IC Markets Europe Fundamental Forecast | 24 January 2024
What happened in the Asia session?
The dollar index (DXY) dipped under 103.50 while gold failed to capitalize on the weaker dollar with spot prices hovering around the region of $2,025/oz. Meanwhile, crude oil retreated from its overnight high but prices could be buoyed during the US session, especially if geopolitical tensions in the Middle East escalate while supply disruptions in the US exacerbate.
What does it mean for the Europe & US sessions?
The Bank of Canada (BoC) is widely expected to keep its overnight rate on hold at 5.00% for the fourth consecutive meeting in a row as policymakers noted that there were further signs that the current high rates were moderating spending and relieving price pressures at December’s meeting. With inflation moderating lower and the economy looking sluggish, the BoC is likely to keep rates on hold once again, a move that would weaken the Loonie and drive USD/CAD higher later today.
The Dollar Index (DXY)
Key news events today
S&P Global Composite PMI (2:45 pm GMT)
What can we expect from DXY today?
Economic activity in the US has been growing steadily over the last few months as evident in the recent Composite PMI readings. Growth has been buoyed by the services sector while manufacturing remains in the doldrums – a trend that is set to continue as seen in the flash estimates for January. Should PMI activity grow stronger than originally expected, it could provide further lift for the dollar.
Central Bank Notes:
- The Federal Funds Rate target range remained unchanged at 5.25% to 5.50% for the third meeting in a row.
- The Committee seeks to achieve maximum employment and inflation at the rate of 2.0% over the longer run.
- The Committee will continue to assess additional information and its implications for monetary policy.
- In determining the extent of any additional policy firming that may be appropriate to return inflation to 2.0% over time, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments.
- In addition, the Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities, as described in its previously announced plans.
- Next meeting runs from 30 to 31 January 2024.
Next 24 Hours Bias
Medium Bullish
Gold (XAU)
Key news events today
Richmond Manufacturing Index (3:00 pm GMT)
What can we expect from Gold today?
S&P Global Composite PMI (2:45 pm GMT)
What can we expect from Gold today?
Economic activity in the US has been growing steadily over the last few months as evident in the recent Composite PMI readings. Growth has been buoyed by the services sector while manufacturing remains in the doldrums – a trend that is set to continue as seen in the flash estimates for January. Should PMI activity grow stronger than originally expected, it could provide further lift for the dollar and put gold under pressure once again.
Next 24 Hours Bias
Medium Bearish
The Australian Dollar (AUD)
Key news events today
S&P Global Composite PMI (10:00 pm GMT 23rd January)
What can we expect from AUD today?
The flash Composite PMI for Australia illustrated further slowdown in the pace of business activity, marking the fourth consecutive month of contraction. On a slightly brighter note, manufacturing activity returned to expansion for the first time in 11 months, albeit marginally. The Aussie remains under pressure and is likely to drift lower towards 0.6540.
Central Bank Notes:
- The RBA kept the cash rate target unchanged at 4.35%, marking the fifth pause out of the last six board meetings.
- Inflation in Australia has passed its peak but is still too high and the progress in bringing inflation back to the target range of 2% to 3% was looking slower than earlier forecast.
- Any further tightening of monetary policy to ensure that inflation returns to target in a reasonable timeframe will depend upon the data and the evolving assessment of risks.
- Next meeting is on 6 February 2024.
Next 24 Hours Bias
Medium Bearish
The Kiwi Dollar (NZD)
Key news events today
No major news events.
What can we expect from NZD today?
New Zealand’s inflation continues to moderate lower on a quarterly basis with December’s CPI printing at 4.7% YoY, down from September’s reading of 5.6% YoY. Although inflation is still well above the RBNZ’s target range of 1% to 3%, this latest figure was the smallest rise in over two years. Combined with a sluggish economy, the RBNZ will likely adopt a more neutral stance with regards to its outlook on monetary policy – a move that will keep the Kiwi under pressure.
Central Bank Notes:
- The Monetary Policy Committee kept the OCR unchanged at 5.50% for the fourth meeting in a row.
- The Committee is confident that the current level of the OCR is restricting demand. However, ongoing excess demand and inflationary pressures are of concern, given the elevated level of core inflation.
- If inflationary pressures were to be stronger than anticipated, the OCR would likely need to increase further.
- The Committee agreed that interest rates will need to remain at a restrictive level for a sustained period of time, so that consumer price inflation returns to target and to support maximum sustainable employment.
- Next meeting is on 28 February 2024.
Next 24 Hours Bias
Medium Bearish
The Japanese Yen (JPY)
Key news events today
S&P Global Composite PMI (12:30 am GMT)
What can we expect from JPY today?
Japan’s services sector grew strongly in January while manufacturing continues to contract. The latest flash reading signalled the strongest rise in private sector activity in four months while input and outprice prices indicate weaker inflation. Following yesterday’s interest decision by the Bank of Japan, the Japanese yen is likely to remain weak as USD/JPY hit an overnight high of 148.70.
Central Bank Notes:
- The Bank will continue with Quantitative and Qualitative Monetary Easing (QQE) with Yield Curve Control (YCC), aiming to achieve the price stability target of 2.0%, as long as it is necessary for maintaining that target in a sustainable and stable manner.
- The Bank of Japan decided on the following measures:
- YCC: Negative interest rate of -0.1% on policy-rate balances and purchase of Japanese government bonds to keep 10-year JGB yields at around 0% while regarding the upper bound of 1.0% for 10-year JGB yields as a reference in its market operations.
