GBP
FUNDAMENTAL OUTLOOK: WEAK BEARISH
BASELINE
The negative outlook for the UK economy has been a key source of the Pound’s downside. Stagflation risks are high with CPI > 10% and recession expected in 4Q22 (lasting 5 quarters). It has kept pressure on Sterling despite ongoing BoE rate hikes. With the energy cap expected to rise again in October 2022 and April 2023, the new PM hit the ground running by announcing a much bigger than expected fiscal plan which will keep energy prices capped for 2 years for households and will also offer support for businesses. According to preliminary research, this means inflation most likely already peaked in the UK (as the main driver has been energy), and also means that the expected hit to the economy should be less severe than previously thought. Thus, even though the bias for the GBP remains bearish as a recession still seems likely, the fiscal news is a positive development for Sterling on balance, and with a lot of bad news already priced in we are expecting some reprieve for Sterling with asymmetric risk to incoming data (good news expected to have a bigger upside impact compared to the impact from bad news).
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. The fiscal announcements last week were a welcome change, and any further support measures announced by the new PM should continue to ease stagflation fears. With UK threats of triggering Article 16 and EU threats to terminate the Brexit deal if they do Brexit is in focus. For now, markets have rightly ignored this as posturing, but any major de-escalation can see some upside for Sterling.
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. The fiscal announcements last week were a welcome change, and any potential walk back from the new PM on the planslaid out last week would increase stagflation fears once again. With UK threats of triggering Article 16 and EU threats to terminate the Brexit deal if they do Brexit is in focus. For now, markets have rightly ignored this as posturing, but any actual escalation can see sharp GBP downside.
BIGGER PICTURE
The fundamentals for Sterling remain bearish, especially after the BoE’s recent forecasts of a 5-quarter recession in the UK. Furthermore, given the risks to growth, there is growing speculation that the BoE might not be too far away from pausing their current hiking cycle. Anything that exacerbates stagflation fears is expected to weigh on the Pound and anything that alleviates some pressure could see some reprieve. Since Sterling is trading at fresh new cycle lows, the risk to reward for chasing it lower looks unattractive, and we could see asymmetric reactions skewed to the upside on positive data & news.
USD
FUNDAMENTAL OUTLOOK: BULLISH
BASELINE
With headline CPI above 8%, the Fed is under pressure to continue hiking rates and ramping up QT this month to try and bring demand and supply back in balance. They hiked rates 75bsp in July, and whether they go 50bsp or 75bsp in September will come down to this week’s CPI. At the Jackson Hole the Fed took a hawkish turn by pushing back against rate cuts in 2023 and stressing they not only envision hiking rates to close to 4% by early 2023 but also expect to keep rates high throughout 2023. However, the Fed did announce a data-dependent (meeting-by-meeting) policy stance in July, explaining that the pace of hikes is likely to slow as rates get more restrictive and as more data becomes available. This means incoming growth, inflation and jobs data will be key drivers for short-term USD price action where we expect a cyclical reaction to incoming data (good data being good for the USD and US10Y and bad data being bad for the USD and US10Y). Even though a resolute Fed can put further cyclically driven pressure on bonds and equities and support the USD, the most recent economic data has painted a bit of a goldilocks environment where most growth & labour data has surprised higher while inflation data has surprised lower. This has seen some ‘soft landing’ expectations surfacing which we would expect to support equities and bonds and to pressure the USD should the goldilocks pattern with incoming data continue.
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. Various data is pointing to downward pressure on CPI, enough for 1-year inflation expectations to trade below the Fed’s 2% target. With the ‘peak inflation’ narrative back in full force, a huge upside surprise in CPI this week could disappoint risk buyers and see further upside pressure on the USD.
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 some growing expectations of a possible ‘soft landing’ for the US economy surfacing, further goldilocks data (higher growth & labour but lower inflation) 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. With the Fed in their blackout period, all eyes will be on the incoming data. If inflation confirms new calls for peak inflation with another miss across the board that could trigger downside for the USD.
BIGGER PICTURE
The fundamental outlook for the USD remains bullish as long as the Fed stays hawkish and cyclical concerns put pressure on risk assets. But the data dependence stance from the Fed means that short-term data surprises can pull the USD either way. The recent string of data has triggered some ‘soft landing’ expectations for the US economy, which is expected to weigh on the USD given all of the safe haven inflows based on recession fears. In the short-term, with positioning in mind, and speculation of both ‘peak inflation’ and a ‘soft landing’, we would expect a softer USD in the week ahead running into the CPI print. A beat or a big miss can create equally big reactions in the short-term, but we would prefer shorting opportunities on a surprise CPI miss.
