Hello Traders!
We approached a significant support zone also having a strong fundamental upside bias.
Enter at trend line break or the breakout of the zone.
Stops below the zone.
Take profit at the highs.
Fundamental Drivers
Great British Pound (GBP)
Fundamental Bias: Weak Bullish
1. The Monetary Policy outlook for the BOE
The BoE took a hit to their credibility with their November policy decision when the bank voted 7-2 to keep rates on hold and also had a very clear U-turn among some of the recent hawkish comments from the likes of Bailey and Pill. Going into the meeting markets had fully priced a
15bsp hike in 4Q21, and even though analysts and economists were divided on whether that hike would take place in Nov or Dec the bank’s statement and press conference has now seen market expectations for a hike pushed back to Feb 2022. This came from the bank’s dovish tilt
regarding growth, inflation as well as a change or tone which said that hikes would be appropriate in the coming months if the labour data
comes in line with the bank’s projections. We were anticipating a violent repricing on med-term rate expectations for the past few weeks now, stressing that rates markets were too aggressively priced, but the U-turn from the bank regarding the near-term was surprising and means incoming labour market data will be key in gauging when lift off will occur. When asked about their obvious U-turn, the bank pushed back and
said they won’t endorse market rate pricing, but external member Saunders did just that in early Oct. Overall, the bank delivered a dovish tone, and took a big hit to their credibility, which means markets will be a lot more careful with jumping the gun on their forward guidance going forward. A key reason why we have not changed our outlook for the GBP to bearish after the Nov BoE meeting is because the forecasts for
both growth and inflation were conditioned on an implied bank rate of 1% by end 2022, which seems highly unlikely. Thus, after this week’s repricing, if rates price in less than 1% by 2022 then the conditioned path for growth & inflation should be higher again all else being equal.
2. The country’s economic developments
The successful vaccination program and subsequent reopening of the UK economy was a big positive for Sterling from the start of the year, but with a lot of those positives already in the price and some expectation of stalling growth, the upward momentum will get tougher in the near-
term. Also, alongside the BoE’s dovish tilt incoming economic data will be crucially important for markets to gauge the rate path. This incoming
week we have the Sep labour report, and with the BoE’s comments that they want to see what the labour market does before acting on rates it means this print will be important, not as important as the October report we get in Dec but definitely one to watch in the week ahead.
3. Political Developments
Even though a Brexit deal was reached last year, some issues like the Northern Ireland protocol remains, and with neither side willing to budge it seems like these issues are here to stay for now. There has been heated rhetoric from both sides with the UK threatening to trigger Article 16 and the EU threatening to terminate the Brexit deal if they do. For now, these are just threats, but any actual escalation could increase the odds of seeing so risk premium built into Sterling. Also keep the fishing challenges with France in mind as well.
Japanese Yen (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 depending on the type of market environment from a risk and cycle point of view. With bond yields looking a bit stretched at the current levels any decent mean reversion is expected to be supportive for the JPY, so it remains a key asset class to keep track.
Have a great week!
Regards
Vitez
We approached a significant support zone also having a strong fundamental upside bias.
Enter at trend line break or the breakout of the zone.
Stops below the zone.
Take profit at the highs.
Fundamental Drivers
Great British Pound (GBP)
Fundamental Bias: Weak Bullish
1. The Monetary Policy outlook for the BOE
The BoE took a hit to their credibility with their November policy decision when the bank voted 7-2 to keep rates on hold and also had a very clear U-turn among some of the recent hawkish comments from the likes of Bailey and Pill. Going into the meeting markets had fully priced a
15bsp hike in 4Q21, and even though analysts and economists were divided on whether that hike would take place in Nov or Dec the bank’s statement and press conference has now seen market expectations for a hike pushed back to Feb 2022. This came from the bank’s dovish tilt
regarding growth, inflation as well as a change or tone which said that hikes would be appropriate in the coming months if the labour data
comes in line with the bank’s projections. We were anticipating a violent repricing on med-term rate expectations for the past few weeks now, stressing that rates markets were too aggressively priced, but the U-turn from the bank regarding the near-term was surprising and means incoming labour market data will be key in gauging when lift off will occur. When asked about their obvious U-turn, the bank pushed back and
said they won’t endorse market rate pricing, but external member Saunders did just that in early Oct. Overall, the bank delivered a dovish tone, and took a big hit to their credibility, which means markets will be a lot more careful with jumping the gun on their forward guidance going forward. A key reason why we have not changed our outlook for the GBP to bearish after the Nov BoE meeting is because the forecasts for
both growth and inflation were conditioned on an implied bank rate of 1% by end 2022, which seems highly unlikely. Thus, after this week’s repricing, if rates price in less than 1% by 2022 then the conditioned path for growth & inflation should be higher again all else being equal.
2. The country’s economic developments
The successful vaccination program and subsequent reopening of the UK economy was a big positive for Sterling from the start of the year, but with a lot of those positives already in the price and some expectation of stalling growth, the upward momentum will get tougher in the near-
term. Also, alongside the BoE’s dovish tilt incoming economic data will be crucially important for markets to gauge the rate path. This incoming
week we have the Sep labour report, and with the BoE’s comments that they want to see what the labour market does before acting on rates it means this print will be important, not as important as the October report we get in Dec but definitely one to watch in the week ahead.
3. Political Developments
Even though a Brexit deal was reached last year, some issues like the Northern Ireland protocol remains, and with neither side willing to budge it seems like these issues are here to stay for now. There has been heated rhetoric from both sides with the UK threatening to trigger Article 16 and the EU threatening to terminate the Brexit deal if they do. For now, these are just threats, but any actual escalation could increase the odds of seeing so risk premium built into Sterling. Also keep the fishing challenges with France in mind as well.
Japanese Yen (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 depending on the type of market environment from a risk and cycle point of view. With bond yields looking a bit stretched at the current levels any decent mean reversion is expected to be supportive for the JPY, so it remains a key asset class to keep track.
Have a great week!
Regards
Vitez