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.
3. 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.
4. CFTC Analysis
Large specs decreased longs (-40K) and leveraged funds (-19K) increased shorts, both exhibiting a strong bearish sentiment. But after the EUR’s strong bounce from recent lows, it seems additional shorts were added just at the wrong time. Regardless of positioning, trading the EUR with a clear catalyst is a must right now.
5. The Week Ahead
Very quiet week ahead for the EUR with the only economic data highlights being the flash PMI numbers for France, Germany and the EU composite measure. The PMI numbers will provide markets with a timely estimate for how recent geopolitical stresses have affected the mood among businesses. Remember that PMIs are diffusion indexes based on the subjective inputs from purchasing managers. It’s basically asking businesses whether they think the outlook is better or worse than it was the previous month and given the war in Ukraine we should not be surprised by a bigger than expected miss. That also means that if PMIs don’t slow down materially, it could ease some of the growing stagflation fears among market participants. Additionally, markets will also be eyeing commodity prices and geopolitical developments. Given the proximity of the war as well as the impact from sanctions, the EUR and GBP has carried the brunt of the geopolitical fallout in the FX space. Thus, given that the EUR is still very close to recent lows, any major positive breakthroughs will arguably have a bigger impact compared to negative ones (unless the negative news involves things like chemical attacks or heightened risk of the war spilling over into the rest of Europe).
USD
FUNDAMENTAL BIAS: BULLISH
1. Monetary Policy
At their March meeting the Fed delivered on a 25bsp hike as expected with Fed’s Bullard the only dissenter voting for a 50bsp hike. The Dot Plot saw a big upgrade from 3 hikes (Dec) to 7 hikes for 2022, with the FFR seen reaching 2.75%-3.0% in 2023 before falling in 2024. The Fed did however lower their neutral rate from 2.5% to 2.4% which were a bit of a negative. Inflation forecasts for 2022 were raised to 4.1% (previous 2.7%) but med-term inflation saw less aggressive upgrades. Even though the overall message and projections were definitely hawkish, the fact that GDP estimates were lowered to 2.8% from 4.0% shows a Fed that expects their actions to impact demand and could also be incorporating some of the recent geopolitical uncertainties. The Fed didn’t provide any new details on QT but did note that the decision to start selling assets will be made at a coming meeting (markets consensus sees a July start as likely) but did add that the FOMC made good progress in their QT discussion with a May announcement very likely. During the presser the Chair expressed his view that the economy is doing really well and, in his view, will be more than able to withstand the incoming rate hikes (a very similar situation like we had in 4Q18). When asked whether 50bsp hikes could be on the table, the chair explained that the FOMC has not made decision to front-load hikes and will keep an eye on incoming inflation data to determine their policy actions going forward, but of course added that every incoming meeting was live. Overall, the Fed was
hawkish, but due to very strong pre-positioning and close to peak hawkishness priced for STIR markets the meeting saw a ‘sell-the-fact’ reaction across major asset classes.
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
Overall net-long positioning was a risk for the USD going into the FOMC, where due to very strong performance in recent weeks, it was a very high bar for a hawkish Fed to see a sustained move higher in the USD before seeing a bit of a correction. Leveraged funds now hold a net-short in the USD, but unless geopolitics offer meaningful safe haven inflows or stagflation fears jump higher, some short-term downside is possible.
4. The Week Ahead
The week ahead will be one the quietest ones we’ve had in a while on the economic data side. The main highlights will be incoming Fed speak after last week’s hawkish FOMC policy decision, with focus on whether we get any additional insights and opinions on the rate path, inflation and of course QT. With a lack of key data to give further insights into how fast growth is slowing, the stagflation narrative will probably get most of its cues from commodity prices. Keep in mind that the Dollar has an inverse correlation to global growth and usually has a positive expected return during periods of disinflation and stagflation. We’ll also be keeping an eye on further geopolitical developments, where the USD’s safe haven status will play a role in possible short-term directional moves as well. However, if we don’t see any major trending moves in commodities, and we don’t have any major geopolitical developments, the USD is still close to cycle highs and means it remains vulnerable to some profit taking and additional short-term corrective price action. Watching key support at 97.70 will be key as a break and close below that support arguably opens up room for a dive towards 97.00. Just keep in mind that the bias for the USD remains bullish in the med-term, so any moves lower are expected to be more tactical in nature, unless driven by specific catalysts of course.
