EUR
FUNDAMENTAL BIAS: NEUTRAL
1. Monetary Policy
The ECB used the April meeting as a place holder meeting for the most part by not announcing any additional policy tweaks. The plans to phase out the APP into Q3 remained intact by reducing purchases from 40bln to 30bln in May and then down to 20bln in June. Markets were leaning towards a slightly more hawkish take from the bank (given recent inflation pressures), but the lack of conviction to remove the conditionality regarding the APP removal was seen as dovish. President Lagarde added to this dovish tone by explaining that Q3 has three months and IF the bank stops the APP, it could happen July, August or September. This was an important statement as the difference between a July and September end could mean the difference between a Q3 or Q4 rate hike. The president also added to the dovish tone by stressing that risks for the economic outlook are tilted to the downside and have recently intensified with geopolitical and virus-related challenges. When asked about policy normalization, the president made a strange comment by saying it is premature to think about monpol normalisation. As the bank is currently embarking on normalization this comment seemed out of place and reaffirmed the overall dovish take from the meeting. There were the usual sources releases after the presser which said policymakers see a July hike as still possible after Thursday's meeting, which provided some reprieve. With inflation >7% and growth slowing, the June meeting which accompanies staff economic projections will be critical for markets to solidify whether expectations of 1 or 2 hikes this year is correct or not.
2. Economic & Health Developments
Growth differentials still favour the US over EU capital flows, but differentials have turned positive and remain positive against the UK. Given growing stagflation fears the ECB is in a tough spot, being forced to normalize policy to try and combat inflation but could as a result damage growth. Ongoing EU fiscal discussions to possibly allow ‘green bonds’ NOT to count against budget deficits remains in focus, alongside debt issuance for energy purchases. If approved, it will offer a flood of fiscal support which would be positive for the EUR and EU equities.
3. Geopolitics
The EUR pushed lower aggressively after initial geopolitical scares but have been trying to carve out a base. Proximity to the war and the impact of sanctions remains a risk if the situation deteriorates. With lots of negatives already priced, chasing lows on bad news is not as attractive as chasing the EUR higher on good news.
4. CFTC Analysis
Another bullish signal from recent positioning update as all three major categories saw net-long weekly changes. Price action has been constructive and seems like EURUSD is trying to carve out a base. Technically the momentum points lower but given how much bad news has been priced and recent hawkish ECB comments, we would prefer chasing longs on good news as opposed to chasing lower on bad news.
5. The Week Ahead
Geopolitics, Flash PMI’s and risk sentiment will be key focus points for the EUR in the week ahead. If risk can stage some overdue recovery this week, the Dollar flows will be an important factor for the EUR. Any pullbacks in the DXY as a result of better risk sentiment should be supportive for the EUR and other majors. For the flash PMI’s, the question is whether the outlook from purchasing managers have been worse or better than expected. Any surprise beats in PMIs could offer the EUR a possible lift against the USD, especially after the recent hawkish ECB rhetoric and the fact that risk sentiment has been looking stretched on the bearish side. Geopolitics will also be eyed, both on the Russian and Brexit fronts. On the Russia side, it seems that most of the negativity from a possible oil embargo might have been priced, but any negative developments or retaliation from Russia against Finland and Sweden’s bid to join NATO can cause an increase in EUR risk premium and weigh on the single currency. For now, the increased threats of terminating the Brexit deal have been rightly seen as posturing, but if any side actually goes through with their recent threats that could open up a decent EURGBP buy opportunity.
GBP
FUNDAMENTAL BIAS: WEAK BEARISH
1. Monetary Policy
At their May meeting, the BoE delivered on expectations by raising the bank rate by 25bsp to 1.0%. There was an initial hawkish surprise as the vote split was 9-0 (no dissent from Cunliffe) and 3 of the 9 MPC members voted for a 50bsp move at the meeting. However, the hawkish reaction soon faded as it was also revealed that 2 of the 6 members who voted for a hike thought that this marked the end of the current hiking cycle. The dovishness didn’t stop there though as the BoE revised up their forecasts for peak inflation to >10% which added to the stagflation fears as the bank also saw possible GDP contraction in 2023. Furthermore, the bank took their first real stab at overly aggressive STIR pricing for the 2022 rate path by saying the current path would imply a big undershoot of their 2% inflation target in 2023 and was later backed up by Governor Bailey who said even though he thought rates should continue to rise he didn’t agree with those who think the MPC should be raising interest rates by a lot more. As the bank rate was raised to 1.0%, the markets expected some clarity from the bank on their plans to reduce the balance sheet. However, the bank decided to play for more time and said the bank will provide an update on their plans at the August meeting, pushing back expectations of active QT from Q2 to Q3. As a result of the overall dovish tone, Sterling fell to its lowest levels since 1Q21. The meeting confirmed market calls that the bank would look to hold rates steady after reaching 1.50%.
