GBP_1_M GBP_1_M GBP_1_M

FX Update: GBP vote of confidence on today’s budget statement.

Forex
Strats-Hardy-88x88
John Hardy

Head of FX Strategy

Summary:  The US dollar has consolidated a bit after strong US Retail Sales, although long US treasury yields fell further yesterday, suggesting risk sentiment is chief driver for now until more incoming US data arrives. The key event today is the Chancellor Hunt autumn budget statement and the vote of confidence for sterling in its wake, as even the measures already announced are set to worsen the UK growth outlook in coming quarters and years.


FX Trading focus: Focus on sterling today on autumn budget statement. USD perks up with sentiment correlation even clearer now.

The US dollar has perked up, trading well off the lows of earlier this week as risk sentiment was in for a weak session late yesterday and into the morning hours in Europe today. The October US Retail Sales report was far stronger than expected, but this didn’t impress the US Treasury market, where yields fell to new local lows on a strong 20-year treasury auction and on the soft risk sentiment. US long yields and the US dollar going in opposite directions is a distinct change of behavior from the prior regime and these recent market moves suggest that USD traders mostly only have a nose for risk sentiment as the USD driver. Certainly, the next bits of incoming data ahead of the December 14 FOMC meeting are weak beer until at least the November 30 PCE data for October and then the November jobs report a couple of days later before what has now become the main event, the November CPI report just a day before the FOMC meeting. The dip in long yields unfolded with no change at the short end of the yield curve, so the 2-10 US yield curve inversion stretched all the way to -67 basis points yesterday, a new extreme since 1981 as recession fears intensify. It will take considerable work to reverse this USD move, and still think that it is too early to say that the USD highs are in for the cycle.

The chief focus today is on the UK Budget Statement, which is set to lay out a whole raft of measures intended set UK public debt on a sustainable trajectory over the coming five-plus years. Chancellor Hunt has said that the budget moves will be a mix of spending cuts and tax rises in an approximate 60/40 ratio. To avoid the Conservative party going down in flames at the 2024 election (or earlier?), many of the least popular measures like tax rises on personal incomes are not set to take effect until 2026-27, when the overall deficit trajectory is also meant to improve more sharply (the narrative is to avoid piling onto the near term recession risks in the near term, but the effect is really one of simply kicking the can down the road). Note on the spending side that the public pension will rose 10.1% (based on the September CPI) as of next April 1. I have a hard time seeing sterling finding further fuel for a sustainable rally on the back of this statement, but let’s see. It is certainly a critical vote of confidence today.

Chart: EURGBP
To keep the USD out of the equation, as it has been the biggest mover among G10 currencies of late, I will watch EURGBP over today’s autumn budget statement from Jeremy Hunt for isolating the vote-of-confidence, or lack thereof, for sterling. The pair has been trading choppily within the 0.8700 to 0.8800+ range ahead of today’s statement, discussed above, and a daily close on either side of the range points to the conclusions the market is making on the impact the coming fiscal austerity will have on the UK economy and its currency. The textbook observation is that fiscal austerity is currency negative, but the recent market repricing higher of sterling was more about avoiding a chaotic loss of confidence in the stability of the country’s finances. Upside for sterling is possible if the market has not yet fully unwound that “lack of confidence” discount on the currency and if the risk sentient backdrop brightens again as sterling seems to be highly sensitive to general swings in sentiment as well.

17_11_2022_JJH_Update_01
Source: Saxo Group

Table: FX Board of G10 and CNH trend evolution and strength.
US dollar still the weakest of the lot in a trending sense and a lot of wood to chop if we are to see a reversal back higher. Interesting to note the oddly weak NOK and SEK despite solid bout of risk on in Europe of late. AUD, meanwhile, followed the CNH weakness overnight and soft Asian markets, not the strong AU jobs report.

17_11_2022_JJH_Update_02
Source: Bloomberg and Saxo Group

Table: FX Board Trend Scoreboard for individual pairs.
Has USDCNH put in a major low here? watching that one as it is the closest major USD pair of note to posting a reversal with the weakness in CNH overnight after a record surge in sovereign bond yields this week in onshore Chinese markets. Elsewhere, noting the weak SEK as EURSEK may be set to flip back to an up-trend that will be made worse if risk sentiment worsens (considering recent strong sentiment failed to do much for the krona). The Swedish property sector deserves close watching as it is highly levered and the first developer of note (Sehlhall) looks to be in trouble.

17_11_2022_JJH_Update_03
Source: Bloomberg and Saxo Group

Upcoming Economic Calendar Highlights

  • 1230 – UK Chancellor Hunt presents autumn budget
  • 1230 – UK Bank of England Chief Economist Pill to speak
  • 1300 – US Fed’s Bullard (voter 2022) to speak
  • 1330 – US Oct. Housing Starts and Building Permits
  • 1330 – US Oct. Philadelphia Fed
  • 1330 – US Weekly Initial Jobless Claims
  • 1440 – US Fed’s Mester (Voter 2022) to speak
  • 1540 – US Fed’s Jefferson and Kashkari (voter 2023) to speak 
  • 1600 – US Nov. Kansas City Fed Manufacturing Activity
  • 1845 – US Fed’s Kashkari (voter 2023) to speak
  • 2330 – Japan Oct. National CPI
  • 0001 – UK Nov. GfK Consumer Confidence

Disclaimer

The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
Full disclaimer (https://www.home.saxo/legal/disclaimer/saxo-disclaimer)
Full disclaimer (https://www.home.saxo/legal/saxoselect-disclaimer/disclaimer)

Saxo Bank A/S (Headquarters)
Philip Heymans Alle 15
2900
Hellerup
Denmark

Contact Saxo

Select region

International
International

Trade responsibly
All trading carries risk. Read more. To help you understand the risks involved we have put together a series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. Read more

This website can be accessed worldwide however the information on the website is related to Saxo Bank A/S and is not specific to any entity of Saxo Bank Group. All clients will directly engage with Saxo Bank A/S and all client agreements will be entered into with Saxo Bank A/S and thus governed by Danish Law.

Apple and the Apple logo are trademarks of Apple Inc, registered in the US and other countries and regions. App Store is a service mark of Apple Inc. Google Play and the Google Play logo are trademarks of Google LLC.