IC Markets Asia Fundamental Forecast | 24 May 2024
What happened in the US session?
After coming higher than estimates over the last couple of weeks, unemployment claims printed below the forecast of 220K. The latest claims of 215K were also lower than the 4-week average of 217K and should figures begin to trend lower moving forward, it would signal a that the labour market is still resilient despite higher interest rates.
Meanwhile, S&P Global released its flash Composite PMI report for the month of May where PMI output grew at the fastest pace in two years to hit a 25-month high of 54.4. Services business activity accelerated sharply as it touched a 12-month high of 54.8 while the manufacturing sector signalled a modest increase, rising to 50.9 which is a 2-month high. Despite the ‘soft’ GDP estimate for the first quarter of this year, PMI activity looks to have received a shot in the arm for the second quarter.
Following the above robust macroeconomic data, the dollar index (DXY) reversed sharply from around 104.65 to surge past the threshold of 105 to make an overnight high of 105.12 as traders assessed that this data could push back the first potential rate cut by the Federal Reserve even further.
What does it mean for the Asia Session?
As Asian markets digest the latest US macro data, the DXY was hovering above the 105-threshold and could continue to climb higher as the day progresses to register a strong week of gains. This index is already up 0.6% on the week and is set to register the largest rise in seven weeks.
The Dollar Index (DXY)
Key news events today
FOMC Member Waller Speaks (1:35 pm GMT)
UoM Consumer Sentiment (2:00 pm GMT)
What can we expect from DXY today?
Federal Reserve Governor Christopher Waller is due to speak at the Reykjavík Economic Conference where audience questions are expected. Should he echo similar remarks as his fellow policymakers as evident in the latest FOMC minutes, the dollar is likely to receive a strong short-term boost.
After which, the University of Michigan (UoM) will release its final report on consumer sentiment for the month of May which will confirm the slight dip in sentiment for the American consumer as they now perceive negative developments on inflation, unemployment and interest rates in the year ahead. In addition, inflation expectations rose from 3.2% last month to 3.5% YoY this month, remaining above the 2.3 to 3% range that was seen in the two years prior to 2020. Weaker-than-anticipated consumer sentiment could sap demand for the dollar in the near-term.
Central Bank Notes:
- The Federal Funds Rate target range remained unchanged at 5.25% to 5.50% for the sixth meeting in a row.
- The Committee seeks to achieve maximum employment and inflation at the rate of 2% over the longer run and judges that the risks to achieving its employment and inflation goals have moved toward better balance over the past year.
- The economic outlook is uncertain, and the Committee remains highly attentive to inflation risks. Inflation has eased over the past year but remains elevated and in recent months, there has been a lack of further progress toward the Committee’s 2% inflation objective.
- Recent indicators suggest that economic activity has continued to expand at a solid pace while job gains have remained strong, and the unemployment rate has remained low.
- In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee’s goals.
- The Committee’s assessments will take into account a wide range of information, including readings on labour market conditions, inflation pressures and inflation expectations, and financial and international developments.
- In addition, the Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities. Beginning in June, the Committee will slow the pace of decline of its securities holdings by reducing the monthly redemption cap on Treasury securities from $60 billion to $25 billion.
- The Committee will maintain the monthly redemption cap on agency debt and agency mortgage-backed securities at $35 billion and will reinvest any principal payments in excess of this cap into Treasury securities.
- Next meeting runs from 11 to 12 June 2024.
Next 24 Hours Bias
Medium Bullish
Gold (XAU)
Key news events today
FOMC Member Waller Speaks (1:35 pm GMT)
UoM Consumer Sentiment (2:00 pm GMT)
What can we expect from Gold today?
Federal Reserve Governor Christopher Waller is due to speak at the Reykjavík Economic Conference where audience questions are expected. Should he echo similar remarks as his fellow policymakers as evident in the latest FOMC minutes, the dollar is likely to receive a strong short-term boost.
