IC Markets Europe Fundamental Forecast | 23 January 2024
What happened in the Asia session?
As widely expected, the Bank of Japan (BoJ) released its monetary policy statement where the central bank kept its key policy rate on hold at -0.1% while purchasing a necessary amount of Japanese government bonds (JGBs) without setting an upper limit so that 10-year JGB yields will remain at around 0%.
With regards to its Yield Curve Control (YCC) policy framework, the central bank will regard the upper bound of 1.0% for 10-year JGB yields as a reference in its market operations, and in order to encourage the formation of a yield curve that is consistent with the above guideline for market operations, it will continue with large-scale JGB purchases. In short, there were no changes to its key monetary policy programmes – a move that is likely to keep downward pressure on the Japanese yen.
What does it mean for the Europe & US sessions?
The Richmond Manufacturing Index slowed in December as components such as new orders, employment and shipments all edged lower. Firms remained generally pessimistic about local business conditions while continuing to report declining backlogs. Should manufacturing activity continue to deteriorate further in January, the dollar could come under some short-term selling pressures.
The Dollar Index (DXY)
Key news events today
Richmond Manufacturing Index (3:00 pm GMT)
What can we expect from DXY today?
The Richmond Manufacturing Index slowed in December as components such as new orders, employment and shipments all edged lower. Firms remained generally pessimistic about local business conditions while continuing to report declining backlogs. Should manufacturing activity continue to deteriorate further in January, the dollar could come under some short-term selling pressures.
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
Weak Bearish
Gold (XAU)
Key news events today
Richmond Manufacturing Index (3:00 pm GMT)
What can we expect from Gold today?
The Richmond Manufacturing Index slowed in December as components such as new orders, employment and shipments all edged lower. Firms remained generally pessimistic about local business conditions while continuing to report declining backlogs. Should manufacturing activity continue to deteriorate further in January, the dollar could come under some short-term selling pressures and potentially lift gold prices.
Next 24 Hours Bias
Weak Bullish
The Australian Dollar (AUD)
Key news events today
NAB Business Confidence (12:30 am GMT)
What can we expect from AUD today?
The National Australia Bank (NAB) will release its findings on business confidence for the month of December. Confidence has plunged over the last couple of months as sentiment deteriorated in most industries. Conditions weakened in sectors such as mining, transport & utilities, construction, and recreation & personal services. Further deterioration in business confidence could nudge the RBA towards a more neutral stance with regards to monetary policy and thus put downward pressure on the Aussie.
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 Bullish
The Kiwi Dollar (NZD)
Key news events today
CPI (9:45 pm GMT)
What can we expect from NZD today?
New Zealand’s inflation has somewhat eased since its peak which took place in the last quarter of 2022. However, inflation is still well above the RBNZ’s target of 2%. Headline CPI moderated from 6.0% YoY to 5.6% YoY while the core reading eased from 7.1% YoY to 5.8% YoY in the third quarter of last year. Should inflationary pressures continue to be stubbornly sticky, the RBNZ may have to adopt a hawkish tone – a move that could function as a bullish catalyst for the Kiwi.
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 Bullish
The Japanese Yen (JPY)
Key news events today
BoJ Monetary Policy Statement (3:09 am GMT)
BoJ Press Conference (Tentative)
What can we expect from JPY today?
As widely expected, the Bank of Japan (BoJ) released its monetary policy statement where the central bank kept its key policy rate on hold at -0.1% while purchasing a necessary amount of Japanese government bonds (JGBs) without setting an upper limit so that 10-year JGB yields will remain at around 0%.
With regards to its Yield Curve Control (YCC) policy framework, the central bank will regard the upper bound of 1.0% for 10-year JGB yields as a reference in its market operations, and in order to encourage the formation of a yield curve that is consistent with the above guideline for market operations, it will continue with large-scale JGB purchases. In short, there were no changes to its key monetary policy programmes – a move that is likely to keep downward pressure on the Japanese yen.
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
No major news events.
What can we expect from EUR today?
The Euro failed to break above the threshold of 1.0900 overnight but this currency was rising strongly at the beginning of the Asia session. This threshold has acted as a major resistance level in January and the Euro could once again stall around this level.
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
Weak Bullish
The Swiss Franc (CHF)
Key news events today
No major news events.
What can we expect from CHF today?
Demand for the Swiss franc picked as Asian markets came online, causing USD/CHF to fall towards 0.8650. This currency pair is likely to remain under pressure 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 Bearish
The Pound (GBP)
Key news events today
No major news events.
What can we expect from GBP today?
The Pound found support around the 1.2700-level overnight before rising strongly at the start of the Asia session. This currency has faced resistance around 1.2740 over the past one week and it could once again stall around this region.
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
Medium Bullish
The Canadian Dollar (CAD)
Key news events today
No major news events.
What can we expect from CAD today?
Stronger demand for the US dollar drove USD/CAD above 1.3480 overnight but this currency pair was pulling back as Asian markets came online. Further pullback can be expected as the day progresses.
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
Weak Bearish
Oil
Key news events today
API Crude Oil Stock (9:30 pm GMT)
What can we expect from Oil today?
Crude oil prices rose strongly during the US session following a Ukrainian drop strike on Russia’s Novatek fuel terminal, raising concerns on supply disruptions. WTI climbed 2% as WTI oil hit $75.40 per barrel. Should the API crude oil stock decline more than market expectations, it could function as another bullish catalyst for this commodity.
Next 24 Hours Bias
Medium Bullish
