Week Ahead:

Top Trading Opportunities

W/c 17 February 2020
Our main focus for the week ahead will be:
 On the GBP with a slate of important
economic data and speculation of
possible changes to the UK budget

Week Ahead: Top Trading Opportunities

Baseline For The GBP
Even though we saw the BoE decide to surprise markets by leaving rates We also saw quite a big jump in the previous Jobs Report showing a
on hold in January, we still maintain a fundamental bearish bias on the massive gain of 208K versus expectations of 110K.
GBP.

The most recent forward-looking data for the UK has arguably been better
than expected. The first example would be the big jump seen in January
PMI numbers which was given as a main reason for some BoE members
to rather leave rates unchanged.

However, the other back-looking hard data has not been that encouraging
with both downtrends seen in Core (1.4%) and headline CPI YY (1.3%)
printing well below the bank’s 2% target.\

Growth data has also been lackluster with Q4 GDP printing at 0.0% and
GDP YY printing at 1.1%.

Week Ahead: Top Trading Opportunities

Baseline For The GBP
However, the main focus for the GBP is back on Brexit as the UK and
EU try and get a trade deal in place before the December 2020
deadline.

If the UK and EU does not strike a deal before the deadline, the UK will
leave the EU under WTO rules or with a basic free-trade agreement.

ING investment bank explains that the GBP is set to struggle for the rest
of 2020 as both a free-trade agreement and WTO rules would be
“negative for investment and growth” and cause uncertainty to rise.

We saw some short-term upside for the GBP this week with the
surprise resignation of the Finance Minister who was immediately
replaced by Rishi Sunak, who is more aligned to the PM’s ambitious
spending plans and a supporter of tax cuts, lowering capital gains
taxes and increased spending on infrastructure.

This saw an initial move to the upside as the potential of higher

fiscal stimulus could take the pressure off the BoE in terms of easier
monetary policy.

Week Ahead: Top Trading Opportunities

Baseline For The Risk Events
Next week has a very busy economic calendar for the Pound with both
back-looking hard data as well as forward-looking sentiment-based data
on the schedule.

First up is the December Jobs report due on Wednesday. After the big
surprise beat in the November report, the market will be tuned in to see
whether the same upwards trend was maintained in December.

It is interesting to consider the above chart of total UK employment tracked

on a YoY basis.

There has been a steady downtrend in employment on a YoY basis

from 2014 with a stronger fall after the 2016 Brexit referendum, but the fall
should not be surprising since the current unemployment rate is sitting at
multi-decade lows.

In terms of expectations, the market is expecting employment and average Overall, recent numbers shows that the labour market remains tight.
earnings to tick down.

Week Ahead: Top Trading Opportunities

Baseline For The Risk Events
Then on Wednesday we have the January readings for CPI. The
downtrend in headline and Core CPI should be a cause of concern for
the BoE and will be closely watched by the markets.

The headline MM and Core measures are expected to contract,

however both YY measures are expected to edge up to 1.5%.

The fall in consumer spending during the important Christmas period

does not bode well for the overall growth prospects for the UK.

Markets are expecting a sharp rebound in the numbers for the

On Thursday we move on to Retail Sales data. One of the big influencers
that caused markets to price in a potential rate cut by the BoE in January
was the surprise miss in Retail Sales for December as consumers failed
to increase their spending for a record fifth month in a row.
headline MM and Core MM numbers but expecting the YY metrics to
edge down.
All the week’s data will be important, but the Flash PMI numbers on
Friday will probably be one of the most important metrics for the week.

Week Ahead: Top Trading Opportunities

Baseline For The Risk Events

The markets saw a quick repricing of rate cut expectations in January Some BoE members like Vlieghe has expressly mentioned the
when the January PMI numbers showed a very sharp jump. forward-looking sentiment-based data as one of his primary concerns,
thus any further jump or miss in the PMI’s could increase or decrease
expectations for monetary policy.

The main focus for the Pound will remain Brexit and trade deal related
developments.

However, after this week’s short-term move in the Pound due to the
expectations of more potential fiscal stimulus we also need to pay
attention to any comments about the upcoming budget.

