last week’s positioning changes with Asset Managers and Leveraged Funds both adding a chunky number of net-longs. Still trading close to recent lows means speculative EUR longs versus the GBP and CAD looks interesting but doing so without catalysts at this stage is very risky.
4. The Week Ahead
The week ahead will be a quiet one for the EUR. We have Final PMI data coming up which will be interesting to watch after the surprisingly solid numbers out of France and Germany (despite the geopolitical developments). However, since they are Final prints, they are not expected to be enough to create any major market reactions, unless we see a massive deviation between the Flash and Final data. Apart from that, geopolitical risks will still be in focus given the Eurozone’s proximity to the war, and their dependence on Russian oil and gas, where any major escalations (expected to be EUR negative) or de-escalations (expected to be EUR positive) will be on the radar. The pop higher in the EUR earlier last week on the back of positive negotiation developments showed us how overly sensitive the EUR is with positive news compared to negative news, which we think is mainly a case of short-term positioning. Our preferred way of expressing any positive EUR developments is through EURGBP longs and possibly EURCAD longs (with Friday’s incoming Canadian jobs report in focus).
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 way 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 PM Johnson’s the remains a question mark, even though fallout from the Sue Gray report was limited. If distrust grows the question remains whether a vote of no-confidence could happen (if so, short-term downside is likely). Focus will then be on whether the PM can survive a noconfidence vote (a win should be GBP ▲ and a loss GBP ▼). The Northern Ireland protocol remains a focus as well with previous UK threats to trigger Article 16 and EU threats to terminate the Brexit deal if they do. For now, markets have rightly ignored this as posturing, but any actual escalation can see sharp GBP downside.
4. CFTC Analysis
Recent CFTC data showed a mixed bag for GBP positioning once again as large specs and asset managers increased net-short positioning while leveraged funds increased net-longs by a whopping 20K contracts. For now, positioning doesn’t provide much in the way of a directional bias. However, price action at the index level has been somewhat stretched to the downside recently so be mindful of that.
5. The Week Ahead
Economic data will be very light for the UK with no major data points on the schedule. We do have BoE speak in the mix again with BoE’s Bailey, Cunliffe and Phil expected to speak. Bailey might not give us anything new on monetary policy after his speech this past week (which saw him sticking to recent dovish rhetoric), but Cunliffe and Phil could be interesting. Recall that it was Cunliffe who dissented at the March meeting and voted to keep rates unchanged given the risks to the consumer, so markets will be paying attention to what he has to say. Similarly, chief economist Phil’s comments will be viewed, but taking them with a pinch of salt would be a good idea since his communication and actual policy decision has been quite different from one another in recent months (not putting his vote where his comments is). Our bias for Sterling remains neutral with a skew towards bearish but prefer to express that view with EURGBP right now, which means we will use any bearish sentiment shifts for Sterling to use as opportunities for possible EURGBP longs.
FUNDAMENTAL BIAS: NEUTRAL
1. Monetary Policy
Accelerating policy normalization, but just don’t call it that. The March ECB meeting saw the ECB surprise markets by speeding up their normalization pace with the APP set to increase to EUR 40bln in April and then lowered to EUR 30bln in May and EUR 20bln in June, with an aim of ending APP in Q3. This was quite a shift, and alongside 2024 HICP expected at 1.9% it meant a hike for 2022 is still on the table. However, even though the statement was hawkish, the ECB tried very hard to come across as dovish as possible, no doubt trying to get a soft landing. The bank broke the link between APP and rates by saying hikes could take place ‘some time’ after purchases end (previously said ‘shortly’ after they end). President Lagarde also stressed that the Ukraine/Russia war introduced a material risk to activity and inflation (and it’s too early to know what the full impact of this will be). As a result, she stresses more than once that their actions with the APP should not be seen as accelerating but rather as normalizing (pretty sure going from open-ended QE to done in the next quarter is accelerating but maybe owls play by the different rules). To further add dovishness Lagarde also said that the war in Ukraine means risks are now again titled to the downside, compared to ‘broadly balanced’. After the meeting STIR markets and bund yields jumped to price in close to 2 hikes by year-end again, but the dovish push back from Lagarde saw the EUR come under pressure, failing to benefit from higher implied rates.
