1. Virus Situation
The UK’s vaccination success has been a key driver of positive sentiment for GBP from the start of 2021 and has meant the county is on the verge of completely removing covid restrictions. One short-term negative is recent concerns about the Delta variant which has seen a 4-week delay in the planned reopening originally scheduled for June 21. This doesn’t change the fundamental outlook and should be soon forgotten if the UK moves ahead with it’s new reopening from the middle of July.
Markets were expecting a hawkish tilt from the BOE at their June meeting with Gilt yields, SONIA and Sterling pushing higher into the meeting. The bank took a more balanced view by sticking to a transitory outlook and also slightly tempering the more aggressive rate path expectations going into the meeting. As a result, GBP, Yields and SONIA unwound their pre-meeting upside, The short-lived downside has played out and that means focus for Sterling should be back on the med-term outlook, where the BoE is still expected as the next in line to tilt more hawkish, and participants will look towards the August meeting which includes the next MPR .
3. The country’s economic developments
Hopes of a faster economic reopening and recovery has seen both the BOE and IMF upgrade growth projections for the UK economy which has widened the growth differentials between other majors by quite a bit and is something that should continue to be a supportive factor for GBP as long as the data continues to show better-than-expected prints. Something that we should be mindful of here is that a lot of the positives that has driven Sterling higher in 2021 is arguably already reflected in the price. Thus, if we start to see some disappointing data, as we have more recently, that could start to weigh on some of the aggressive normalization expectations.
4. Political Developments
Remember Brexit? Yeah, me neither, but it came back into focus in the form of the recent punchy rhetoric between the UK and EU regarding the Northern Ireland Protocol which sparked some concerns about possible sanctions on the UK. Even though issues like chilled meats have made progress, the protocol and Brexit itself is about much more than sausages. The latest issue has been that of the divorce bill, which the UK says is between 35 and 39 billion while EU counterparts says it’s over 40 billion Pounds. For now these challenges won’t change the med-term outlook for Sterling unless it leads to actual trader sanctions or tariffs, which right now seems unlikely.
CHF – FUNDAMENTAL BIAS: BEARISH
1. Developments surrounding the global risk outlook.
As a safe-haven currency, the market’s risk outlook is the primary driver for the CHF. Swiss economic data rarely proves market moving; and although SNB intervention can have a substantial impact on CHF, its impact tends to be relatively short-lived. Additionally, the SNB are unlikely to adjust policy anytime soon, given their overall tone and a preference for being behind the ECB in terms of policy decisions.
The market’s overall risk tone is improving with coronavirus vaccines being rolled out as well as the unprecedented amount of accommodation and fiscal support from governments. Of course, risks remain as many countries are now battling third waves of the virus. As such, there is still a degree of uncertainty and risks to the overall risk outlook which could prove supportive for the CHF should negative factors for the global economy develop; however, on balance the overall risk outlook is continuing to improve and barring any major meltdowns in risk assets the bias for the CHF remains .
Despite the negative drivers, the CHF has remained surprisingly strong over the past couple of weeks. This divergence from the fundamental outlook doesn’t make much sense, but the CHF often has a mind of its own and can often move in opposite directions from what short-term sentiment or its fundamental outlook suggests, thus be careful when trading the CHF and always keep the possibility of SNB intervention in mind.