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, the Omicron restrictions weighed on growth. Differentials still favour the US and UK above the EZ. The big focus though is on the incoming inflation data after the ECB’s recent hawkish pivot at their Feb meeting. On the fiscal front, attention is on ongoing discussions to potentially allow purchases of ‘green bonds’ NOT to count against budget deficits. 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
Friday’s CFTC data did not show what we expected. Despite the big falls in the EUR and a very big reduction in Asset Manager net-longs, leverage funds reduced net-shorts on the EUR. Unless they reduced shorts in anticipation of a bounced from stretched lows the update does not make much sense right now. Regardless of positioning though, the best way to trade the EUR from these levels is with a clear catalyst.
4. The Week Ahead
For the week ahead it’ll be very quiet on the data front, with all the focus for the EUR still on the geopolitical situation, where any escalation in tensions is expected to weigh on the EUR while de-escalations are expected to provide support. Apart from that, given the liquidity of the EURUSD and EURGBP currency pairs, as well as the EUR’s close to 60% weighting in the DXY, the upcoming FOMC and BoE policy decisions could end up being the biggest drivers for the EUR apart from geopolitics. The hurdle is quite high for the Fed to really surprise markets on the hawkish side (certainly possible for them to do so though), which means unless markets price in even more hikes for the Fed and unless the geopolitical situation deteriorates very drastically, the strong USD upside might run out of short-term steam which would be supportive for the EUR. When it comes to the BoE though, the recent amount of downside priced in for the GBP in such a short space of time and the recent dovish tones from the bank, means the bar is very low for a less dovish reaction from the GBP. Why is this important for the EUR? Given the liquidity of the EURGBP pair any major momentum in EURGBP can affect the EUR and GBP pairs in general so worth keeping on the radar.
USD
FUNDAMENTAL BIAS: BULLISH
1. Monetary Policy
The Jan FOMC decision was hawkish on multiple fronts. The statement signalled a March hike as expected, but Chair Powell portrayed a very hawkish tone. Even though Powell said they can’t predict the rate path with certainty, he stressed the economy is in much better shape compared to the 2015 cycle and that will have implications for the pace of hikes (more and faster). Furthermore, he explained that there is ‘quite a bit of room’ to raise rates without damaging employment, which suggests upside risks to the rate path. A big question going into the meeting was how concerned the Fed was about recent equity market volatility . But the Chair explained that markets and financial conditions are reflecting policy changes in advance and that in aggregate the measures they look at isn’t showing red lights. Thus, any ‘Fed Put’ is much further away and inflation is the Fed’s biggest concern right now. The Chair also didn’t rule out the possibility of a 50bsp hike in March or possibly hiking at every meeting this year, which was hawkish as it means the Fed wants optionality to move more aggressive if they need to. We didn’t get new info on the balance sheet and Powell reiterated that they’re contemplating a start of QT after hiking has begun and they’ll discuss this in coming meetings. Overall, the tone and language were a lot more hawkish than the Dec meeting and more hawkish than consensus was expecting.
2. Global & Domestic Economy
As the reserve currency, the USD’s global usage means it’s usually inversely correlated to the global economy and global trade. The USD usually appreciates when growth & inflation slow (disinflation) and depreciates when growth & inflation accelerates (reflation). Thus, current expectations of a cyclical slowdown (and possible stagflation) are good for the Dollar. Incoming data will be watched in relation to the ‘Fed Put’ as there are many similarities between now and 4Q18, where the Fed were also tightening into a slowdown. If growth data slows and the Fed stays hawkish it’s a positive for the USD, once the Fed pivots dovish that’ll be a negative for the USD.
3. CFTC Analysis
The USD remains a net-long across major participants, but with price action looking stretched and with peak hawkishness for the Fed arguably close with >6 hikes priced, the risk to reward of chasing USD strength is not very attractive right now. Continued stagflation and geopolitical risks it mean that stretched positioning might not be as important as usual. JP Morgan also shared some stats that suggest the USD has a historical tendency to strengthen in the 6 months going into a first hike but then to weaken during the 6 months directly after a first hike. This is an interesting phenomenon which is worth keeping in mind given the USD’s recent performance.
4. The Week Ahead
The week ahead for the USD will be dominated by ongoing geopolitical tensions as well as the incoming FOMC meeting. On the geopolitical front, escalation and de-escalation will affect safe haven flows which means it will remain an important driver for the USD, especially with rising commodity prices also stoking growing fears of stagflation. On the FOMC side, a 25bsp hike is fully priced, but markets still have a lot to think about as the March meeting will be accompanied by an updated Summary of Economic Projections, where the markets want to see how the dots have changed (previous meeting showed 3 hikes for 2022). STIR markets currently priced in close to 7 hikes, so anything below 5 ought to be seen as dovish. During his recent testimony, Powell said that markets have responded to their guidance with good transmission and have priced in a much higher tightening path, so
if their tone and comments alone have done so much heavy lifting there isn’t much reason for them to suddenly ease off on that. It’s true that the Ukraine/Russia war does add uncertainty, but with the US economy and financial sector far less exposed to Russia compared to Europe, the biggest ‘risk’ from the geopolitical situation is higher commodity prices that feeds into higher inflation expectations. Thus, even though the war adds uncertainty (and the Fed is likely going to say that it does) there is very little reason for them to ease off right now, especially with political pressures building going into the mid-terms. But won’t the Fed be concerned with asset markets by coming across even more hawkish? Despite growth concerns, a war in Europe, global sanctions, additional commodity supply shocks and expectations for 6 Fed hikes and QT, if the S&P is down less than 14% with all of that going on it means that any ‘Fed put’ is probably much further away and no need for the bank to change their tone just yet. How far a hawkish Fed can push long-end yields and the USD is up for debate though.
