JP Morgan

EUR

The COVID news flow seemed to take a turn for the worse over the weekend… or maybe it’s finally just being noticed. There are reports of hospitalisations rising in the UK and while they may not be at the same level as in the first or second waves, if UK cases are to get to 100k, or even 200k a day then even on reduced percentages of hospitalisations, the numbers will still be high enough to challenge the idea that lockdowns are a thing of the past. This comes at an already challenging time for the growth narrative as PMIs top out and oil backs off its bull run with some negative news over the weekend. The confusing thing for currencies and high beta in particular is that despite this backdrop central banks continue to switch hawkish. The ECB will highlight the weeks calendar on Thursday and I wouldn’t be surprised to see a few days of muted activity in advance. The outcome to the ECB feels like it’s skewed in a bullish direction for the Euro from these levels. After the strategic review left the ECB even further from their goals, Lagarde raised the stakes for this Thursday suggesting it will be an important meeting. Realistically all we are likely to get is new forward guidance and the key will be the changes they make to the conditionality around raising rates; the statement “…sufficiently close to but below 2%...”. A shift to “very close to 2%” as our economists expect is the least they could do and given the heightened expectations, would be a disappointment. Additionally, there was a story late last week in a well followed news vendor that NIRP could be questioned as part of this strategic review, an outside tail risk in my mind but certainly something that would spice up Thursday. I like running long EUR on crosses headed into the meeting this week. Elsewhere on the calendar this week we get PMIs on Friday and we are likely to get the resolution of the US fiscal negotiations.

GBP

Bit of a bull trap last week with Ramsden and Saunders (another known dove) coming out hawkish heaping the intrigue on the August meeting with an ever deteriorating COVID backdrop as the Johnson’s high stakes strategy continues to draw widespread scientific criticism as we reach ‘freedom day’ today. It is hard not to take a defensive approach to markets at this juncture given the situation not just in the UK but elsewhere as well although interest has remained pretty subdued of late, I am not sure this will remain the case should stocks start to slip more meaningfully however. Still like the idea of using sterling sell-offs to build for the August MPC but given proximity and news-flow I have little interest at these levels. Quiet week of data until Friday which sees Sales / flash PMIs while Haskel (less dovish external) speaks at 11.00 BST today and Broadbent (centrist internal) speaks Thursday. 1.3730/40 is first support in cable with 1.3650/70 the big level below (0.8505/10, 0.8470 EURGBP) while 1.3790/00 turns resistance with 1.3900/10 above (0.8605/15, 0.8670 EURGBP).