Momentum Models Flip Bullish on EUR/USD

When evaluating the performance of our momentum models we are considering the average performance across the one-, three-, and 12-month momentum models.

Summary

• Momentum models delivered a sixth consecutive week of positive returns, led by FX (+0.1% WoW).
• Performance is better over the past three months with equities driving the average return higher (+6.1%).
• Since our last update, momentum models are less bearish on US long bonds, they have flipped bullish on EUR/USD and have pared NZD/USD bearishness.

Latest Signals

Equity momentum models remain bullish on the S&P 500, Nikkei and DAX and marginally bearish on the FTSE-100 (Chart 1 and Table 1).

Meanwhile, rates momentum models returned net-long on JGBs while they pared US long bond bearishness.

Within FX, momentum models flipped bullish on EUR/USD and remained bullish GBP/USD – we are long EUR/GBP (target: 0.89; stop loss: 0.845). Elsewhere, they pared NZD/USD bearishness, adding to low conviction seen across the $-bloc (Chart 2 and Table 2).

Model Performance

Momentum models have recorded six consecutive weeks of positive returns, gaining a further +0.1% WoW. FX momentum models (+0.3% WoW) performed best, with equity (+0.0% WoW) and rates momentum models (-0.3% WoW) comparatively flagging. Performance is better over the past three months (FX: +0.5%; rates: +1.3%; equity: +6.1%).

Our Views

Markets are becoming more convinced that the Federal Reserve will hike in July, in line with Dominque’s expectations (she also expects a November hike). However, further afield, Dominique continues to stand out of the crowd with her 8% terminal rate call. Core PCE ending 2023 above +4% YoY, however, should move markets closer to her view.

Across the pond, Henry has had to deal with seemingly no shortage of inflationary pressures. May UK inflation beat expectations, with a surprise in core and headline readings (though there were some positive takeaways). The Bank of England responded days later with a 50bp hike to 5%.

*The basic strategy is to use returns (lookback windows) to give buy/sell signals. So, if the US stocks are up over the past 3 months, you buy, otherwise, you sell (note I use excess returns).

Bilal Hafeez is the CEO and Editor of Macro Hive. He spent over twenty years doing research at big banks – JPMorgan, Deutsche Bank, and Nomura, where he had various “Global Head” roles and did FX, rates and cross-markets research.

Ben Ford is a Researcher at Macro Hive. Benjamin studied BSc Financial Mathematics at Cardiff University and MSc Finance at Cass Business School, his dissertations were on the tails of GARCH volatility models, and foreign exchange investment strategies during crises, respectively.

Photo Credit: depositphotos.com

(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)