GBP
FUNDAMENTAL BIAS: BULLISH
1. Virus Situation
The UK’s vaccination success has been a key driver of positive sentiment for GBP from the start of 2021 and has meant the county have been able to open up their economy much faster and sooner.
2. The Monetary Policy outlook for the BOE
Markets were expecting a hawkish tilt from the BOE at their June meeting with Gilt yields, SONIA futures and Sterling pushing higher into the meeting. The bank took a more balanced view by sticking to a transitory inflation outlook and also slightly tempering the more aggressive rate path expectations going into the meeting. As a result, GBP, Yields and SONIA futures unwound their pre-meeting upside. More recently the hawkish comments from dovish BoE member Saunders raised some expectations that a tapering of asset purchases might be on the card in the near future, with some participants looking at next week’s meeting as a possible hint from the bank that such a move might be on the cards. However, given how close the bank is to completing the current program, and given the fact that the bank would arguably want to wait and assess the impact on the labour market after the furlough scheme falls away, these expectations might be a bit too hawkish. Either way, the incoming BoE meeting next week will be an important one for Sterling and if we do see a more positive MPC that could just be what GBPUSD needs to push back above the 1.40 level.
3. The country’s economic developments
Hopes of a faster economic recovery has seen both the BOE and IMF upgrade growth projections for the UK economy which has widened the growth differentials between other majors by quite a bit and should continue to be supportive for GBP as long as the data continues to show better-than-expected prints. Something to be mindful of is that a lot of these positives are arguably reflected in the price. Thus, if we start to see some disappointing data, as we have more recently, that could start to weigh on some of the aggressive normalization expectations.
4. Political Developments
Remember Brexit? Yeah, me neither, but this week the rhetoric between the two sides continued to go in the wrong direction with the UK side explaining to the EU that they are looking at all the options on the table (include article 16) if they can’t reach an agreement with the EU regarding the Northern Ireland Protocol. For now Sterling has looked through all the rigmarole and should continue to do so as long as the cans are kicked down the road.
JPY
FUNDAMENTAL BIAS: BEARISH
1. Safe-haven status and overall risk outlook
As a safe-haven currency, the market's risk outlook is the primary driver of JPY. Economic data rarely proves market moving; and although monetary policy expectations can prove highly market-moving in the short-term, safe-haven flows are typically the more dominant factor. The market's overall risk tone has improved considerably following the pandemic with good news about successful vaccinations, and ongoing monetary and fiscal policy support paved the way for markets to expect a robust global economic recovery. Of course, there remains many uncertainties and many countries are continuing to fight virus waves, but as a whole the outlook has kept on improving over the past couple of months, which would expect safe-haven demand to diminish and result in a bearish outlook for the JPY.
2. Low-yielding currency with inverse correlation to US10Y
As a low yielding currency, the JPY usually shares an inverse correlation to strong moves in yield differentials, more specifically in strong moves in US10Y . However, like most correlations, the strength of the inverse correlation between the JPY and US10Y is not perfect and will ebb and flow dependent on the type of market environment from a risk and cycle point of view. Even though the correlation was exceptionally strong from the start of the year, we have started to see some breakdown in the correlation over the past few weeks. The pair has broadly started to follow yields more recently, which has given us reason to take a pause in the pair as the bond market has not really been trading the way that we (and it seems vast majority of market participants) have expected. Given the current growth, inflation and tapering expectations the market expected yields to trade higher, but that hasn’t been the case of course. As long as yields remain stuck at key support the odds of building a base and moving higher again means the upside bias remains intact for USDJPY , but if yields should take out recent support, we would expect USDJPY to follow it lower.
FUNDAMENTAL BIAS: BULLISH
1. Virus Situation
The UK’s vaccination success has been a key driver of positive sentiment for GBP from the start of 2021 and has meant the county have been able to open up their economy much faster and sooner.
2. The Monetary Policy outlook for the BOE
Markets were expecting a hawkish tilt from the BOE at their June meeting with Gilt yields, SONIA futures and Sterling pushing higher into the meeting. The bank took a more balanced view by sticking to a transitory inflation outlook and also slightly tempering the more aggressive rate path expectations going into the meeting. As a result, GBP, Yields and SONIA futures unwound their pre-meeting upside. More recently the hawkish comments from dovish BoE member Saunders raised some expectations that a tapering of asset purchases might be on the card in the near future, with some participants looking at next week’s meeting as a possible hint from the bank that such a move might be on the cards. However, given how close the bank is to completing the current program, and given the fact that the bank would arguably want to wait and assess the impact on the labour market after the furlough scheme falls away, these expectations might be a bit too hawkish. Either way, the incoming BoE meeting next week will be an important one for Sterling and if we do see a more positive MPC that could just be what GBPUSD needs to push back above the 1.40 level.
3. The country’s economic developments
Hopes of a faster economic recovery has seen both the BOE and IMF upgrade growth projections for the UK economy which has widened the growth differentials between other majors by quite a bit and should continue to be supportive for GBP as long as the data continues to show better-than-expected prints. Something to be mindful of is that a lot of these positives are arguably reflected in the price. Thus, if we start to see some disappointing data, as we have more recently, that could start to weigh on some of the aggressive normalization expectations.
4. Political Developments
Remember Brexit? Yeah, me neither, but this week the rhetoric between the two sides continued to go in the wrong direction with the UK side explaining to the EU that they are looking at all the options on the table (include article 16) if they can’t reach an agreement with the EU regarding the Northern Ireland Protocol. For now Sterling has looked through all the rigmarole and should continue to do so as long as the cans are kicked down the road.
JPY
FUNDAMENTAL BIAS: BEARISH
1. Safe-haven status and overall risk outlook
As a safe-haven currency, the market's risk outlook is the primary driver of JPY. Economic data rarely proves market moving; and although monetary policy expectations can prove highly market-moving in the short-term, safe-haven flows are typically the more dominant factor. The market's overall risk tone has improved considerably following the pandemic with good news about successful vaccinations, and ongoing monetary and fiscal policy support paved the way for markets to expect a robust global economic recovery. Of course, there remains many uncertainties and many countries are continuing to fight virus waves, but as a whole the outlook has kept on improving over the past couple of months, which would expect safe-haven demand to diminish and result in a bearish outlook for the JPY.
2. Low-yielding currency with inverse correlation to US10Y
As a low yielding currency, the JPY usually shares an inverse correlation to strong moves in yield differentials, more specifically in strong moves in US10Y . However, like most correlations, the strength of the inverse correlation between the JPY and US10Y is not perfect and will ebb and flow dependent on the type of market environment from a risk and cycle point of view. Even though the correlation was exceptionally strong from the start of the year, we have started to see some breakdown in the correlation over the past few weeks. The pair has broadly started to follow yields more recently, which has given us reason to take a pause in the pair as the bond market has not really been trading the way that we (and it seems vast majority of market participants) have expected. Given the current growth, inflation and tapering expectations the market expected yields to trade higher, but that hasn’t been the case of course. As long as yields remain stuck at key support the odds of building a base and moving higher again means the upside bias remains intact for USDJPY , but if yields should take out recent support, we would expect USDJPY to follow it lower.
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.