IC Markets Asia Fundamental Forecast | 26 January 2024
What happened in the US session?
As widely expected, the ECB maintained its main refinancing rate at 4.5% for the third meeting in a row. Despite concerns about a looming recession and a gradual easing in inflationary pressures, the ECB pledged to maintain rates at sufficiently restrictive levels for as long as necessary in order to return inflation back to its target of 2% in a timely manner.
During her press conference, ECB President Christine Lagarde stated that it was premature to engage in discussions regarding interest rate cuts due to persistent underlying price pressures within the Eurozone and uncertainties stemming from geopolitical tensions. The Euro plunged as low as 1.0830 in the aftermath of the ECB press statement and conference, dropping 0.6% over this period equivalent to 60 pips.
Across the pond, the advance GDP estimate for the fourth quarter of 2023 showed the American economy growing strongly at 3.3% YoY versus the forecast of 2.0%. Growth was led by increases in consumer spending, exports, state and local government spending, to name a few key sectors. Meanwhile, unemployment claims printed at 214k which was higher than the estimate of 199k, which suggests some softness in the US labour market. The dollar index (DXY) rose to an overnight high of 103.68 before pulling back slightly.
What does it mean for the Asia Session?
The Tokyo Core CPI fell to its lowest reading since March 2022 as it eased to 1.6% YoY in January, down from December’s 2.1%. The latest print beat the estimate of 1.9% by quite a wide margin, highlighting the pace of inflationary pressures dissipating in the capital. Further easing of inflation metrics takes the pressure off the Bank of Japan to raise their key policy rate in the near future, potentially putting further downward pressure on the Japanese yen.
The Dollar Index (DXY)
Key news events today
PCE Price Index (1:30 pm GMT)
What can we expect from DXY today?
The PCE Price Index – which is the Federal Reserve’s preferred gauge of inflation – has trended lower over the past seven months. January’s estimate shows the core PCE reading easing further from 3.2% YoY to 3.0% YoY while the headline PCE is expected to remain unchanged at 2.6% YoY. Should inflationary pressures continue to dissipate, the dollar could potentially weaken during the US session.
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
PCE Price Index (1:30 pm GMT)
What can we expect from Gold today?
The PCE Price Index – which is the Federal Reserve’s preferred gauge of inflation – has trended lower over the past seven months. January’s estimate shows the core PCE reading easing further from 3.2% YoY to 3.0% YoY while the headline PCE is expected to remain unchanged at 2.6% YoY. Should inflationary pressures continue to dissipate, the dollar could potentially weaken and thus lift gold prices during the US session.
Next 24 Hours Bias
Weak Bearish
The Australian Dollar (AUD)
Key news events today
No major news events.
What can we expect from AUD today?
Stronger demand for the dollar drove the Aussie as low as 0.6570 overnight. This currency found strong support around this region to rebound higher and was rising towards the threshold of 0.6600 as Asian markets came online.
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 Bearish
The Kiwi Dollar (NZD)
Key news events today
No major news events.
What can we expect from NZD today?
Stronger demand for the dollar caused the Kiwi to dive towards the threshold of 0.6100 overnight. This currency found some support around this threshold at the beginning of the Asia session but overhead pressures remain.
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
No major news events.
What can we expect from JPY today?
Further easing of inflation metrics takes the pressure off the Bank of Japan to raise their key policy rate in the near future, potentially putting further downward pressure on the Japanese yen and thus keeping USD/JPY elevated. This currency pair was trading around 147.60 at the onset of the Asia session.
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?
Despite ECB President Christine Lagarde’s relatively hawkish press conference yesterday, the Euro plunged overnight but found strong support around the region of 1.0830. This currency was rebounding higher as Asian markets came online and is likely to retrace higher before resuming the downturn.
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
Medium Bearish
The Swiss Franc (CHF)
Key news events today
No major news events.
What can we expect from CHF today?
The Swiss franc has gained some strength over the dollar since the start of this week causing USD/CHF to pull back from its recent high of 0.8728. This currency pair is expected to slide lower 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
No major news events.
What can we expect from GBP today?
Stronger demand for the dollar drove the Pound as low as 1.2680 overnight. This currency found strong support around this region to rebound higher and climbed above 1.2700 as Asian markets came online.
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
No major news events.
What can we expect from CAD today?
Higher crude oil prices are providing a strong tailwind for the Canadian dollar causing USD/CAD to retreat from its recent high of 1.3535. This currency pair is likely to slide lower today to notch a second consecutive close in the red.
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 Bullish
Oil
Key news events today
No major news events.
What can we expect from Oil today?
Crude oil prices jumped overnight as the recent GDP estimate showed the US economy growing much stronger than originally anticipated in the fourth quarter of 2023 while geopolitical tensions in the Red Sea continue to disrupt the global shipping trade. WTI oil gained 2.7% to hit a high of $77.40 per barrel overnight and this commodity is all but certain to mark a second consecutive week of gains.
Next 24 Hours Bias
Medium Bullish