2. Economic & Health Developments
Recent activity data suggests the hit from lockdowns weren’t as bad as feared, but Omicron restrictions weighed on growth. Differentials still favour the US but interestingly has turned positive against the UK. The big focus is on the incoming data to offer further clues of possible stagflation, where the ECB could be forced to act on rates due to higher inflation but would negatively impact demand and growth as a result. There’s also focus on the fiscal side with ongoing discussions to potentially allow purchases of ‘green bonds’ NOT to count against budget deficits, and the possibility of major new debt issuance to finance energy purchases. If approved, this can drastically change the fiscal landscape and would be a positive for the EUR and EU equities. Geopolitics Even though the EUR, through Western sanctions, have dodged potential weakness from the CBR selling the EUR to prop up the RUB, the single currency was not immune for long. It held up okay initially, but as proximity risk to the war and economic risk from supply constraints and sanctions grew, the risk premium ballooned, sending EUR risk reversals sharply lower and implied volatility higher. Even though further geopolitical developments will be important to watch, the EUR already saw very big moves lower, which means right now chasing the lows on bad news aren’t as attractive as chasing highs on good news.
3. CFTC Analysis
Further bullish sentiment signals from last week’s positioning changes with Asset Managers and Leveraged Funds both adding a chunky number of net-longs. Still trading close to recent lows means speculative EUR longs versus the GBP and CAD looks interesting but doing so without catalysts at this stage is very risky.
4. The Week Ahead
The week ahead will be a quiet one for the EUR. We have Final PMI data coming up which will be interesting to watch after the surprisingly solid numbers out of France and Germany (despite the geopolitical developments). However, since they are Final prints, they are not expected to be enough to create any major market reactions, unless we see a massive deviation between the Flash and Final data. Apart from that, geopolitical risks will still be in focus given the Eurozone’s proximity to the war, and their dependence on Russian oil and gas, where any major escalations (expected to be EUR negative) or de-escalations (expected to be EUR positive) will be on the radar. The pop higher in the EUR earlier last week on the back of positive negotiation developments showed us how overly sensitive the EUR is with positive news compared to negative news, which we think is mainly a case of short-term positioning. Our preferred way of expressing any positive EUR developments is through EURGBP longs and possibly EURCAD longs (with Friday’s incoming Canadian jobs report in focus).
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 way 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 PM Johnson’s the remains a question mark, even though fallout from the Sue Gray report was limited. If distrust grows the question remains whether a vote of no-confidence could happen (if so, short-term downside is likely). Focus will then be on whether the PM can survive a noconfidence vote (a win should be GBP ▲ and a loss GBP ▼). The Northern Ireland protocol remains a focus as well with previous UK threats to trigger Article 16 and EU threats to terminate the Brexit deal if they do. For now, markets have rightly ignored this as posturing, but any actual escalation can see sharp GBP downside.
4. CFTC Analysis
Recent CFTC data showed a mixed bag for GBP positioning once again as large specs and asset managers increased net-short positioning while leveraged funds increased net-longs by a whopping 20K contracts. For now, positioning doesn’t provide much in the way of a directional bias. However, price action at the index level has been somewhat stretched to the downside recently so be mindful of that.
5. The Week Ahead
Economic data will be very light for the UK with no major data points on the schedule. We do have BoE speak in the mix again with BoE’s Bailey, Cunliffe and Phil expected to speak. Bailey might not give us anything new on monetary policy after his speech this past week (which saw him sticking to recent dovish rhetoric), but Cunliffe and Phil could be interesting. Recall that it was Cunliffe who dissented at the March meeting and voted to keep rates unchanged given the risks to the consumer, so markets will be paying attention to what he has to say. Similarly, chief economist Phil’s comments will be viewed, but taking them with a pinch of salt would be a good idea since his communication and actual policy decision has been quite different from one another in recent months (not putting his vote where his comments is). Our bias for Sterling remains neutral with a skew towards bearish but prefer to express that view with EURGBP right now, which means we will use any bearish sentiment shifts for Sterling to use as opportunities for possible EURGBP longs.
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.