The reason for the jump in business sentiment was attributed to the
positive attitude and sighs of relief for some businesses when the UK
Conservative’s landslide victory in the December general election.

Week Ahead: Top Trading Opportunities

Possible Sentiment Shifts
Dovish Sentiment Shifts The highest conviction dovish opportunity would come from a combination
of the above-mentioned points. For example, negative trade deal comments
For this week, our first attention for potential dovish shifts will be on any alongside negative budget expectations as well as big surprises misses in
further negative or pessimistic comments from the UK or EU side with the economic data
regards to the trade deal negotiations.

Secondly, given the recent moves seen in this week after the surprise
resignation the market is expecting the possibility of more fiscal stimulus in
the upcoming budget.

Thus, any comments that allude that the reshuffle in the cabinet will not
necessarily lead to more fiscal stimulus would create a short-term dovish
trading opportunity and will put the BoE back in focus.

Furthermore, any significant miss in the upcoming data can see short-term
pressure on the GBP as it will feed into the current bearish fundamental
outlook. Any significant miss in the data could also impact interest rate
expectations which is something we’ll need to keep track of throughout the
week.

Even though all the data released next week is important, make sure to pay
particular attention to the PMI data on Friday as a quick turnaround in the
numbers would cause speculation whether some BoE members like
Vlieghe would opt for a cut if the sentiment-based indicators start moving in
the wrong direction again.

Week Ahead: Top Trading Opportunities

Possible Sentiment Shifts
Hawkish Sentiment Shifts Any beat that decreased rate cut expectations should be market moving.

Given the current fundamental bearish outlook on the Pound stems from For the best trading opportunity, we would want as many of the above-
the growing likelihood that the UK will leave the EU without a deal, any mentioned points aligned to give us the highest probability expectation for
comments that show a positive change in tone can see GBP upside in the more sustainable moves to the upside.
week ahead.

One of the current areas of contention is regarding fisheries and financial

services, so any signs that the UK or EU are softening their red lines on
these two points will be a positive move and tradable in the short-term.

Also, as we saw upside in the GBP following the cabinet reshuffle the
market is now already leaning towards the possibility of more fiscal
spending.

Thus, any comments that confirm additional spending can provide

additional upside for the GBP.

Then moving on to the economic data, the BoE was particularly focused on
the sentiment-based indicators like the PMI’s and noted a marked jump in
business optimism following the General Election.

However, the highest conviction opportunity from the data would be a beat
across the board in all the data points scheduled next week.

Week Ahead: Top Trading Opportunities

How To Trade The GBP
In the case of a dovish sentiment shift we could look to pair the GBP
against something like the NZD which has remained well supported in
this past week after the RBNZ made a neutral tilt toward monetary policy
and downplayed the expected impact of the Coronavirus on the New
Zealand economy.
These type of sentiment shifts are valid for trading phase one trades.
If you want to learn how phase one trades work, you can check out our
news trading strategy play-list on our YouTube channel where we post
weekly examples of how these trades play out.

As the NZD is a high-beta currency, make sure to pay close attention After a phase one move we can also look for potential phase two
to the current risk tone. A risk-on tone should be supportive of the pullbacks of that initial move. We post updates on these moves
NZD while a risk-off tone should put pressure on the NZD. inside our ‘tradable sentiment shifts’ reports, inside the Forex
Source Terminal under the market insights tab.
In the case of a hawkish sentiment shift we could look to pair the GBP
against the EUR which was pressured in the last week due to a stronger You can see each day which sentiment shifts are in play and
USD as well as re-awakened fears about EU growth prospects. As both which ones are still valid for trading the phase two pullbacks.
the GBP and EUR are exposed to Brexit related risks there are
fewer external risks with the pair. You can also learn about how these set ups work during our live
analysis webinars each day, inside the Forex Source Terminal.
Remember that these recommendations are based on
the current fundamental bias for these currencies at the time of
writing and can change throughout the week. Make sure to re-
evaluate whether the short-term sentiment is still valid for these
currencies before taking any trades.

Week Ahead: Top Trading Opportunities

forexsource.co

Week Ahead: Top Trading Opportunities