IC Markets Asia Fundamental Forecast | 6 February 2024
What happened in the US session?
The ISM Services PMI expanded for the 13th consecutive month with January’s reading coming in at 53.4, which was higher than the estimate of 52.0. New orders – a sign of future business activity – also grew strongly while the prices index recorded its largest monthly gain since August 2012. The services sector has pulled up overall economic growth in the US and stronger demand is being reflected in the prices index. Higher prices are likely to make the Fed even more patient with any potential interest rate cuts in the near future causing the dollar index (DXY) to hit a high of 104.60 overnight.
What does it mean for the Asia Session?
The Reserve Bank of Australia (RBA) will release its monetary policy statement today where they are widely expected to keep the cash rate on hold at 4.35%. Inflation continues to remain above the RBA’s target of 2 to 3% as headline CPI printed at 4.1% YoY in the fourth quarter of 2023. Economic activity remains weak as evident in the recent PMI reports which have indicated contraction over the last four months. Despite sluggish economic growth, the statement could communicate a hawkish outlook as inflation remains above target, possibly providing the Aussie with a short-term boost.
The Dollar Index (DXY)
Key news events today
FOMC Member Mester Speaks (5:00 pm GMT)
What can we expect from DXY today?
Federal Reserve Bank of Cleveland President Loretta Mester is due to speak at the Ohio Bankers League Economic Summit where audience questions are expected. Should she also follow in Fed Chair Jerome Powell’s footsteps and hit back against premature interest rate cuts, demand for the dollar is likely to remain strong.
Central Bank Notes:
- The Federal Funds Rate target range remained unchanged at 5.25% to 5.50% for the fourth meeting in a row.
- The Committee seeks to achieve maximum employment and inflation at the rate of 2.0% over the longer run.
- Recent indicators suggest that economic activity has been expanding at a solid pace.
- Job gains have moderated since early last year but remain strong, and the unemployment rate has remained low.
- Inflation has eased over the past year but remains elevated.
- In considering any adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks. The Committee does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2.0%.
- 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 19 to 20 March 2024.
Next 24 Hours Bias
Weak Bullish
Gold (XAU)
Key news events today
FOMC Member Mester Speaks (5:00 pm GMT)
What can we expect from Gold today?
Federal Reserve Bank of Cleveland President Loretta Mester is due to speak at the Ohio Bankers League Economic Summit where audience questions are expected. Should she also follow in Fed Chair Jerome Powell’s footsteps and hit back against premature interest rate cuts, demand for the dollar is likely to remain strong and thus put downward pressure on gold.
Next 24 Hours Bias
Weak Bearish
The Australian Dollar (AUD)
Key news events today
RBA Monetary Policy Statement (3:30 am GMT)
RBA Press Conference (4:30 am GMT)
What can we expect from AUD today?
The Reserve Bank of Australia (RBA) will release its monetary policy statement today where they are widely expected to keep the cash rate on hold at 4.35%. Inflation continues to remain above the RBA’s target of 2 to 3% as headline CPI printed at 4.1% YoY in the fourth quarter of 2023. Economic activity remains weak as evident in the recent PMI reports which have indicated contraction over the last four months. Despite sluggish economic growth, the statement could communicate a hawkish outlook as inflation remains above target, possibly providing the Aussie with a short-term boost.
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
Weak Bullish
The Kiwi Dollar (NZD)
Key news events today
Labour Force Report (9:45 pm GMT)
What can we expect from NZD today?
New Zealand’s labour market weakened as employment dropped by 0.2% while the unemployment rate increased from 3.6% to 3.9% in the third quarter of 2023. In addition, job vacancies have also dwindled throughout 2023 indicating a slowdown in hiring practices by corporations and business owners. The fourth quarter estimates point to employment growing 0.3% but accompanied with unemployment rising to 4.3%. Continued softness in the labour market is likely to put the Kiwi under pressure later today.
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
Weak Bullish
The Japanese Yen (JPY)
Key news events today
No major news events.
What can we expect from JPY today?
Recent demand for the dollar has driven USD/JPY above 148 with this currency pair hitting a high of 148.90 overnight. Combined with the Bank of Japan’s ultra-dovish monetary policy stance, USD/JPY has made significant gains in 2024. This currency pair was pulling back slightly as Asian markets came online but it is expected to remain elevated today.