After which, the University of Michigan (UoM) will release its final report on consumer sentiment for the month of May which will confirm the slight dip in sentiment for the American consumer as they now perceive negative developments on inflation, unemployment and interest rates in the year ahead. In addition, inflation expectations rose from 3.2% last month to 3.5% YoY this month, remaining above the 2.3 to 3% range that was seen in the two years prior to 2020. Weaker-than-anticipated consumer sentiment could sap demand for the dollar in the near-term. Gold could face higher volatility during this 30-minute period.
Next 24 Hours Bias
Medium Bearish
The Australian Dollar (AUD)
Key news events today
No major news events.
What can we expect from AUD today?
Robust macroeconomic data out of the US caused the Aussie to reverse sharply from 0.6650 and dive under the threshold of 0.6600 by the end of the US session. This currency pair was trading around 0.6595 as Asian markets came online – these are the support and resistance levels for today.
Support: 0.6560
Resistance: 0.6650
Central Bank Notes:
- The RBA kept the cash rate target unchanged at 4.35%, marking the eighth pause out of the last nine board meetings.
- The CPI grew by 3.6% over the year to the March quarter, down from 4.1% cent over the year to December. Underlying inflation was higher than headline inflation and declined by less – this was due in large part to services inflation, which remains high and is moderating only gradually.
- The central forecasts, based on the assumption that the cash rate follows market expectations, are for inflation to return to the target range of 2 to 3% in the second half of 2025, and to the midpoint in 2026.
- In the near term, inflation is forecast to be higher because of the recent rise in domestic petrol prices, and higher than expected services price inflation, which is now forecast to decline more slowly over the rest of the year.
- Inflation is, however, expected to decline over 2025 and 2026.
- The path of interest rates that will best ensure that inflation returns to target in a reasonable timeframe remains uncertain and the Board is not ruling anything in or out.
- Next meeting is on 18 June 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?
Despite the robust macroeconomic data out of the US, the Kiwi held up well as compared to other currency pairs as demand for the dollar surged overnight. This currency pair was trading around 0.6090 at the beginning of the Asia session – these are the support and resistance levels for today.
Support: 0.6085
Resistance: 0.6140
Central Bank Notes:
- The Monetary Policy Committee kept the OCR unchanged at 5.50% for the seventh meeting in a row and agreed that interest rates need to remain at a restrictive level for a sustained period to ensure annual headline CPI inflation returns to the 1 to 3% target range.
- Restrictive monetary policy is contributing to an easing in capacity pressures while headline inflation, core inflation, and most measures of inflation expectations are continuing to decline. However, domestic inflation has fallen more slowly than expected and headline CPI inflation remains above the Committee’s target band.
- Higher dwelling rents, insurance costs, council rates, and other domestic services price inflation have resulted in a slow decline in domestic inflation, posing a risk to inflation expectations.
- GDP declined by 0.1% in the December 2023 quarter with economic growth having now been negative for four of the past five quarters. High interest rates have reduced household spending, as well as residential and business investment, despite very strong population growth. Recent indicators of economic activity have been weak, as expected.
- Next meeting is on 10 July 2024.
Next 24 Hours Bias
Weak Bearish
The Japanese Yen (JPY)
Key news events today
No major news events.
What can we expect from JPY today?
Demand for the greenback surged following the robust US macroeconomic data causing USD/JPY to race past the threshold of 157 overnight. This currency pair was trading around 157.10 as Asian markets came online – these are the support and resistance levels for today.
Support: 156.60
Resistance: 158.00
Central Bank Notes:
- The Bank considers that the policy framework of Quantitative and Qualitative Monetary Easing (QQE) with Yield Curve Control and the negative interest rate policy to date have fulfilled their roles. With the price stability target of 2%, it will conduct monetary policy as appropriate, guiding the short-term interest rate as a primary policy tool.