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.
3. 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.
4. CFTC Analysis
Large specs decreased longs (-40K) and leveraged funds (-19K) increased shorts, both exhibiting a strong bearish sentiment. But after the EUR’s strong bounce from recent lows, it seems additional shorts were added just at the wrong time. Regardless of positioning, trading the EUR with a clear catalyst is a must right now.
5. The Week Ahead
Very quiet week ahead for the EUR with the only economic data highlights being the flash PMI numbers for France, Germany and the EU composite measure. The PMI numbers will provide markets with a timely estimate for how recent geopolitical stresses have affected the mood among businesses. Remember that PMIs are diffusion indexes based on the subjective inputs from purchasing managers. It’s basically asking businesses whether they think the outlook is better or worse than it was the previous month and given the war in Ukraine we should not be surprised by a bigger than expected miss. That also means that if PMIs don’t slow down materially, it could ease some of the growing stagflation fears among market participants. Additionally, markets will also be eyeing commodity prices and geopolitical developments. Given the proximity of the war as well as the impact from sanctions, the EUR and GBP has carried the brunt of the geopolitical fallout in the FX space. Thus, given that the EUR is still very close to recent lows, any major positive breakthroughs will arguably have a bigger impact compared to negative ones (unless the negative news involves things like chemical attacks or heightened risk of the war spilling over into the rest of Europe).
USD
FUNDAMENTAL BIAS: BULLISH
1. Monetary Policy
At their March meeting the Fed delivered on a 25bsp hike as expected with Fed’s Bullard the only dissenter voting for a 50bsp hike. The Dot Plot saw a big upgrade from 3 hikes (Dec) to 7 hikes for 2022, with the FFR seen reaching 2.75%-3.0% in 2023 before falling in 2024. The Fed did however lower their neutral rate from 2.5% to 2.4% which were a bit of a negative. Inflation forecasts for 2022 were raised to 4.1% (previous 2.7%) but med-term inflation saw less aggressive upgrades. Even though the overall message and projections were definitely hawkish, the fact that GDP estimates were lowered to 2.8% from 4.0% shows a Fed that expects their actions to impact demand and could also be incorporating some of the recent geopolitical uncertainties. The Fed didn’t provide any new details on QT but did note that the decision to start selling assets will be made at a coming meeting (markets consensus sees a July start as likely) but did add that the FOMC made good progress in their QT discussion with a May announcement very likely. During the presser the Chair expressed his view that the economy is doing really well and, in his view, will be more than able to withstand the incoming rate hikes (a very similar situation like we had in 4Q18). When asked whether 50bsp hikes could be on the table, the chair explained that the FOMC has not made decision to front-load hikes and will keep an eye on incoming inflation data to determine their policy actions going forward, but of course added that every incoming meeting was live. Overall, the Fed was
hawkish, but due to very strong pre-positioning and close to peak hawkishness priced for STIR markets the meeting saw a ‘sell-the-fact’ reaction across major asset classes.
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
Overall net-long positioning was a risk for the USD going into the FOMC, where due to very strong performance in recent weeks, it was a very high bar for a hawkish Fed to see a sustained move higher in the USD before seeing a bit of a correction. Leveraged funds now hold a net-short in the USD, but unless geopolitics offer meaningful safe haven inflows or stagflation fears jump higher, some short-term downside is possible.
4. The Week Ahead
The week ahead will be one the quietest ones we’ve had in a while on the economic data side. The main highlights will be incoming Fed speak after last week’s hawkish FOMC policy decision, with focus on whether we get any additional insights and opinions on the rate path, inflation and of course QT. With a lack of key data to give further insights into how fast growth is slowing, the stagflation narrative will probably get most of its cues from commodity prices. Keep in mind that the Dollar has an inverse correlation to global growth and usually has a positive expected return during periods of disinflation and stagflation. We’ll also be keeping an eye on further geopolitical developments, where the USD’s safe haven status will play a role in possible short-term directional moves as well. However, if we don’t see any major trending moves in commodities, and we don’t have any major geopolitical developments, the USD is still close to cycle highs and means it remains vulnerable to some profit taking and additional short-term corrective price action. Watching key support at 97.70 will be key as a break and close below that support arguably opens up room for a dive towards 97.00. Just keep in mind that the bias for the USD remains bullish in the med-term, so any moves lower are expected to be more tactical in nature, unless driven by specific catalysts of course.