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 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 PM’s future remains a risk. If distrust grows question remains on whether a no-confidence vote can happen (if so, short-term downside is likely), and whether he can survive the vote (a win should be GBP positive and a loss GBP negative). The Northern Ireland protocol remains a focus, with previous UK threats to trigger Article 16 and EU threats to terminate the Brexit deal if they do. Markets have rightly ignored this as posturing, but any actual escalation can see sharp GBP downside.
4. CFTC Analysis
Mixed signals from positioning, but aggregate positioning (large specs, leveraged funds & asset managers) is still below 1 standard dev from the 15-year mean. Even though the outlook for Sterling shifted to weak bearish from neutral following the recent BoE meeting, we don’t want to chase the GBP lower from here.
5. The Week Ahead
After last week’s busy data schedule, the calendar is much lighter this week with flash PMIs the only real event of note for Sterling. Retail Sales was an interesting print for the UK. Even though there is very little to celebrate with a -4.9% YY print, all four measures printed much higher than expected. With Sterling still so tactically stretched to the downside, a surprising positive beat in PMIs could offer some tradable upside for Sterling in the short-term. Sterling’s med-term outlook remains weak bearish, but the currency has been stretched to the downside at the index level, and another positive surprise could offer attractive upside. That also means that we won’t be too interested in getting back on the long side of EURGBP just yet. Brexit will also be in focus, where recent threats of terminating the Brexit deal has been rightly seen as posturing, but if any side goes through with their recent threats that could open up a decent EURGBP buy opportunity regardless ofstretched positive for the Pound.
FUNDAMENTAL BIAS: NEUTRAL
1. Monetary Policy
The ECB used the April meeting as a place holder meeting for the most part by not announcing any additional policy tweaks. The plans to phase out the APP into Q3 remained intact by reducing purchases from 40bln to 30bln in May and then down to 20bln in June. Markets were leaning towards a slightly more hawkish take from the bank (given recent inflation pressures), but the lack of conviction to remove the conditionality regarding the APP removal was seen as dovish. President Lagarde added to this dovish tone by explaining that Q3 has three months and IF the bank stops the APP, it could happen July, August or September. This was an important statement as the difference between a July and September end could mean the difference between a Q3 or Q4 rate hike. The president also added to the dovish tone by stressing that risks for the economic outlook are tilted to the downside and have recently intensified with geopolitical and virus-related challenges. When asked about policy normalization, the president made a strange comment by saying it is premature to think about monpol normalisation. As the bank is currently embarking on normalization this comment seemed out of place and reaffirmed the overall dovish take from the meeting. There were the usual sources releases after the presser which said policymakers see a July hike as still possible after Thursday's meeting, which provided some reprieve. With inflation >7% and growth slowing, the June meeting which accompanies staff economic projections will be critical for markets to solidify whether expectations of 1 or 2 hikes this year is correct or not.
2. Economic & Health Developments
Growth differentials still favour the US over EU capital flows, but differentials have turned positive and remain positive against the UK. Given growing stagflation fears the ECB is in a tough spot, being forced to normalize policy to try and combat inflation but could as a result damage growth. Ongoing EU fiscal discussions to possibly allow ‘green bonds’ NOT to count against budget deficits remains in focus, alongside debt issuance for energy purchases. If approved, it will offer a flood of fiscal support which would be positive for the EUR and EU equities.
3. Geopolitics
The EUR pushed lower aggressively after initial geopolitical scares but have been trying to carve out a base. Proximity to the war and the impact of sanctions remains a risk if the situation deteriorates. With lots of negatives already priced, chasing lows on bad news is not as attractive as chasing the EUR higher on good news.