- The Bank of Japan decided on the following measures:
- The Bank will encourage the uncollateralized overnight call rate to remain at around 0 to 0.1% while continuing its JGB purchases with broadly the same amount as before.
- In addition, the Bank will discontinue purchases of exchange-traded funds (ETFs) and Japan real estate investment trusts (J-REITs) and will also gradually reduce the amount of purchases of CP and corporate bonds and will discontinue the purchases in about one year.
- In a quarterly outlook, the committee revised higher CPI prints for FY 2024 to 2.8% from January’s projections of 2.4%, due to the waning effects of higher import prices and fewer government support measures.
- For 2025, the board expects core inflation to hit 1.9%, slightly higher than its earlier estimates of 1.8%, reflecting a recent rise in oil prices.
- Policymakers cut their 2023 GDP growth forecast to 1.3% from 1.8% and for FY 2024, the bank also slashed its GDP outlook to 0.8% from 1.2%, mainly reflecting lower private consumption.
- Next meeting is on 14 June 2024.
Next 24 Hours Bias
Medium Bullish
The Euro (EUR)
Key news events today
Germany GDP (6:00 am GMT)
What can we expect from EUR today?
Germany will release its final GDP reading for the first quarter of this year where the economy is expected to grow 0.2% QoQ. Following a technical recession in the last two quarters of 2023, the German economy has been sluggish due to a prolonged contraction in the manufacturing sector but services have staged a relatively strong rebound in 2024 thus far. Should the GDP print surprise to the upside, it could provide a near-term boost for the Euro.
Central Bank Notes:
- The ECB kept the three key interest rates unchanged for a fifth consecutive meeting, keeping the main refinancing rate on hold at 4.50%.
- Inflation has continued to fall, led by lower food and goods price inflation with most measures of underlying inflation easing, wage growth is gradually moderating, and firms are absorbing part of the rise in labour costs in their profits.
- Financing conditions remain restrictive and the past interest rate increases continue to weigh on demand, which is helping to push down inflation but domestic price pressures are strong and are keeping services price inflation high.
- The Governing Council is determined to ensure that inflation returns to its 2% medium-term target in a timely manner and if the Council’s updated assessment of the inflation outlook, the dynamics of underlying inflation and the strength of monetary policy transmission were to further increase its confidence that inflation is converging to the target in a sustained manner, it would be appropriate to reduce the current level of monetary policy restriction.
- Next meeting is on 6 June 2024.
Next 24 Hours Bias
Medium Bearish
The Swiss Franc (CHF)
Key news events today
SNB Chairman Jordan Speaks (7:54 am GMT)
What can we expect from CHF today?
Swiss National Bank (SNB) Governing Board Chairman Thomas Jordan will be speaking on communication, monetary policy, and public impact at the Swiss Media Forum in Lucerne. After the SNB’s surprise interest rate cut in March, traders will be looking out for any new clues with regards to the central bank’s next move at its upcoming meeting in June. Any dovish remarks from Chairman Jordan is likely to cause the franc to come under pressure and potentially lifting USD/CHF during the European trading hours.
Central Bank Notes:
- The SNB eased monetary policy by lowering its key policy rate by 25 basis points, going from 1.75% to 1.50% in March.
- For some months now, inflation has been back below 2% and thus in the range the SNB equates with price stability.
- According to the new forecast, inflation is also likely to remain in this range over the next few years.
- The forecast puts average annual inflation at 1.4% for 2024, 1.2% for 2025 and 1.1% for 2026, based on the assumption that the SNB policy rate is 1.5% over the entire forecast horizon.
- Swiss GDP growth was moderate in the fourth quarter of last year and it is likely to remain modest in the coming quarters.
- Overall, Switzerland’s GDP is likely to grow by around 1% this year.
- Next meeting is on 20 June 2024.
Next 24 Hours Bias
Medium Bullish
The Pound (GBP)
Key news events today
Retail Sales (6:00 am GMT)
What can we expect from GBP today?
