GBP
FUNDAMENTAL OUTLOOK: WEAK BEARISH
BASELINE
A looming recession has been a key source of Pound weakness and has kept pressure on Sterling despite ongoing BoE hikes. But there is a new threat in focus. It seems the PM’s new fiscal plan, even though putting downside pressure on inflation and lowering growth risks, has drastically increased debt concerns. At an already big debt pile of £2.3 trillion it seems strange that so much negativity was caused by an additional £200-400 billion, but the market’s message was loud and clear on Friday. It’s not only debt concerns but also the increased likelihood that the fiscal plan could add more upward pressure to inflation in the med-term. For now, the price action is clearly incredibly bearish, but we would not want to chase Sterling lower from here. If the Pound continues to fall, we can’t rule out surprise rate moves by the BoE or intervention attempts by the treasury.
POSSIBLE BULLISH SURPRISES
With recession the base assumption, any incoming data that surprises meaningfully higher could trigger relief for the GBP. With focus on stagflation, any downside surprises in CPI or factors that decrease inflation pressures are expected to support the GBP and not pressure it. If GBP falls further, any surprise BoE hikes (or threat of such from this week’s BoE’s speakers) or intervention comments/actions from HMT could trigger short-term relief.
POSSIBLE BEARISH SURPRISES
With recession the base assumption, any material downside surprises in growth data can still trigger short-term pressure. With focus on stagflation, any upside surprises in CPI or factors that increase more inflation pressures are expected to weigh on the GBP and not support it. If GBP falls further, and comments from the BoE or HMT suggest that they are not concerned by the drop could exacerbate the weakness in Sterling.
BIGGER PICTURE
The fundamentals for Sterling remain bearish. Recession is around the corner (might be in one already), and the new fiscal plan has failed to provide any assurances for investors (even though we think the negative reaction is not completely warranted). Waiting for a catalyst to take the other side of this rout is an option, which means all eyes and ears on the BoE and HMT for their comments on Friday’s plunge in Gilts and Sterling.
USD
FUNDAMENTAL OUTLOOK: BULLISH
BASELINE
With headline CPI above 8%, the Fed is under pressure to continue hiking rates and ramping up QT. The bank made its third 75bsp at the Sep meeting and pushed up their 2023 terminal rate projection to 4.6%. The Fed is on a data-dependent (meeting-by-meeting) policy stance, meaning incoming growth, inflation and jobs data remains a key driver for short-term USD volatility where we expect a cyclical reaction with incoming data for both the USD and US10Y. The Aug CPI saw markets price out the likelihood of a soft landing and Friday’s price action saw typical bear market behaviour with heightened volatility across major asset classes giving the USD a big bout of safe haven inflows.
POSSIBLE BULLISH SURPRISES
With the Fed signalling a data dependent policy stance, we expect a cyclical reaction from the USD with incoming US data. Thus, extremely good growth, inflation or jobs data is expected to trigger short-term bullish reactions in the USD. If the cyclical outlook continues to weaken, the USD’s safe haven status still matters. Any incoming data that exacerbates fears of a deep recession and triggers strong moves lower in risk assets & bonds can trigger safe haven flows into the USD. With a lot priced in for the Fed and the USD, the bar is high for hawkish Fed surprises, but any aggressive Fed speak talking up a 5% or higher terminal rate can trigger further USD upside.
POSSIBLE BEARISH SURPRISES
With the Fed signalling a data dependent policy stance, we expect a cyclical reaction from the USD with incoming US data. Thus, extremely bad growth, inflation or jobs data is expected to trigger short-term bearish reactions in the USD. With lingering expectations of a possible ‘soft landing’ for the US economy, any goldilocks data (higher growth & labour but lower inflation data) could trigger safe haven outflows from the USD and into US equities. With a lot priced in for the Fed and the USD, it won’t take much to disappoint on the dovish side. Any big concerns about growth from Fed speakers could trigger safe haven outflows.
BIGGER PICTURE
The fundamental outlook for the USD remains bullish as long as the Fed stays hawkish and cyclical concerns put pressure on risk sentiment. The data dependent stance from the Fed means that short-term data surprises can pull the USD either way and would be our preferred way of trading the Dollar right now. Keeping a close eye on overall risk sentiment will be important for the USD in the upcoming week after a big move higher in cross asset volatility on Friday.
