FX Update: Waiting out the complacency for what comes next… FX Update: Waiting out the complacency for what comes next… FX Update: Waiting out the complacency for what comes next…

FX Update: Waiting out the complacency for what comes next…

Forex 5 minutes to read
John Hardy

Head of FX Strategy

Summary:  We have a very complacent market in a very illiquid trading month. The market appears to be pricing a gentle landing, with commodities back on the defensive and the US dollar aimless ahead of the latest jobs report today. Yesterday saw the largest Bank of England hike in 27 years, with the Bank of England forecasting a nasty and prolonged recession, and yet UK yields are almost unchanged after intraday churning yesterday.


FX Trading focus: Waiting out the complacency. Bank of England goes dire – UK yields shrug.

The Bank of England issued perhaps the most remarkably dire outlooks for an economy ever at its meeting yesterday, suggesting that inflation will peak at 13% later this year as the UK economy is set to dip into a prolonged recession starting in Q4 of this year and extending through the next calendar year. Yields traded all over the place in the wake of the expected 50 basis point hike, the largest in 27 years, as the market tried to draw implications on whether the BoE would continue moving in 50 basis point increments over the next couple of meetings, given the pessimistic outlook. In the end, the market decided that the incoming inflation forecast will keep the hurdle high for any BoE downshift and the market retained expectations for more large hikes to come, with 45 bps prices for September and another 41 bps for November. By the end of the day, Governor Bailey managed to convince that the bank is forced to forge ahead to get inflationary risks under control despite the gathering clouds and continued to note the risks of an inflationary spiral becoming “embedded” in the economy. The balance sheet reduction plan announced yesterday is at the more aggressive end of the £50-100 billion/year range at £80 billion. Sterling now has to trade on sentiment as opposed to rate spreads – any rapid deterioration in sentiment could see the pound looking vulnerable again versus USD and perhaps CHF, and even JPY if yields remain subdued.

Chart: EURUSD
The USD was mixed yesterday, staying firm against commodity currencies as the recent slide in crude oil prices suggests a market gearing up for recession risks. After an intraday rally, the USD was pushed back lower against the EUR and JPY as soft US weekly claims kept US yield tames and complacent risk sentiment continues to hold back the dollar. If the US jobs data solidifies the view that the US labor market is softening and pushes yields lower, the greenback may see an intensification of this pattern, with USDJPY particularly yield-sensitive and EURUSD possibly squeezing into a flurry of stops, likely above 1.0300. A far stronger than expected jobs report together with a considerable upside surprise in the average hourly earnings data in particular could see the USD broadly stronger. EURUSD needs to resolve one way or another soon after nearly three weeks in the 1.0100-1.0275+ range. Further out, the dire energy/power situation as Europe looks forward to the risk of a dark winter and power cuts, potentially to whole swathes of its economy, will likely keep a lid on an EUR upside ambitions beyond a positioning adjustment.

Source: Saxo Group

Elsewhere, the feeling across markets is one of low-energy complacency, rather remarkable given the menu of forward risks in Europe on power shortages and globally on China tensions (see free eurointelligence.com stories on the front page today on possible new cold-war like lines drawing up as a major concern, although I don't share all of the historical parallels/lessons). Zooming into today’s US jobs data, the most interesting test of the market narrative today and in coming US jobs/earnings reports, would be earnings growth that remains elevated in a still-tight jobs market and continues to drive stubbornly high inflation, not to mention the inflation readings themselves (Important: US July CPI is up next Wednesday). As noted in today’s Saxo Market Call podcast, the Atlanta Fed median wage measure touched a strong new high in June at 6.7%, even as the average hourly earnings series has stagnated around the 5.0% area on a moving average basis. But the more important driver here is whether the data challenges the market backdrop – it seems the only thing that can, given that clear, coordinated pushback from the Fed to discourage the market’s forward policy expectations failed to even register since the FOMC meeting.

Table: FX Board of G10 and CNH trend evolution and strength.

The downdraft in the commodity currencies is perhaps the most consistent momentum shift of note as we await the reaction to US jobs data today (and CPI data next Wednesday!), though gold is challenging above an interesting level versus the US dollar today (1,780) and has posted the largest momentum advance over the last five days in our universe.

Source: Bloomberg and Saxo Group

Table: FX Board Trend Scoreboard for individual pairs.
Waiting for whether USD pairs get a spark from today’s data, there is no strong signal, which has picked up a bit more for sterling and the commodity currencies. In the case of sterling, EURGBP needs to vault well clear of 0.8450 to look a bit more determinedly directional. JPY pairs should be sensitive to any US yield move on the back of the data today and CPI next Wednesday.

Source: Bloomberg and Saxo Group

Upcoming Economic Calendar Highlights (all times GMT)

  • 1115 – UK Bank of England Chief Economist Pill to speak
  • 1230 – Canada Jul. Employment Data
  • 1230 – US Jul. Change in Nonfarm Payrolls
  • 1230 – US Jul. Change in Nonfarm Payrolls
  • 1230 – US Jul. Average Hourly Earnings
  • 1400 – Canada Jul. Ivey PMI

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 (Schweiz) AG
The Circle 38
CH-8058
Zürich-Flughafen
Switzerland

Contact Saxo

Select region

Switzerland
Switzerland

All trading carries risk. Losses can exceed deposits on margin products. You should consider whether you understand how our products work and whether you can afford to take the high risk of losing your money. To help you understand the risks involved we have put together a general Risk Warning series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. The KIDs can be accessed within the trading platform. Please note that the full prospectus can be obtained free of charge from Saxo Bank (Switzerland) ltd. or the issuer.

This website can be accessed worldwide however the information on the website is related to Saxo Bank (Switzerland) Ltd. All clients will directly engage with Saxo Bank (Switzerland) Ltd. and all client agreements will be entered into with Saxo Bank (Switzerland) Ltd. and thus governed by Swiss Law.

The content of this website represents marketing material and has not been notified or submitted to any supervisory authority.

If you contact Saxo Bank (Switzerland) Ltd. or visit this website, you acknowledge and agree that any data that you transmit to Saxo Bank (Switzerland) Ltd., either through this website, by telephone or by any other means of communication (e.g. e-mail), may be collected or recorded and transferred to other Saxo Bank Group companies or third parties in Switzerland or abroad and may be stored or otherwise processed by them or Saxo Bank (Switzerland) Ltd. You release Saxo Bank (Switzerland) Ltd. from its obligations under Swiss banking and securities dealer secrecies and, to the extent permitted by law, data protection laws as well as other laws and obligations to protect privacy. Saxo Bank (Switzerland) Ltd. has implemented appropriate technical and organizational measures to protect data from unauthorized processing and disclosure and applies appropriate safeguards to guarantee adequate protection of such data.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the U.S. and other countries. App Store is a service mark of Apple Inc.