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, the Omicron restrictions weighed on growth. Differentials still favour the US and UK above the EZ. The big focus though is on the incoming inflation data after the ECB’s recent hawkish pivot at their Feb meeting. On the fiscal front, attention is on ongoing discussions to potentially allow purchases of ‘green bonds’ NOT to count against budget deficits. 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
Friday’s CFTC data did not show what we expected. Despite the big falls in the EUR and a very big reduction in Asset Manager net-longs, leverage funds reduced net-shorts on the EUR. Unless they reduced shorts in anticipation of a bounced from stretched lows the update does not make much sense right now. Regardless of positioning though, the best way to trade the EUR from these levels is with a clear catalyst.
4. The Week Ahead
For the week ahead it’ll be very quiet on the data front, with all the focus for the EUR still on the geopolitical situation, where any escalation in tensions is expected to weigh on the EUR while de-escalations are expected to provide support. Apart from that, given the liquidity of the EURUSD and EURGBP currency pairs, as well as the EUR’s close to 60% weighting in the DXY, the upcoming FOMC and BoE policy decisions could end up being the biggest drivers for the EUR apart from geopolitics. The hurdle is quite high for the Fed to really surprise markets on the hawkish side (certainly possible for them to do so though), which means unless markets price in even more hikes for the Fed and unless the geopolitical situation deteriorates very drastically, the strong USD upside might run out of short-term steam which would be supportive for the EUR. When it comes to the BoE though, the recent amount of downside priced in for the GBP in such a short space of time and the recent dovish tones from the bank, means the bar is very low for a less dovish reaction from the GBP. Why is this important for the EUR? Given the liquidity of the EURGBP pair any major momentum in EURGBP can affect the EUR and GBP pairs in general so worth keeping on the radar.
USD
FUNDAMENTAL BIAS: BULLISH
1. Monetary Policy
The Jan FOMC decision was hawkish on multiple fronts. The statement signalled a March hike as expected, but Chair Powell portrayed a very hawkish tone. Even though Powell said they can’t predict the rate path with certainty, he stressed the economy is in much better shape compared to the 2015 cycle and that will have implications for the pace of hikes (more and faster). Furthermore, he explained that there is ‘quite a bit of room’ to raise rates without damaging employment, which suggests upside risks to the rate path. A big question going into the meeting was how concerned the Fed was about recent equity market volatility . But the Chair explained that markets and financial conditions are reflecting policy changes in advance and that in aggregate the measures they look at isn’t showing red lights. Thus, any ‘Fed Put’ is much further away and inflation is the Fed’s biggest concern right now. The Chair also didn’t rule out the possibility of a 50bsp hike in March or possibly hiking at every meeting this year, which was hawkish as it means the Fed wants optionality to move more aggressive if they need to. We didn’t get new info on the balance sheet and Powell reiterated that they’re contemplating a start of QT after hiking has begun and they’ll discuss this in coming meetings. Overall, the tone and language were a lot more hawkish than the Dec meeting and more hawkish than consensus was expecting.
2. Global & Domestic Economy
As the reserve currency, the USD’s global usage means it’s usually inversely correlated to the global economy and global trade. The USD usually appreciates when growth & inflation slow (disinflation) and depreciates when growth & inflation accelerates (reflation). Thus, current expectations of a cyclical slowdown (and possible stagflation) are good for the Dollar. Incoming data will be watched in relation to the ‘Fed Put’ as there are many similarities between now and 4Q18, where the Fed were also tightening into a slowdown. If growth data slows and the Fed stays hawkish it’s a positive for the USD, once the Fed pivots dovish that’ll be a negative for the USD.
3. CFTC Analysis
The USD remains a net-long across major participants, but with price action looking stretched and with peak hawkishness for the Fed arguably close with >6 hikes priced, the risk to reward of chasing USD strength is not very attractive right now. Continued stagflation and geopolitical risks it mean that stretched positioning might not be as important as usual. JP Morgan also shared some stats that suggest the USD has a historical tendency to strengthen in the 6 months going into a first hike but then to weaken during the 6 months directly after a first hike. This is an interesting phenomenon which is worth keeping in mind given the USD’s recent performance.
4. The Week Ahead
The week ahead for the USD will be dominated by ongoing geopolitical tensions as well as the incoming FOMC meeting. On the geopolitical front, escalation and de-escalation will affect safe haven flows which means it will remain an important driver for the USD, especially with rising commodity prices also stoking growing fears of stagflation. On the FOMC side, a 25bsp hike is fully priced, but markets still have a lot to think about as the March meeting will be accompanied by an updated Summary of Economic Projections, where the markets want to see how the dots have changed (previous meeting showed 3 hikes for 2022). STIR markets currently priced in close to 7 hikes, so anything below 5 ought to be seen as dovish. During his recent testimony, Powell said that markets have responded to their guidance with good transmission and have priced in a much higher tightening path, so
if their tone and comments alone have done so much heavy lifting there isn’t much reason for them to suddenly ease off on that. It’s true that the Ukraine/Russia war does add uncertainty, but with the US economy and financial sector far less exposed to Russia compared to Europe, the biggest ‘risk’ from the geopolitical situation is higher commodity prices that feeds into higher inflation expectations. Thus, even though the war adds uncertainty (and the Fed is likely going to say that it does) there is very little reason for them to ease off right now, especially with political pressures building going into the mid-terms. But won’t the Fed be concerned with asset markets by coming across even more hawkish? Despite growth concerns, a war in Europe, global sanctions, additional commodity supply shocks and expectations for 6 Fed hikes and QT, if the S&P is down less than 14% with all of that going on it means that any ‘Fed put’ is probably much further away and no need for the bank to change their tone just yet. How far a hawkish Fed can push long-end yields and the USD is up for debate though.
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.