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. The disorderly move in Gilt yields were enough to force the BoE’s to step in with a limited (both in time and size) bond buying intervention plan. This has brought some calm to the angst but being limited won’t be enough to fix the fiscal concerns. It was another volatile week for Sterling as a result of the political uncertainty with the resignation of PM Truss. In the week ahead we only have S&P Global PMIs to watch on the data side, but all focus and attention will be on the leadership race to see which 2 or 3 candidates will meet the minimum 100 nominations to put their names in the hat.
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 massive disorderly moves in Gilts forces the BoE to step up as the buyer of last resorts that could trigger GBP upside. If either Johnson or Sunak gets enough nominations that could ease some of the pressure from the Pound.
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 we have big disorderly moves in Gilts but the BoE reiterates, they won’t intervene again that could put pressure on GBP. Any outcome that increases the likelihood of a general election should increase the risk premium in the GBP.
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). Even though flash PMI data will be important to watch as always, the political situation will likely overshadow the econ data as all eyes will be on the leadership race to see who will win the race as the UK’s next PM.
USD
FUNDAMENTAL OUTLOOK: BULLISH
BASELINE
With headline CPI above 8% and Core CPI seeing another acceleration in the SEP CPI data, the Fed is under pressure to continue hiking rates and ramping up QT. Markets expect another 75bsp hike in NOV and currently prices the terminal rate at 4.8%. 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 (good data expected to be supportive for the USD while bad data is expected to pressure the USD). Even though the USD had good composure for the majority of the week, the WSJ article, BoJ intervention and less hawkish comments from Fed’s Daly saw a strong push lower in the DXY . Given what has been priced for the USD and yields, the Daly comments and WSJ article gives us a short-term downside bias for the USD in the week ahead.
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 catalysts that increase deep recession fears and triggers strong moves lower in risk assets & bonds can trigger safe haven flows into the USD. With a lot priced for the Fed and USD, the bar is high for hawkish Fed surprises, but any aggressive Fed speak talking up a >5.0% 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. If the cyclical outlook starts to improve, the USD’s safe haven status still matters. Any incoming catalysts that decrease deep recession fears and triggers strong moves higher in risk assets & bonds can trigger safe haven outflows out of the USD. 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 econ calendar is slightly more exciting compared to last week with S&P Global PMI, Consumer Confidence and Core PCE, but after the Fed Daly comments and the WSJ article we suspect the USD could trade softer next week as the Fed enters their blackout period from Saturday.
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. The disorderly move in Gilt yields were enough to force the BoE’s to step in with a limited (both in time and size) bond buying intervention plan. This has brought some calm to the angst but being limited won’t be enough to fix the fiscal concerns. It was another volatile week for Sterling as a result of the political uncertainty with the resignation of PM Truss. In the week ahead we only have S&P Global PMIs to watch on the data side, but all focus and attention will be on the leadership race to see which 2 or 3 candidates will meet the minimum 100 nominations to put their names in the hat.
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 massive disorderly moves in Gilts forces the BoE to step up as the buyer of last resorts that could trigger GBP upside. If either Johnson or Sunak gets enough nominations that could ease some of the pressure from the Pound.
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 we have big disorderly moves in Gilts but the BoE reiterates, they won’t intervene again that could put pressure on GBP. Any outcome that increases the likelihood of a general election should increase the risk premium in the GBP.
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). Even though flash PMI data will be important to watch as always, the political situation will likely overshadow the econ data as all eyes will be on the leadership race to see who will win the race as the UK’s next PM.
USD
FUNDAMENTAL OUTLOOK: BULLISH
BASELINE
With headline CPI above 8% and Core CPI seeing another acceleration in the SEP CPI data, the Fed is under pressure to continue hiking rates and ramping up QT. Markets expect another 75bsp hike in NOV and currently prices the terminal rate at 4.8%. 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 (good data expected to be supportive for the USD while bad data is expected to pressure the USD). Even though the USD had good composure for the majority of the week, the WSJ article, BoJ intervention and less hawkish comments from Fed’s Daly saw a strong push lower in the DXY . Given what has been priced for the USD and yields, the Daly comments and WSJ article gives us a short-term downside bias for the USD in the week ahead.
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 catalysts that increase deep recession fears and triggers strong moves lower in risk assets & bonds can trigger safe haven flows into the USD. With a lot priced for the Fed and USD, the bar is high for hawkish Fed surprises, but any aggressive Fed speak talking up a >5.0% 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. If the cyclical outlook starts to improve, the USD’s safe haven status still matters. Any incoming catalysts that decrease deep recession fears and triggers strong moves higher in risk assets & bonds can trigger safe haven outflows out of the USD. 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 econ calendar is slightly more exciting compared to last week with S&P Global PMI, Consumer Confidence and Core PCE, but after the Fed Daly comments and the WSJ article we suspect the USD could trade softer next week as the Fed enters their blackout period from Saturday.
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