EUR
FUNDAMENTAL BIAS: NEUTRAL
1. Monetary Policy
Accelerating policy normalization in deed, 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. With very big moves lower already, chasing the lows aren’t very attractive, but picking bottoms is equally dangerous without clear catalysts.
3. CFTC Analysis
Some bullish sentiment signals from last week’s positioning changes with Large Specs increasing longs while leveraged funds decreased shorts. 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.
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 the fate of PM Johnson remains a focus. Fallout from the Sue Gray report was limited but as distrust grows the question remains whether a vote of no-confidence will happen (if so,short-term downside is likely). Focus will then be on whether the PM can survive a no-confidence vote (a win should be GBP positive and a loss GBP negative). The Northern Ireland protocol remains a focus 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 posturing, but any actual escalation can see sharp downside for GBP.
4. CFTC Analysis
Recent CFTC data showed a mixed bag for GBP positioning as large specs and asset managers increased netshort positioning while leveraged funds increased shorts. For now, positioning doesn’t provide much in the way of a directional bias. However, price action has been stretched to the downside so be mindful of that.
FUNDAMENTAL BIAS: NEUTRAL
1. Monetary Policy
Accelerating policy normalization in deed, 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. With very big moves lower already, chasing the lows aren’t very attractive, but picking bottoms is equally dangerous without clear catalysts.
3. CFTC Analysis
Some bullish sentiment signals from last week’s positioning changes with Large Specs increasing longs while leveraged funds decreased shorts. 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.
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 the fate of PM Johnson remains a focus. Fallout from the Sue Gray report was limited but as distrust grows the question remains whether a vote of no-confidence will happen (if so,short-term downside is likely). Focus will then be on whether the PM can survive a no-confidence vote (a win should be GBP positive and a loss GBP negative). The Northern Ireland protocol remains a focus 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 posturing, but any actual escalation can see sharp downside for GBP.
4. CFTC Analysis
Recent CFTC data showed a mixed bag for GBP positioning as large specs and asset managers increased netshort positioning while leveraged funds increased shorts. For now, positioning doesn’t provide much in the way of a directional bias. However, price action has been stretched to the downside so be mindful of that.
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.