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Can sterling and swissie both head lower?
John J. Hardy
Global Head of Macro Strategy
Summary: Sterling backed up higher on four hawkish dissenters to the BoE rate cut yesterday, while the EURCHF backup suggests market taking Trump tariffs more seriously, with new twist on possible tariffs on gold bullion.
Bank of England dissents: meh – it’s about the structural backdrop
Sterling jumped higher on yesterday’s BoE meeting that saw a surprisingly split vote of 5-4 as the MPC held an unprecedented second vote to ensure the results because an initial three-way split (one wanted a 50-bp reduction) meant no decision could be announced. This is nominally hawkish as short UK rates backed on doubts that further BoE cuts will be in the offing this year (November BoE meeting priced at 50/50 now). Bailey noted uncertainty on inflation and admitted that the bank’s QT programme was causing strain at the long end of the UK gilt curve, but no specific guidance was available on what decision will be made in the review of the pace of QT. The knee-jerk rally in sterling does nothing to change the structural weaknesses in the UK economy and dynamics for sterling, which may quickly revert to its weakening trend from here. A quick erasure of yesterday’s rally would be the best path for the EURGBP bulls, but yesterday’s meeting could take more time to digest, especially if geopolitics weigh on euro in the coming week or more (Trump-Putin summit – what will it produce?).
Swiss franc – signs of resistance after Trump tariffs. And now tariffs on gold?
The Swiss franc has seen one of its more notable moves lower against the euro since early March, when the single currency was surging across the board on anticipation of the massive incoming German fiscal stimulus. The enthusiasm for that stimulus has since faded on signs of a very slow rollout. The latest EURCHF surge is driven by the suddenly very high relative tariff wall of 39% that Trump has imposed on Swiss imports. A good friend of mine touted some very valid likely reasons for the US singling out Switzerland – the fact that it is “neutral” in defense alliance terms, but gets to enjoy the NATO security umbrella in some respects. But as well, there is the angle that Swiss pharmaceuticals are far and away the largest single category of exports into the US and Trump is on the warpath on drug prices, whether from a populist angle or because these are also in the sphere of “national security” for key drugs that are not produced in the US. Third, the Swiss National Bank has been a massive accumulator of US stocks, something it has earned a fortune on and this could be a kind of “you’re welcome” tariff. Finally, the FT is even reporting that gold bullion could be tariffed as well, which would shut down any gold flows to the US. Could EURCHF have bottomed out for the cycle on this reassessment and head back toward parity, or is that too ambitious?
Chart: EURGBP
EURGBP sold off heavily on the BoE meeting yesterday, not anticipating the scale of hawkish dissent to the rate cut decision and boosting sterling from a rate-spread angle. But the structural pressures on sterling remain and could continue to pressure sterling from here. One wild card for the euro is how a Trump-Putin summit and any lasting ceasefire in Ukraine would play for the single currency. Would this be supportive from a “less tension and uncertainty” angle or negative from a “less urgency on fiscal” angle? A quick rally and close back above 0.8700 would have the bulls back in business, otherwise, any sell-off needs to be corralled ahead of the 0.8600+ range lows to keep the trend intact in the short term.
No Fed Chair nomination for now, but Miran’s nomination still interesting.
Trump nominated current chair of the Council of Economic Advisers Stephen Miran to the empty Fed Board of Governors spot, saying that the nomination would be for a temporary basis to serve out remainder of the replaced Kugler’s term, which ends in January. This certainly looks a less aggressive move than nominating someone already now that would clearly be the eventual nominee to replace Chair Powell next May. It also gives Trump time to make a choice in January and for Treasury Secretary Bessent to mastermind a comprehensive approach to policy in this new era of fiscal dominance, in which the Fed will merely prove an accessory to the Treasury’s policy.
Looking ahead – next steps on US-China, US CPI and Retail Sales.
Next week, the first order of business is the status of US-China relations and whether the Tuesday deadline for current negotiations sees a further extension of the status quo together with a more durable framework or a re-escalation of hostilities. The market is not anticipating the latter, so a re-escalation would be the “surprise side”. More potential to rock markets, particularly in Europe, comes from any Trump-Putin summit that takes shape, if any. Trump is signaling for the first time a willingness to have a one-on-one meeting with Putin and something may happen next week, according to sources.
On the economic data front, the US July CPI release on Tuesday and the July Retail Sales report on Friday are the two US highlights of note, while we have important UK employment, claims and earnings data up on Tuesday.
Two central bank meetings next week: Australia’s RBA meets Tuesday and is expected to deliver another 25-bp cut on its “every other meeting” pace. The AUD has crept slowly higher with constant back-filling after the whiplash April sell-off and recovery. The outlook for the country is beset with uncertainty as its economy and security alliances sit astride a widening US-China fault-line. Impossible for me to take a view for now.
FX Board of G10 and CNH trend evolution and strength.
Note: If unfamiliar with the FX board, please see a video tutorial for understanding and using the FX Board.
Trends are getting watered down as the sterling rally knocked some of the stuffing out of the euro up-trend, while the US dollar has so far only neutralized the former up-trend and is not yet in a new downtrend. Note the sharp CHF weakening (momentum -2.8 on the weekly) as well.
Table: NEW FX Board Trend Scoreboard for individual pairs. The fresh GBPJPY downtrend will be on the rocks soon if it doesn’t see another selling wave in the coming sessions, while USDJPY is on watch for a new down-trend if it can take out recent lows. The AUDUSD “downtrend” is also on deathwatch on any solid uptick in coming days.
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The instrument(s) referenced in this content may be issued by a partner, from whom Saxo receives promotional fees, payment or retrocessions. While Saxo may receive compensation from these partnerships, all content is created with the aim of providing clients with valuable information and options..