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
Weak Bullish
The Euro (EUR)
Key news events today
Germany Factory Orders (7:00 am GMT)
Retail Sales (10:00 am GMT)
What can we expect from EUR today?
Factory orders in Germany – the manufacturing powerhouse of Europe – have been relatively weak over the past five months. After growing 0.3% MoM in November, December’s estimate points to a modest decline of 0.1% for the month of December. Should December’s retail sales in the Eurozone also disappoint, the Euro could come under pressure once more.
Central Bank Notes:
- The ECB kept the three key interest rates unchanged for a third consecutive meeting, keeping the main refinancing rate on hold at 4.50%.
- The incoming information has broadly confirmed its previous assessment of the medium-term inflation outlook.
- Aside from an energy-related upward base effect on headline inflation, the declining trend in underlying inflation has continued, and the past interest rate increases keep being transmitted forcefully into financing conditions.
- Tight 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 7 March 2024.
Next 24 Hours Bias
Weak Bearish
The Swiss Franc (CHF)
Key news events today
No major news events.
What can we expect from CHF today?
The Swiss franc has weakened considerably versus the dollar since last Friday causing USD/CHF to rise towards the threshold of 0.8700. This currency pair hit a high of 0.8719 overnight and is expected to remain elevated as the day progresses.
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
Weak Bullish
The Pound (GBP)
Key news events today
Construction PMI (9:30 am GMT)
What can we expect from GBP today?
Construction activity in the UK has contracted over the past four months as total new work decreased at the slowest pace since August due to subdued customer demand. January’s estimate of 47.2 points to another month of contraction and a weaker-than-expected PMI reading could increase the overhead pressures 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% for the fourth consecutive meeting.
- Two members preferred to increase the Bank Rate by 0.25% to 5.50% while one member preferred to reduce Bank Rate by 0.25% to 5.00%.
- CPI inflation remains well above the 2% target, with twelve-month CPI inflation increasing from 3.9% in November to 4.0% in December 2023 while wage growth has eased across a number of measures and is projected to decline further in coming quarters, although still elevated.
- This downside news has been broad-based, reflecting lower fuel, core goods and services price inflation.
- CPI inflation is projected to be 2.3% in two years’ time and 1.9% in three years.
- Next meeting is on 21 March 2024.
Next 24 Hours Bias
Weak Bullish
The Canadian Dollar (CAD)
Key news events today
Ivey PMI (3:00 pm GMT)
What can we expect from CAD today?
The Ivey PMI has expanded over the last five consecutive months highlighting the optimistic sentiment surrounding business confidence in Canada. January’s estimate of 55.0 points to continued confidence and a stronger-than-expected print could cause USD/CAD to pull back in the short-term.
Central Bank Notes:
- The Bank of Canada held its target for the overnight rate at 5.0% for the fourth meeting in a row while continuing its policy of quantitative tightening.
- Canada’s economy has stalled since the middle of 2023 with real GDP forecasted to grow 0.8% in 2024 and 2.4% in 2025.
- The slowdown in demand is reducing price pressures in a broader number of CPI components, with CPI inflation expected to remain close to 3% in the first half of 2024 before gradually easing, returning to the target of 2% in 2025.
- The Governing Council is still concerned about risks to the outlook for inflation, particularly the persistence in underlying inflation, and wants to see further and sustained easing in core inflation and continues to focus on the balance between demand and supply in the economy, inflation expectations, wage growth, and corporate pricing behaviour.
- Next meeting is on 10 April 2024.
Next 24 Hours Bias
Weak Bearish
Oil
Key news events today
API Crude Oil Stock (9:30 pm GMT)
What can we expect from Oil today?
Ongoing tensions in the Middle East and in Russia stoked concerns on global crude oil supply as Ukrainian drones struck Russia’s largest oil refinery. WTI oil fell to a low of $71.45 per barrel at the beginning of the US session before rebounding higher on news of the drone attack, jumping as high as $73.20 overnight. Crude prices are expected to climb higher as the day progresses.
Next 24 Hours Bias
Medium Bullish
