GBP USD - FUNDAMENTAL DRIVERS
GBP
FUNDAMENTAL OUTLOOK: WEAK BEARISH
BASELINE
A looming recession has been a key source of Pound weakness and has kept pressure on Sterling despite ongoing BoE hikes. But there is a new threat in focus. It seems the PM’s new fiscal plan, even though putting downside pressure on inflation and lowering growth risks, has drastically increased debt concerns. At an already big debt pile of £2.3 trillion it seems strange that so much negativity was caused by an additional £200-400 billion, but the market’s message was loud and clear. The pop in Gilt yields were so disorderly and fast that it forced the BoE’s hand to step in with limited (both in time and size) bond buying intervention to try and keep Gilt yields in check. This has brought some calm to the angst and was a supportive driver for Sterling this week.
POSSIBLE BULLISH SURPRISES
With recession the base assumption, any incoming data that surprises meaningfully higher could trigger relief for the GBP. With focus on stagflation, any downside surprises in CPI or factors that decrease inflation pressures are expected to support the GBP and not pressure it. If Gilt yields resume their rise, it could see further bond buying from the BoE which should provide support for Sterling.
POSSIBLE BEARISH SURPRISES
With recession the base assumption, any material downside surprises in growth data can still trigger short-term pressure. With focus on stagflation, any upside surprises in CPI or factors that increase more inflation pressures are expected to weigh on the GBP and not support it. If Gilt yields resume their rise, but the BoE decided not to get involved again, it could put further pressure on Sterling.
BIGGER PICTURE
The fundamentals for Sterling remain bearish. Recession is around the corner (might be in one already), and the new fiscal plan has failed to provide any assurances for investors (even though we think the negative reaction is not completely warranted). At these deeply negative levels Sterling is oversold, which means we don’t have appetite for chasing it lower, especially after the BoE’s attempt to bring some calm back into the Gilt market.
USD
FUNDAMENTAL OUTLOOK: BULLISH
BASELINE
With headline CPI above 8%, the Fed is under pressure to continue hiking rates and ramping up QT. The bank made its third 75bsp at the Sep meeting and pushed up their 2023 terminal rate projection to 4.6%. The Fed is on a data-dependent (meeting-by-meeting) policy stance, meaning incoming growth, inflation and jobs data remains a key driver for short-term USD volatility where we expect a cyclical reaction with incoming data for both the USD and US10Y . The Aug CPI saw markets price out the likelihood of a soft landing and subsequent price action saw typical bear market behaviour with heightened volatility across major asset classes giving the USD a big bout of safe haven inflows. This past week, the BoE’s attempt to calm down the bond market & threat of Yuan intervention saw some mild pressure in the USD.
POSSIBLE BULLISH SURPRISES
With the Fed signalling a data dependent policy stance, we expect a cyclical reaction from the USD with incoming US data. Thus, extremely good growth, inflation or jobs data is expected to trigger short-term bullish reactions in the USD. If the cyclical outlook continues to weaken, the USD’s safe haven status still matters. Any incoming data that exacerbates fears of a deep recession and triggers strong moves lower in risk assets & bonds can trigger safe haven flows into the USD. With a lot priced in for the Fed and the USD, the bar is high for hawkish Fed surprises, but any aggressive Fed speak talking up a higher than 5% terminal rate can trigger further USD upside.
POSSIBLE BEARISH SURPRISES
With the Fed signalling a data dependent policy stance, we expect a cyclical reaction from the USD with incoming US data. Thus, extremely bad growth, inflation or jobs data is expected to trigger short-term bearish reactions in the USD. With some lingering expectations of a possible ‘soft landing’ for the US economy, any goldilocks data (higher growth & labour but lower inflation data) could trigger safe haven outflows from the USD and into US equities. With a lot priced in for the Fed and the USD, it won’t take much to disappoint on the dovish side. Any big concerns about growth from Fed speakers could trigger outflows.
BIGGER PICTURE
The fundamental outlook for the USD remains bullish as long as the Fed stays hawkish and cyclical concerns put pressure on risk sentiment. The data dependent stance from the Fed means that short-term data surprises can pull the USD either way and would be our preferred way of trading the Dollar right now. The upcoming week is full of important data with the two ISM prints and of course NFP. Even though the USD is expected to trade cyclically with incoming data, we do need to keep an open mind about goldilocks data (higher growth and lower inflation ) as that could see a nuanced reaction in the USD.
