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 both the doves and the hawks. The QE vote split was more dovish (7-1) with BoE’s Saunders the only dissenter, while upgrades to growth and inflation were positive, even though price pressures is still views as mostly ‘transitory’. Reasons for a patient stance was the uncertainty surrounding the virus at the time as well as waiting for the end of the furlough scheme to assess the impact on the labour market. Thus, the bank will be in wait-and-see mode until at least Oct or Nov. The other important change 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 its balance sheet. Market participants are mixed about what this means (it’s positive since the bank has enough confidence to lower the balance sheet even while rates are low, but on the other hand it means rates can stay lower for longer which is a negative). However, all in all the most important take away was the continued optimism about the economy despite virus uncertainty and 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 and has been a positive input for GBP. However, a lot of these positives are arguably already reflected in the price which means a continuation of the recent misses in economic data could make further solid gains more difficult for the GBP to maintain. Even though the announcement of more fiscal tightening than expected saw some short-term downside in Sterling, the hawkish comments from the BoE more than offset the prior negative sentiment and provided a solid push higher, and as long as there aren’t any more fiscal tightening surprises it should not matter much for GBP in the med-term. This week’s data dump will be important, but probably not enough to alter the outlook for monetary policy.
4. Political Developments
Remember Brexit? Yeah, me neither, but recent rhetoric between the UK and EU hasn’t gone in a very positive direction with the UK side explaining to the EU that they are looking at all the options on the table (including 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.
5. CFTC Analysis
Latest CFTC data for the GBP (updated until 7 Sep) showed a positioning change of -9624 with a net non-commercial position of -24524. The recent flush lower in positioning means current levels for GBP still look attractive for med-term buyers, especially after the hawkish BoE comments. However, the short-term upside does look stretched at -2.07 and -2.45 standard deviation so watch out for possible mean reversion.
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 the probability is skewed higher given the outlook for growth, inflation and tapering and should be supportive for the USD.
4. Economic Data
This week was all about NFP…where the miss showed just how difficult it’s been for economists to forecast where post-pandemic labour prints will land. Even though the headline NFP saw a monster miss (235K vs consensus of 750K), the data under the hood wasn’t all that bad with average earnings printing at 0.6% (above max forecasts), and the Unemployment rate still falling to 5.2% from 5.4% and participation staying flat at 61.7%. Thus, with the overall outcome being more of a mixed bag, the only thing the print has done is give the Fed time to kick the can down the road for another month. Catch our Top Trading Opportunities report for colour on this week’s upcoming US CPI print on Tuesday.
5. CFTC Analysis
Latest CFTC data for the USD (updated until 7 Sep) showed a positioning change of 775 with a net non-commercial position of +21465. 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 Fed Speak and the upcoming CPI on Sep 14th and FOMC on the 22nd 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 both the doves and the hawks. The QE vote split was more dovish (7-1) with BoE’s Saunders the only dissenter, while upgrades to growth and inflation were positive, even though price pressures is still views as mostly ‘transitory’. Reasons for a patient stance was the uncertainty surrounding the virus at the time as well as waiting for the end of the furlough scheme to assess the impact on the labour market. Thus, the bank will be in wait-and-see mode until at least Oct or Nov. The other important change 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 its balance sheet. Market participants are mixed about what this means (it’s positive since the bank has enough confidence to lower the balance sheet even while rates are low, but on the other hand it means rates can stay lower for longer which is a negative). However, all in all the most important take away was the continued optimism about the economy despite virus uncertainty and 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 and has been a positive input for GBP. However, a lot of these positives are arguably already reflected in the price which means a continuation of the recent misses in economic data could make further solid gains more difficult for the GBP to maintain. Even though the announcement of more fiscal tightening than expected saw some short-term downside in Sterling, the hawkish comments from the BoE more than offset the prior negative sentiment and provided a solid push higher, and as long as there aren’t any more fiscal tightening surprises it should not matter much for GBP in the med-term. This week’s data dump will be important, but probably not enough to alter the outlook for monetary policy.
4. Political Developments
Remember Brexit? Yeah, me neither, but recent rhetoric between the UK and EU hasn’t gone in a very positive direction with the UK side explaining to the EU that they are looking at all the options on the table (including 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.
5. CFTC Analysis
Latest CFTC data for the GBP (updated until 7 Sep) showed a positioning change of -9624 with a net non-commercial position of -24524. The recent flush lower in positioning means current levels for GBP still look attractive for med-term buyers, especially after the hawkish BoE comments. However, the short-term upside does look stretched at -2.07 and -2.45 standard deviation so watch out for possible mean reversion.
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 the probability is skewed higher given the outlook for growth, inflation and tapering and should be supportive for the USD.
4. Economic Data
This week was all about NFP…where the miss showed just how difficult it’s been for economists to forecast where post-pandemic labour prints will land. Even though the headline NFP saw a monster miss (235K vs consensus of 750K), the data under the hood wasn’t all that bad with average earnings printing at 0.6% (above max forecasts), and the Unemployment rate still falling to 5.2% from 5.4% and participation staying flat at 61.7%. Thus, with the overall outcome being more of a mixed bag, the only thing the print has done is give the Fed time to kick the can down the road for another month. Catch our Top Trading Opportunities report for colour on this week’s upcoming US CPI print on Tuesday.
5. CFTC Analysis
Latest CFTC data for the USD (updated until 7 Sep) showed a positioning change of 775 with a net non-commercial position of +21465. 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 Fed Speak and the upcoming CPI on Sep 14th and FOMC on the 22nd the main events to keep on the radar.