FUNDAMENTAL OUTLOOK: WEAK BEARISH
BASELINE
A looming recession has been a key source of Pound weakness and has kept pressure on Sterling despite ongoing BoE hikes. But there is a new threat in focus. It seems the PM’s new fiscal plan, even though putting downside pressure on inflation and lowering growth risks, has drastically increased debt concerns. At an already big debt pile of £2.3 trillion it seems strange that so much negativity was caused by an additional £200-400 billion, but the market’s message was loud and clear on Friday. It’s not only debt concerns but also the increased likelihood that the fiscal plan could add more upward pressure to inflation in the med-term. For now, the price action is clearly incredibly bearish, but we would not want to chase Sterling lower from here. If the Pound continues to fall, we can’t rule out surprise rate moves by the BoE or intervention attempts by the treasury.
POSSIBLE BULLISH SURPRISES
With recession the base assumption, any incoming data that surprises meaningfully higher could trigger relief for the GBP. With focus on stagflation, any downside surprises in CPI or factors that decrease inflation pressures are expected to support the GBP and not pressure it. If GBP falls further, any surprise BoE hikes (or threat of such from this week’s BoE’s speakers) or intervention comments/actions from HMT could trigger short-term relief.
POSSIBLE BEARISH SURPRISES
With recession the base assumption, any material downside surprises in growth data can still trigger short-term pressure. With focus on stagflation, any upside surprises in CPI or factors that increase more inflation pressures are expected to weigh on the GBP and not support it. If GBP falls further, and comments from the BoE or HMT suggest that they are not concerned by the drop could exacerbate the weakness in Sterling.
BIGGER PICTURE
The fundamentals for Sterling remain bearish. Recession is around the corner (might be in one already), and the new fiscal plan has failed to provide any assurances for investors (even though we think the negative reaction is not completely warranted). Waiting for a catalyst to take the other side of this rout is an option, which means all eyes and ears on the BoE and HMT for their comments on Friday’s plunge in Gilts and Sterling.
USD
FUNDAMENTAL OUTLOOK: BULLISH
BASELINE
With headline CPI above 8%, the Fed is under pressure to continue hiking rates and ramping up QT. The bank made its third 75bsp at the Sep meeting and pushed up their 2023 terminal rate projection to 4.6%. The Fed is on a data-dependent (meeting-by-meeting) policy stance, meaning incoming growth, inflation and jobs data remains a key driver for short-term USD volatility where we expect a cyclical reaction with incoming data for both the USD and US10Y. The Aug CPI saw markets price out the likelihood of a soft landing and Friday’s price action saw typical bear market behaviour with heightened volatility across major asset classes giving the USD a big bout of safe haven inflows.
POSSIBLE BULLISH SURPRISES
With the Fed signalling a data dependent policy stance, we expect a cyclical reaction from the USD with incoming US data. Thus, extremely good growth, inflation or jobs data is expected to trigger short-term bullish reactions in the USD. If the cyclical outlook continues to weaken, the USD’s safe haven status still matters. Any incoming data that exacerbates fears of a deep recession and triggers strong moves lower in risk assets & bonds can trigger safe haven flows into the USD. With a lot priced in for the Fed and the USD, the bar is high for hawkish Fed surprises, but any aggressive Fed speak talking up a 5% or higher terminal rate can trigger further USD upside.
POSSIBLE BEARISH SURPRISES
With the Fed signalling a data dependent policy stance, we expect a cyclical reaction from the USD with incoming US data. Thus, extremely bad growth, inflation or jobs data is expected to trigger short-term bearish reactions in the USD. With lingering expectations of a possible ‘soft landing’ for the US economy, any goldilocks data (higher growth & labour but lower inflation data) could trigger safe haven outflows from the USD and into US equities. With a lot priced in for the Fed and the USD, it won’t take much to disappoint on the dovish side. Any big concerns about growth from Fed speakers could trigger safe haven outflows.
BIGGER PICTURE
The fundamental outlook for the USD remains bullish as long as the Fed stays hawkish and cyclical concerns put pressure on risk sentiment. The data dependent stance from the Fed means that short-term data surprises can pull the USD either way and would be our preferred way of trading the Dollar right now. Keeping a close eye on overall risk sentiment will be important for the USD in the upcoming week after a big move higher in cross asset volatility on Friday.
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.