FUNDAMENTAL OUTLOOK: WEAK BEARISH
BASELINE
A looming recession has been a key source of Pound weakness and has kept pressure on Sterling despite ongoing BoE hikes. But there is a new threat in focus. It seems the PM’s new fiscal plan, even though putting downside pressure on inflation and lowering growth risks, has drastically increased debt concerns. At an already big debt pile of £2.3 trillion it seems strange that so much negativity was caused by an additional £200-400 billion, but the market’s message was loud and clear. The pop in Gilt yields were so disorderly and fast that it forced the BoE’s hand to step in with limited (both in time and size) bond buying intervention to try and keep Gilt yields in check. This has brought some calm to the angst and was a supportive driver for Sterling this week.
POSSIBLE BULLISH SURPRISES
With recession the base assumption, any incoming data that surprises meaningfully higher could trigger relief for the GBP. With focus on stagflation, any downside surprises in CPI or factors that decrease inflation pressures are expected to support the GBP and not pressure it. If Gilt yields resume their rise, it could see further bond buying from the BoE which should provide support for Sterling.
POSSIBLE BEARISH SURPRISES
With recession the base assumption, any material downside surprises in growth data can still trigger short-term pressure. With focus on stagflation, any upside surprises in CPI or factors that increase more inflation pressures are expected to weigh on the GBP and not support it. If Gilt yields resume their rise, but the BoE decided not to get involved again, it could put further pressure on Sterling.
BIGGER PICTURE
The fundamentals for Sterling remain bearish. Recession is around the corner (might be in one already), and the new fiscal plan has failed to provide any assurances for investors (even though we think the negative reaction is not completely warranted). At these deeply negative levels Sterling is oversold, which means we don’t have appetite for chasing it lower, especially after the BoE’s attempt to bring some calm back into the Gilt market.
USD
FUNDAMENTAL OUTLOOK: BULLISH
BASELINE
With headline CPI above 8%, the Fed is under pressure to continue hiking rates and ramping up QT. The bank made its third 75bsp at the Sep meeting and pushed up their 2023 terminal rate projection to 4.6%. The Fed is on a data-dependent (meeting-by-meeting) policy stance, meaning incoming growth, inflation and jobs data remains a key driver for short-term USD volatility where we expect a cyclical reaction with incoming data for both the USD and US10Y . The Aug CPI saw markets price out the likelihood of a soft landing and subsequent price action saw typical bear market behaviour with heightened volatility across major asset classes giving the USD a big bout of safe haven inflows. This past week, the BoE’s attempt to calm down the bond market & threat of Yuan intervention saw some mild pressure in the USD.
POSSIBLE BULLISH SURPRISES
With the Fed signalling a data dependent policy stance, we expect a cyclical reaction from the USD with incoming US data. Thus, extremely good growth, inflation or jobs data is expected to trigger short-term bullish reactions in the USD. If the cyclical outlook continues to weaken, the USD’s safe haven status still matters. Any incoming data that exacerbates fears of a deep recession and triggers strong moves lower in risk assets & bonds can trigger safe haven flows into the USD. With a lot priced in for the Fed and the USD, the bar is high for hawkish Fed surprises, but any aggressive Fed speak talking up a higher than 5% terminal rate can trigger further USD upside.
POSSIBLE BEARISH SURPRISES
With the Fed signalling a data dependent policy stance, we expect a cyclical reaction from the USD with incoming US data. Thus, extremely bad growth, inflation or jobs data is expected to trigger short-term bearish reactions in the USD. With some lingering expectations of a possible ‘soft landing’ for the US economy, any goldilocks data (higher growth & labour but lower inflation data) could trigger safe haven outflows from the USD and into US equities. With a lot priced in for the Fed and the USD, it won’t take much to disappoint on the dovish side. Any big concerns about growth from Fed speakers could trigger outflows.
BIGGER PICTURE
The fundamental outlook for the USD remains bullish as long as the Fed stays hawkish and cyclical concerns put pressure on risk sentiment. The data dependent stance from the Fed means that short-term data surprises can pull the USD either way and would be our preferred way of trading the Dollar right now. The upcoming week is full of important data with the two ISM prints and of course NFP. Even though the USD is expected to trade cyclically with incoming data, we do need to keep an open mind about goldilocks data (higher growth and lower inflation ) as that could see a nuanced reaction in the USD.
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