GBP USD BUY (POUND STERLING - US DOLLAR)
GBP
FUNDAMENTAL BIAS: BULLISH
1. Virus Situation
The successful vaccination program has allowed the UK to open up faster and sooner than peers & provides a favourable environment for GBP.
2. The Monetary Policy outlook for the BOE
The BoE meeting on 5 August provided a flurry of comments with something for the doves and the hawks. The QE vote split was a tad more dovish with a 7-1 split with BoE’s Saunders to only dissenter, while the upgrades to growth and inflation were positive but with similar comments of ‘transitory’ price pressures muting any real market impact. The reasons for the bank to remain patient right now in terms of policy normalization is the current uncertainty surrounding the virus and of course the bank waiting for the end of the furlough scheme to assess the impact on the labour market. That means, that the bank would arguably be in wait-and-see mode until at least October or November. The other change that was important to take note of was the reduction in the bank’s QT threshold from 1.5% to 0.5%, with the bank looking at a bank rate of 0.5% to stop reinvesting maturing assets and a rate of 1.0% to start selling assets and reducing the balance sheet. Market participants are mixed about what this means for the bank as on the one end it’s positive since the bank has enough confidence to lower the balance sheet even while rates are low, but on the other end it also means that rates can stay lower for much longer which is more negative. Arguably the most important comments to take away was their continued optimism about the economy despite the uncertainty as well as their comments that modest tightening will be required.
3. The country’s economic developments
Hopes of a fast economic recovery has seen the BOE and IMF upgrade GDP projections for the UK which has widened the growth differentials between other major economies by quite a bit. As the economy continues to rebound this should continue to be supportive for GBP as long as the data reflects that. Something to be mindful of is that a lot of these positives are arguably reflected in the price. Thus, if we start to see some disappointing data, that could mean that decent upside would be more difficult for Sterling to maintain.
4. Political Developments
Remember Brexit? Yeah, me neither, but this week the rhetoric between the two sides continued to go in the wrong direction with the UK side explaining to the EU that they are looking at all the options on the table (include article 16) if they can’t reach an agreement with the EU regarding the Northern Ireland Protocol. For now, Sterling has looked through all the rigmarole and should continue to do so as long as the cans are kicked down the road.
4. CFTC Analysis
Latest CFTC data for the GBP (updated until 17 August) showed a positioning change of -2419 with a net non-commercial position of +4651. The downside in the USD after the bad sentiment report wasn’t enough to see a further build in Sterling net-longs. Current levels for Sterling still look attractive for med-term buyers, especially with the positioning seeing quite a flush lower in the past few weeks. The miss in both retail sales and inflation last week did see some additional pain on the Pound and in the week ahead Monday’s flash PMI will be important.
USD
FUNDAMENTAL BIAS: NEUTRAL
1. The global risk outlook.
Global economic data continues to surprise lower and should continue to struggle to surprise to the upside after the pandemic rebound. As the USD usually moves inversely to global growth that should be supportive for the USD.
2. The Monetary Policy outlook for the FED
In July the FOMC noted that the economy has made progress toward their goals, and they’ll continue to assess progress in coming meetings. They also took a more sanguine view of the virus situation by removing prior comments that sectors affected by the pandemic ‘remain weak but have shown improvement’ and instead replaced it with ‘sectors most affected by the pandemic have shown improvement but have not fully recovered’. This was initially seen as less dovish, but Powell used his usual dovish tone to correct any ‘hawkish’ takes by stressing that employment still has a ‘ways to go’ and noted that there was still "some ground to cover" when it comes to the labour market. He also reiterated that any decision to announce tapering will be done well in advance. For now, markets are looking at the incoming data to decide whether tapering will be announced at the Jackson Hole Symposium or in the fall. This past week we some interesting comments from Fed’s Waller who tilted their language and stance towards Bullard and Kaplan in expecting that two more solid employment prints (800K-1M) would mean substantial further progress has been met and tapering could then start at a faster pace. This was bullish for the USD, but the more important and market moving comments came from Fed’s Clarida who has seemingly moved into the Neutral camp (previously dovish) by saying he agrees with the median Fed projections of a first hike by early 2023 and more importantly his comments about inflation has moved away from the sanguine view expressed by the doves and is more concerned about current price pressures. This shift saw Dollar upside with all eyes on the Sep NFP to see whether markets will expect Sep or Dec to be the official tapering announcement meeting.
3. Real Yields
Despite recent divergence between the USD and US real yields, we still think further downside in real yields will be a struggle so close to new cycle lows and that probability is skewed higher from here given the outlook for growth, inflation and tapering and should support the USD.
4. Economic Data
Retail sales came in below consensus but given the price action it was clear that majority of participants were looking for a much worse number following the colossal drop in the Univ Mich Sentiment report the week before. However, the USD was also supported by the jittery and risk off flows in the markets and was further aided by the Fed’s minutes which confirmed that the median view of the board has shifted towards earlier tapering. In the week ahead all eyes will be on the Jackson Hole Symposium to see whether the market gets an unofficial tapering announcement nod from Fed Chair Powell which if it happens will open up the possibility of an official announcement at the Sep meeting.
5. CFTC Analysis
Latest CFTC data for the USD (updated until 17 August) showed a positioning change of -115 with a net non-commercial position of +19211. For now, with the fundamental outlook still neutral, and with positioning at current levels the incoming data will remain the key driver for the USD’s short-term volatility, with the Jackson Hole and GDP this week the main events to keep on the radar.