Retail sales were flat over the last couple of months while the estimate for April points to a decline of 0.5% MoM. It appears that the British consumer is finally succumbing to effects of higher interest rates in the UK and sales could continue to dwindle in the coming months. Should sales decline more than anticipated, the Cable could face heavy selling pressures during the European trading hours.
Central Bank Notes:
- The Bank of England’s Monetary Policy Committee (MPC) voted by a majority of 7-to-2 to maintain its Official Bank Rate at 5.25% for the sixth consecutive meeting.
- Two members preferred to reduce the Bank Rate by 25 basis points to 5%, an increase of one from the previous meeting.
- Twelve-month CPI inflation fell to 3.2% in March from 3.4% in February and is expected to return to close to the 2% target in the near term, but increase slightly in the second half of this year to around 2.5% owing to the unwinding of energy-related base effects.
- CPI inflation is projected to be 1.9% in two years’ time and 1.6% in three years in the May Report. With respect to indicators of inflation persistence, services consumer price inflation has declined but remains elevated at 6% in March.
- Following modest weakness last year, UK GDP is expected to have risen by 0.4% in 2024 Q1 and to grow by 0.2% in Q2, stronger than expected in the February Report. Despite picking up during the forecast period, demand growth is expected to remain weaker than potential supply growth throughout most of that period.
- The MPC remains prepared to adjust monetary policy as warranted by economic data to return inflation to the 2% target sustainably and will therefore continue to monitor closely indications of persistent inflationary pressures and resilience in the economy as a whole, including a range of measures of the underlying tightness of labour market conditions, wage growth and services price inflation.
- Next meeting is on 20 June 2024.
Next 24 Hours Bias
Medium Bearish
The Canadian Dollar (CAD)
Key news events today
Retail Sales (12:30 pm GMT)
What can we expect from CAD today?
Canada’s retails sales declined in January and February, falling 0.3% and 0.1% respectively MoM. The estimate of -0.1% for March points to a third successive month of weaker sales and could cause the Loonie to come under pressure – a move that would buoy USD/CAD.
Central Bank Notes:
- The Bank of Canada held its target for the overnight rate at 5.0% for the fifth meeting in a row while continuing its policy of quantitative tightening.
- Canada’s economy stalled in the second half of last year and the economy moved into excess supply but economic growth is forecasted to pick up in 2024. Overall, the Bank forecasts GDP growth of 1.5% in 2024, 2.2% in 2025, and 1.9% in 2026.
- CPI inflation slowed to 2.8% in February, with easing in price pressures becoming more broad-based across goods and services. However, shelter price inflation is still very elevated, driven by growth in rent and mortgage interest costs.
- Core measures of inflation, which had been running around 3.5%, slowed to just over 3% in February, and 3-month annualized rates are suggesting downward momentum. The Bank expects CPI inflation to be close to 3% during the first half of this year, move below 2.5% in the second half, and reach the 2% inflation target in 2025.
- The Governing Council is particularly watching the evolution of core inflation, and continues to focus on the balance between demand and supply in the economy, inflation expectations, wage growth, and corporate pricing behaviour.
- While inflation is still too high and risks remain, CPI and core inflation have eased further in recent months and the Council will be looking for evidence that this downward momentum is sustained.
- Next meeting is on 5 June 2024.
Next 24 Hours Bias
Medium Bullish
Oil
Key news events today
No major news events.
What can we expect from Oil today?
Concerns surrounding sticky inflation and elevated interest rates are raising doubts that demand for crude oil will remain robust for the rest of the year caused prices to reverse sharply and tumble hard. WTI managed to briefly climb above the $79-mark overnight before diving rapidly to fall under $77 per barrel. It stabilized around the $77-mark at the beginning of the Asia session but it is all set to register its worst loss in 4 weeks, declining almost 4% thus far.
Next 24 Hours Bias
Weak Bullish
