The One Currency That We Expect To Remain Bullish For Now

Jarratt Davis

Special Consultant to the FPA
In this week's report, we will take a look at what we believe to be the best trading opportunities for the week ahead. Furthermore, we will discuss what to look for and how to profit from them.

Last week, markets focused on source reports that the ECB’s June meeting was ‘live’ for QE talks.

Bloomberg reported that the meeting could conclude with an announcement on when they intend to cease asset purchases.

This week, the markets’ focus is likely to remain on the ECB as we head into the decision on Thursday.

However, the market will also focus on GBP and USD with key UK and US releases.

The five risk events we will cover in this report are:
  • UK employment report: This will be key for GBP’s fundamental outlook and influential on when the BoE hike rates, especially the average earnings component.
  • US Consumer Price Index: This will likely determine how the market trades USD heading into FOMC.
  • UK Consumer Price Index: Another key event for GBP’s fundamental outlook, especially if both UK inflation and employment give a clear bullish or bearish bias.
  • FOMC June meeting: With the Fed expected to announce another 25 basis point hike and provide an update to the Fed’s dots, this meeting is likely to be the highlight of the week and set the tone for USD going forward.
  • ECB June meeting: Although the ECB are expected to announce no changes to monetary policy at this meeting, any change in ECB forward guidance will provide a great trading opportunity.

Tuesday, June 12
UK Employment Report – GBP
Our first key risk event of the week will be the UK’s employment report. The report will consist of five data points and can, therefore, be a highly volatile event.

These five data points are:
  • Claimant Count Change
  • Unemployment Rate
  • Employment Change
  • Average Weekly Earnings
  • Average Weekly Earnings (Ex-Bonus)
Of the five releases, Claimant Count Change will be reporting for May, while the other four refer to April. A significant deviation in any data point could influence GBP price action and its fundamental outlook.

Of the five data points, the most important will be the Average Weekly Earnings releases. This is because earnings have an underlying influence on inflation which is a key focus for the BoE.

Market consensus for both Earnings components is to remain unchanged from prior. However, ING believes there is upside risk to April’s wage data.

This would imply that the bias for this report could be to the upside.

For the ideal trading opportunity, we would want to see a clearly positive or negative report. This means the data prints above and in line with expectations; or, below and in line with expectations.

If the data prints mixed, GBP will likely experience volatility until the market comes to an eventual bias.

In this scenario, any trading opportunity may still be valid, but likely of a lower conviction.

It’s worth noting that Tuesday will also see the UK government vote on amending the EU withdrawal bill.

If the votes result in parliament having more say in the final Brexit deal, concerns of a hard Brexit could ease.

Given the influence Brexit has on GBP, this could overshadow UK employment.

However, this also means the government’s vote and UK employment could support one another. If this was to occur, GBP could be an excellent buying opportunity.

US Consumer Price Index – USD
US CPI will consist of four measures, all reporting for the month of May. These four measures are:
  • CPI M/M
  • CPI Y/Y
  • Core CPI M/M
  • Core CPI Y/Y
As a component of the Fed’s dual mandate, inflation is a key concern of the Fed. Furthermore, it’s arguably the most influential data point for rate hike expectations.

Therefore, any significant deviation could provide a great trading opportunity. Especially if the data causes the market to adjust its rate hike expectations.

An overall positive report would likely support USD. Potentially increasing expectations for four hikes this year from current consensus of three.

On the other hand, if the data disappoints, USD could weaken. Especially if expectations for four hikes this year falls further.

Once again, the ideal trading opportunity will be if all data deviates in the same direction. If the data prints mixed, USD will likely be volatile with no clear initial bias.

Wednesday, June 13
UK Consumer Price Index – GBP
Just like US CPI, UK CPI will also consist of CPI M/M, CPI Y/Y, Core CPI M/M and Core CPI Y/ Y. The data will also refer to the month of May.

However, there will be a significant difference in the approach we take to the UK’s CPI report. This is because there may already be a very clear sentiment bias from Tuesday.