FUNDAMENTAL BIAS: BULLISH
1. Virus Situation
The successful vaccination program has allowed the UK to open up faster and sooner than peers & provides a favourable environment for GBP.
2. The Monetary Policy outlook for the BOE
The BoE meeting on 5 August provided a flurry of comments with something for the doves and the hawks. The QE vote split was a tad more dovish with a 7-1 split with BoE’s Saunders to only dissenter, while the upgrades to growth and inflation were positive but with similar comments of ‘transitory’ price pressures muting any real market impact. The reasons for the bank to remain patient right now in terms of policy normalization is the current uncertainty surrounding the virus and of course the bank waiting for the end of the furlough scheme to assess the impact on the labour market. That means, that the bank would arguably be in wait-and-see mode until at least October or November. The other change that was important to take note of was the reduction in the bank’s QT threshold from 1.5% to 0.5%, with the bank looking at a bank rate of 0.5% to stop reinvesting maturing assets and a rate of 1.0% to start selling assets and reducing the balance sheet. Market participants are mixed about what this means for the bank as on the one end it’s positive since the bank has enough confidence to lower the balance sheet even while rates are low, but on the other end it also means that rates can stay lower for much longer which is more negative. Arguably the most important comments to take away was their continued optimism about the economy despite the uncertainty as well as their comments that modest tightening will be required.
3. The country’s economic developments
Hopes of a fast economic recovery has seen the BOE and IMF upgrade GDP projections for the UK which has widened the growth differentials between other major economies by quite a bit. As the economy continues to rebound this should continue to be supportive for GBP as long as the data reflects that. Something to be mindful of is that a lot of these positives are arguably reflected in the price. Thus, if we start to see some disappointing data, that could mean that decent upside would be more difficult for Sterling to maintain.
4. Political Developments
Remember Brexit? Yeah, me neither, but this week the rhetoric between the two sides continued to go in the wrong direction with the UK side explaining to the EU that they are looking at all the options on the table (include article 16) if they can’t reach an agreement with the EU regarding the Northern Ireland Protocol. For now, Sterling has looked through all the rigmarole and should continue to do so as long as the cans are kicked down the road.
4. CFTC Analysis
Latest CFTC data for the GBP (updated until 17 August) showed a positioning change of -2419 with a net non-commercial position of +4651. The downside in the USD after the bad sentiment report wasn’t enough to see a further build in Sterling net-longs. Current levels for Sterling still look attractive for med-term buyers, especially with the positioning seeing quite a flush lower in the past few weeks. The miss in both retail sales and inflation last week did see some additional pain on the Pound and in the week ahead Monday’s flash PMI will be important.
USD
FUNDAMENTAL BIAS: NEUTRAL
1. The global risk outlook.
Global economic data continues to surprise lower and should continue to struggle to surprise to the upside after the pandemic rebound. As the USD usually moves inversely to global growth that should be supportive for the USD.
2. The Monetary Policy outlook for the FED
In July the FOMC noted that the economy has made progress toward their goals, and they’ll continue to assess progress in coming meetings. They also took a more sanguine view of the virus situation by removing prior comments that sectors affected by the pandemic ‘remain weak but have shown improvement’ and instead replaced it with ‘sectors most affected by the pandemic have shown improvement but have not fully recovered’. This was initially seen as less dovish, but Powell used his usual dovish tone to correct any ‘hawkish’ takes by stressing that employment still has a ‘ways to go’ and noted that there was still "some ground to cover" when it comes to the labour market. He also reiterated that any decision to announce tapering will be done well in advance. For now, markets are looking at the incoming data to decide whether tapering will be announced at the Jackson Hole Symposium or in the fall. This past week we some interesting comments from Fed’s Waller who tilted their language and stance towards Bullard and Kaplan in expecting that two more solid employment prints (800K-1M) would mean substantial further progress has been met and tapering could then start at a faster pace. This was bullish for the USD, but the more important and market moving comments came from Fed’s Clarida who has seemingly moved into the Neutral camp (previously dovish) by saying he agrees with the median Fed projections of a first hike by early 2023 and more importantly his comments about inflation has moved away from the sanguine view expressed by the doves and is more concerned about current price pressures. This shift saw Dollar upside with all eyes on the Sep NFP to see whether markets will expect Sep or Dec to be the official tapering announcement meeting.
3. Real Yields
Despite recent divergence between the USD and US real yields, we still think further downside in real yields will be a struggle so close to new cycle lows and that probability is skewed higher from here given the outlook for growth, inflation and tapering and should support the USD.
4. Economic Data
Retail sales came in below consensus but given the price action it was clear that majority of participants were looking for a much worse number following the colossal drop in the Univ Mich Sentiment report the week before. However, the USD was also supported by the jittery and risk off flows in the markets and was further aided by the Fed’s minutes which confirmed that the median view of the board has shifted towards earlier tapering. In the week ahead all eyes will be on the Jackson Hole Symposium to see whether the market gets an unofficial tapering announcement nod from Fed Chair Powell which if it happens will open up the possibility of an official announcement at the Sep meeting.
5. CFTC Analysis
Latest CFTC data for the USD (updated until 17 August) showed a positioning change of -115 with a net non-commercial position of +19211. For now, with the fundamental outlook still neutral, and with positioning at current levels the incoming data will remain the key driver for the USD’s short-term volatility, with the Jackson Hole and GDP this week the main events to keep on the radar.