4. CFTC Analysis
Another bullish signal from recent positioning update as all three major categories saw net-long weekly changes. Price action has been constructive and seems like EURUSD is trying to carve out a base. Technically the momentum points lower but given how much bad news has been priced and recent hawkish ECB comments, we would prefer chasing longs on good news as opposed to chasing lower on bad news.
5. The Week Ahead
Geopolitics, Flash PMI’s and risk sentiment will be key focus points for the EUR in the week ahead. If risk can stage some overdue recovery this week, the Dollar flows will be an important factor for the EUR. Any pullbacks in the DXY as a result of better risk sentiment should be supportive for the EUR and other majors. For the flash PMI’s, the question is whether the outlook from purchasing managers have been worse or better than expected. Any surprise beats in PMIs could offer the EUR a possible lift against the USD, especially after the recent hawkish ECB rhetoric and the fact that risk sentiment has been looking stretched on the bearish side. Geopolitics will also be eyed, both on the Russian and Brexit fronts. On the Russia side, it seems that most of the negativity from a possible oil embargo might have been priced, but any negative developments or retaliation from Russia against Finland and Sweden’s bid to join NATO can cause an increase in EUR risk premium and weigh on the single currency. For now, the increased threats of terminating the Brexit deal have been rightly seen as posturing, but if any side actually goes through with their recent threats that could open up a decent EURGBP buy opportunity.
GBP
FUNDAMENTAL BIAS: WEAK BEARISH
1. Monetary Policy
At their May meeting, the BoE delivered on expectations by raising the bank rate by 25bsp to 1.0%. There was an initial hawkish surprise as the vote split was 9-0 (no dissent from Cunliffe) and 3 of the 9 MPC members voted for a 50bsp move at the meeting. However, the hawkish reaction soon faded as it was also revealed that 2 of the 6 members who voted for a hike thought that this marked the end of the current hiking cycle. The dovishness didn’t stop there though as the BoE revised up their forecasts for peak inflation to >10% which added to the stagflation fears as the bank also saw possible GDP contraction in 2023. Furthermore, the bank took their first real stab at overly aggressive STIR pricing for the 2022 rate path by saying the current path would imply a big undershoot of their 2% inflation target in 2023 and was later backed up by Governor Bailey who said even though he thought rates should continue to rise he didn’t agree with those who think the MPC should be raising interest rates by a lot more. As the bank rate was raised to 1.0%, the markets expected some clarity from the bank on their plans to reduce the balance sheet. However, the bank decided to play for more time and said the bank will provide an update on their plans at the August meeting, pushing back expectations of active QT from Q2 to Q3. As a result of the overall dovish tone, Sterling fell to its lowest levels since 1Q21. The meeting confirmed market calls that the bank would look to hold rates steady after reaching 1.50%.
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 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 PM’s future remains a risk. If distrust grows question remains on whether a no-confidence vote can happen (if so, short-term downside is likely), and whether he can survive the vote (a win should be GBP positive and a loss GBP negative). The Northern Ireland protocol remains a focus, with previous UK threats to trigger Article 16 and EU threats to terminate the Brexit deal if they do. Markets have rightly ignored this as posturing, but any actual escalation can see sharp GBP downside.
4. CFTC Analysis
Mixed signals from positioning, but aggregate positioning (large specs, leveraged funds & asset managers) is still below 1 standard dev from the 15-year mean. Even though the outlook for Sterling shifted to weak bearish from neutral following the recent BoE meeting, we don’t want to chase the GBP lower from here.
5. The Week Ahead
After last week’s busy data schedule, the calendar is much lighter this week with flash PMIs the only real event of note for Sterling. Retail Sales was an interesting print for the UK. Even though there is very little to celebrate with a -4.9% YY print, all four measures printed much higher than expected. With Sterling still so tactically stretched to the downside, a surprising positive beat in PMIs could offer some tradable upside for Sterling in the short-term. Sterling’s med-term outlook remains weak bearish, but the currency has been stretched to the downside at the index level, and another positive surprise could offer attractive upside. That also means that we won’t be too interested in getting back on the long side of EURGBP just yet. Brexit will also be in focus, where recent threats of terminating the Brexit deal has been rightly seen as posturing, but if any side goes through with their recent threats that could open up a decent EURGBP buy opportunity regardless ofstretched positive for the Pound.