FUNDAMENTAL OUTLOOK: WEAK BEARISH
BASELINE
The negative outlook for the UK economy has been a key source of the Pound’s downside. Stagflation risks are high with CPI > 10% and recession expected in 4Q22 (lasting 5 quarters). It has kept pressure on Sterling despite ongoing BoE rate hikes. With the energy cap expected to rise again in October 2022 and April 2023, the new PM hit the ground running by announcing a much bigger than expected fiscal plan which will keep energy prices capped for 2 years for households and will also offer support for businesses. According to preliminary research, this means inflation most likely already peaked in the UK (as the main driver has been energy), and also means that the expected hit to the economy should be less severe than previously thought. Thus, even though the bias for the GBP remains bearish as a recession still seems likely, the fiscal news is a positive development for Sterling on balance, and with a lot of bad news already priced in we are expecting some reprieve for Sterling with asymmetric risk to incoming data (good news expected to have a bigger upside impact compared to the impact from bad news).
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. The fiscal announcements last week were a welcome change, and any further support measures announced by the new PM should continue to ease stagflation fears. With UK threats of triggering Article 16 and EU threats to terminate the Brexit deal if they do Brexit is in focus. For now, markets have rightly ignored this as posturing, but any major de-escalation can see some upside for Sterling.
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. The fiscal announcements last week were a welcome change, and any potential walk back from the new PM on the planslaid out last week would increase stagflation fears once again. With UK threats of triggering Article 16 and EU threats to terminate the Brexit deal if they do Brexit is in focus. For now, markets have rightly ignored this as posturing, but any actual escalation can see sharp GBP downside.
BIGGER PICTURE
The fundamentals for Sterling remain bearish, especially after the BoE’s recent forecasts of a 5-quarter recession in the UK. Furthermore, given the risks to growth, there is growing speculation that the BoE might not be too far away from pausing their current hiking cycle. Anything that exacerbates stagflation fears is expected to weigh on the Pound and anything that alleviates some pressure could see some reprieve. Since Sterling is trading at fresh new cycle lows, the risk to reward for chasing it lower looks unattractive, and we could see asymmetric reactions skewed to the upside on positive data & news.
USD
FUNDAMENTAL OUTLOOK: BULLISH
BASELINE
With headline CPI above 8%, the Fed is under pressure to continue hiking rates and ramping up QT this month to try and bring demand and supply back in balance. They hiked rates 75bsp in July, and whether they go 50bsp or 75bsp in September will come down to this week’s CPI. At the Jackson Hole the Fed took a hawkish turn by pushing back against rate cuts in 2023 and stressing they not only envision hiking rates to close to 4% by early 2023 but also expect to keep rates high throughout 2023. However, the Fed did announce a data-dependent (meeting-by-meeting) policy stance in July, explaining that the pace of hikes is likely to slow as rates get more restrictive and as more data becomes available. This means incoming growth, inflation and jobs data will be key drivers for short-term USD price action where we expect a cyclical reaction to incoming data (good data being good for the USD and US10Y and bad data being bad for the USD and US10Y). Even though a resolute Fed can put further cyclically driven pressure on bonds and equities and support the USD, the most recent economic data has painted a bit of a goldilocks environment where most growth & labour data has surprised higher while inflation data has surprised lower. This has seen some ‘soft landing’ expectations surfacing which we would expect to support equities and bonds and to pressure the USD should the goldilocks pattern with incoming data continue.
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. Various data is pointing to downward pressure on CPI, enough for 1-year inflation expectations to trade below the Fed’s 2% target. With the ‘peak inflation’ narrative back in full force, a huge upside surprise in CPI this week could disappoint risk buyers and see further upside pressure on the USD.
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 some growing expectations of a possible ‘soft landing’ for the US economy surfacing, further goldilocks data (higher growth & labour but lower inflation) 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. With the Fed in their blackout period, all eyes will be on the incoming data. If inflation confirms new calls for peak inflation with another miss across the board that could trigger downside for the USD.
BIGGER PICTURE
The fundamental outlook for the USD remains bullish as long as the Fed stays hawkish and cyclical concerns put pressure on risk assets. But the data dependence stance from the Fed means that short-term data surprises can pull the USD either way. The recent string of data has triggered some ‘soft landing’ expectations for the US economy, which is expected to weigh on the USD given all of the safe haven inflows based on recession fears. In the short-term, with positioning in mind, and speculation of both ‘peak inflation’ and a ‘soft landing’, we would expect a softer USD in the week ahead running into the CPI print. A beat or a big miss can create equally big reactions in the short-term, but we would prefer shorting opportunities on a surprise CPI miss.
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.