Therefore, we need to consider any sentiment bias influencing GBP before trading CPI. Even if CPI deviates, if the data is not as extreme as the UK’s employment report, the reaction could be minimal.

For an ideal trading opportunity, the data will have a clear bias and be in line with any existing sentiment. If the data is mixed or contrasts with the existing sentiment, expect GBP volatility.

As CPI in the UK remains above the BoE’s target, this event will be influential for UK rate hike expectations.

According to ING, the market is currently pricing in a 58% chance of an August hike.

This event will be particularly market moving if the market reprices its expectations. Especially if the market pushes expectations back below 50%.

FOMC June Meeting – USD
The FOMC’s June monetary policy decision will consist of four key components. There are:
  • Federal Funds Rate
  • FOMC Statement
  • FOMC Economic Projections
  • FOMC Press Conference
At this meeting, the market expects the Fed to announce a 25 basis point hike. This would see the Federal Funds Rate Increase From 1.50-1.75% to 1.75-2.00%.

According to CME Fed Fund futures, the market is pricing in a 91.3% chance of a 25 basis point hike.

Given the Fed are widely expected to hike, the best opportunity will be if the Fed remains on hold. This would result in an excellent short opportunity as USD weakens across the board.

Even if they do hike, we could still see USD initially weaken in a buy the rumour sell the fact style.

After the hike, the market’s focus will turn to the economic projections and statement. The attention here will be on the Fed’s dot plot which is part of the economic projections release.

For a hawkish shift in the dots, expectations for four hikes this year or the longer run rate will need to increase. An increase in the longer run rate, in particular, will be a hawkish signal.

Regarding the accompanying statement, the overall tone of the Fed will be important. If hawkish, the statement will be USD positive, and if dovish, USD negative.

Finally, 30 minutes later, Fed Chair Powell will host the Fed’s Press Conference. Once again, the market will take note of his tone and overall outlook for the US economy.

A hawkish tone from Powell with no major concerns and an optimistic outlook will be bullish.

A more dovish tone from Powell, expressing concern over the US economy will likely be bearish.

Thursday, June 15
ECB June Meeting – EUR
At their June meeting, the market expects the ECB to keep monetary policy unchanged.

This would see the Minimum Bid Rate remain at 0.00%, the Deposit Facility Rate at 0.40% and the Marginal Lending Rate at 0.25%.

The main focus at this meeting will revolve around the ECB’s approach towards QE.

Market consensus is for little change to QE guidance at this meeting. Most analysts, including those at Danske Bank, expect the ECB to announce changes in July.

However, there are exceptions and views amongst analysts do appear to vary.

ING expects the ECB to announce an extension of QE until year end at a reduced rate of 10 billion EUR per month.

If this scenario were to occur, EUR would likely strengthen across the board. This would provide an excellent opportunity to go long.

Of course, if the ECB announces no changes and fails to hint at changes in July too, EUR will likely weaken. This would provide an excellent opportunity to go short.

In the following press conference, the market will pay close attention to additional comments from Draghi.

Alongside comments on QE, the market will be looking for any insight on the timing of interest rate hikes.

According to Danske Bank, the market currently expects a 10bp hike in July 2019 and a 20bp hike in December 2019.

Any comments which cause the market to reprice expectations will be market moving.

If the market brings forward rate hike expectations, EUR will likely strengthen. If the market pushes back rate hike expectations, EUR will likely weaken.

All five events have the potential to move markets and create trading opportunities. However, given the potential for volatility, it’s important to ensure there’s a clear bias before entering.

Furthermore, it’s worth considering any sentiment bias before the release. The best opportunities will be if data supports the current sentiment.

This will be particularly true for GBP with UK employment on Tuesday and CPI on Wednesday.

Regarding this week’s central bank meetings, the key is to pay attention to comments which contrast with expectations.

Especially those which cause the market to re-evaluate and re-price those expectations.

The goal of this article is to help you improve your understanding and ability to trade risk events.

If you would like to learn more about risk event trading, just leave your questions below!