- Inflation expectations are expected to rise moderately toward the end of the projection period, with continued improvement in the output gap and changes in firms’ wage- and price-setting behaviour and in labour-management wage negotiations.
- Japan’s economy is likely to continue recovering moderately for the time being, supported by factors such as the materialization of pent-up demand, although it is expected to be under downward pressure stemming from a slowdown in the pace of recovery in overseas economies.
- Next meeting is on 19 March 2024.
Next 24 Hours Bias
Medium Bullish
The Euro (EUR)
Key news events today
S&P Global Composite PMI (9:00 am GMT)
What can we expect from EUR today?
Overall economic growth in the EU has contracted over the past seven months and the flash Composite PMI for January points to continuation of this trend. Combined with a stronger demand for the dollar in 2024, the Euro is likely to face overhead pressures and slide lower today.
Central Bank Notes:
- The ECB kept the three key interest rates unchanged for a second consecutive meeting, keeping the main refinancing rate on hold at 4.50%.
- While inflation has dropped in recent months, it is likely to pick up again temporarily in the near term.
- Underlying inflation has eased further but domestic price pressures remain elevated, primarily owing to strong growth in unit labour costs.
- The past interest rate increases continue to be transmitted forcefully to the economy as tighter financing conditions are dampening demand, and this is helping to push down inflation.
- The Governing Council will continue to follow a data-dependent approach to determining the appropriate level and duration of restriction.
- Next meeting is on 25 January 2024.
Next 24 Hours Bias
Medium Bearish
The Swiss Franc (CHF)
Key news events today
No major news events.
What can we expect from CHF today?
Stronger demand for the dollar has kept USD/CHF elevated as this currency pair hit a high of 0.8730 overnight. This currency pair has shown a strong bullish momentum in 2024 and is likely to climb higher today.
Central Bank Notes:
- The SNB kept the policy rate unchanged at 1.75% for a second consecutive meeting in December.
- The inflation forecast puts average annual inflation at 2.1% for 2023, 1.9% for
2024 and 1.6% for 2025.
- GDP growth is likely to be weak in the coming quarters; subdued demand from abroad and the tighter financing conditions are having a dampening effect.
- Switzerland’s GDP is likely to grow by around 1% this year. For 2024, the SNB currently expects growth of between 0.5% and 1%.
- Next meeting is on 21 March 2024.
Next 24 Hours Bias
Medium Bullish
The Pound (GBP)
Key news events today
S&P Global Composite PMI (9:30 am GMT)
What can we expect from GBP today?
Economic activity in the UK has rebounded over the last two months with the Composite PMI returning to expansion over this period. The flash reading for January points to another month of expansion and a stronger-than-anticipated figure could provide a boost for the Pound.
Central Bank Notes:
- The Bank of England’s Monetary Policy Committee (MPC) voted by a majority of 6-to-3 to maintain its Official Bank Rate at 5.25%.
- Three members preferred to increase the Bank Rate by 0.25 percentage points to 5.5%.
- CPI inflation remains well above the 2% target, with twelve-month CPI inflation falling sharply from 6.7% in September to 4.6% in October while services price inflation declined to 6.6%.
- The decline in CPI inflation over recent months could largely be attributed to falls in energy, food, and core goods price inflation, as external cost pressures had continued to abate. Services price inflation had remained elevated, however.
- The mean projection for CPI inflation is 2.2% and 1.9% at the two- and three-year horizons, respectively.
- Next meeting is on 1 February 2024.
Next 24 Hours Bias
Weak Bullish
The Canadian Dollar (CAD)
Key news events today
BoC Monetary Policy Report (2:45 pm GMT)
BoC Press Conference (3:30 pm GMT)
What can we expect from CAD today?
The Bank of Canada (BoC) is widely expected to keep its overnight rate on hold at 5.00% for the fourth consecutive meeting in a row as policymakers noted that there were further signs that the current high rates were moderating spending and relieving price pressures at December’s meeting. With inflation moderating lower and the economy looking sluggish, the BoC is likely to keep rates on hold once again, a move that would weaken the Loonie and drive USD/CAD higher later today.
Central Bank Notes:
- The Bank of Canada held its target for the overnight rate at 5.0% for the third meeting in a row while continuing its policy of quantitative tightening.
- Canada’s economy stalled through the middle quarters of 2023 with real GDP contracting at a rate of 1.1% in the third quarter, following a growth of 1.4% in the second quarter.
- The slowdown in the economy is reducing inflationary pressures in a broadening range of goods and services prices, leading to the easing of CPI inflation to 3.1% YoY in October.
- The Governing Council is still concerned about risks to the outlook for inflation and remains prepared to raise the policy rate further if needed and would also like to see further and sustained easing in core inflation.
- Next meeting is on 24 January 2024.
Next 24 Hours Bias
Medium Bullish
Oil
Key news events today
EIA Crude Oil Inventories (3:30 pm GMT)
What can we expect from Oil today?
The API stockpiles experienced a much larger drawdown than the market estimate of a 3M-drawdown. Nearly 6.7M barrels of crude were removed from inventories, as concerns surrounding weather-related supply disruptions grew in the US. Should the EIA inventories also drop more than anticipated, it is likely to function as an additional bullish catalyst for crude oil.
Next 24 Hours Bias
Medium Bullish
