IC Markets Europe Fundamental Forecast | 19 March 2024
What happened in the Asia session?
In line with market speculation, the Bank of Japan (BoJ) became the world’s last central bank to exit its negative-rate regime by raising its key policy rate by 10 basis points (bps) from -0.1% to bring it up to neutral. Despite finally raising rates, USD/JPY surged from 149.20 to as high as 150.40 by the end of the Asia session. All eyes will now be on BoJ Governor Kazuo Ueda’s upcoming press conference today.
Meanwhile, the Reserve Bank of Australia (RBA) kept its cash rate on hold at 4.35% but dropped its tightening bias by making no reference to the possibility of further rate hikes. This change in messaging caused the Aussie to plummet from 0.6550 to as low as 0.6520 and strong bearish momentum could drive it below the 0.6500-threshold.
What does it mean for the Europe & US sessions?
The ZEW Economic Sentiment has increased quite steadily since November 2023 with February’s reading of 25 points marking the highest level in a year. The estimate of 25.4 for the month of March points to another month of increase albeit at a slower rate – the Euro could see some lift should the ZEW index print higher than the forecast.
Inflation in Canada has eased quite significantly over the past ten months edging closer to the target of 2% for both the headline and core readings. Should inflationary pressures continue to dissipate further, the Loonie could run into headwinds and potentially provide a boost for USD/CAD.
The Dollar Index (DXY)
Key news events today
Building Permits (12:30 pm GMT)
What can we expect from DXY today?
Building permits – a sign of strength for US residential construction – have remained steady throughout 2023 despite higher mortgage rates. Permits have averaged around 1.45M over this period while February’s estimate points to a gain of 1.5M permits. Should the result surprise market expectations and come in stronger than anticipated, it could potentially function as another bullish catalyst for the dollar.
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
Building Permits (12:30 pm GMT)
What can we expect from Gold today?
Building permits – a sign of strength for US residential construction – have remained steady throughout 2023 despite higher mortgage rates. Permits have averaged around 1.45M over this period while February’s estimate points to a gain of 1.5M permits. Should the result surprise market expectations and come in stronger than anticipated, it could potentially function as another bullish catalyst for the dollar and push gold prices lower.
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?
As widely expected, the Reserve Bank of Australia (RBA) kept its cash rate on hold at 4.35% but dropped its tightening bias by making no reference to the possibility of further rate hikes. This change in messaging caused the Aussie to plummet from 0.6550 to as low as 0.6520 and strong bearish momentum could drive it below the 0.6500-threshold.
Central Bank Notes:
- The RBA kept the cash rate target unchanged at 4.35%, marking the seventh pause out of the last eight board meetings.
- The headline monthly CPI indicator was steady at 3.4% over the year to January, with momentum easing over recent months, driven by moderating goods inflation. Services inflation remains elevated, and is moderating at a more gradual pace.
- The central forecasts are for inflation to return to the target range of 2–3% in 2025, and to the midpoint in 2026.
- While recent data indicate that inflation is easing, it remains high. The Board expects that it will be some time yet before inflation is sustainably in the target range.
- 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 7 May 2024.
Next 24 Hours Bias
Strong Bearish
The Kiwi Dollar (NZD)
Key news events today
No major news events.
What can we expect from NZD today?
Overhead pressures remain for the Kiwi as it hit a low of 0.6065 as Asian markets came online – this currency pair could retrace higher in the initial part of the day before resuming the downturn.
Central Bank Notes:
- The Monetary Policy Committee kept the OCR unchanged at 5.50% for the fifth meeting in a row.
- The Committee remains confident that the current level of the OCR is restricting demand. However, a sustained decline in capacity pressures in the New Zealand economy is required to ensure that headline inflation returns to the 1 to 3% target.
- Core inflation and most measures of inflation expectations have declined, and the risks to the inflation outlook have become more balanced.
- However, headline inflation remains above the 1 to 3% target band, limiting the Committee’s ability to tolerate upside inflation surprises.
- The outlook for the China economy, New Zealand’s top trading partner, remains particularly weak relative to recent historical norms, with structural factors constraining long-term growth.
- Next meeting is on 22 May 2024.
Next 24 Hours Bias
Strong Bearish
The Japanese Yen (JPY)
Key news events today
BoJ Monetary Policy Statement (3:35 am GMT)
BoJ Press Conference (Tentative)
What can we expect from JPY today?
In line with market speculation, the Bank of Japan (BoJ) became the world’s last central bank to exit its negative-rate regime by raising its key policy rate by 10 basis points (bps) from -0.1% to bring it up to neutral. Despite finally raising rates, USD/JPY surged from 149.20 to as high as 150.40 by the end of the Asia session. All eyes will now be on BoJ Governor Kazuo Ueda’s upcoming press conference today.
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.
- Underlying CPI inflation is likely to increase gradually toward achieving the price stability target of 2%, as the output gap turns positive and as medium- to long-term inflation expectations and wage growth rise.
- 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 26 April 2024.
Next 24 Hours Bias
Strong Bullish
The Euro (EUR)
Key news events today
ZEW Economic Sentiment (10:00 am GMT)
What can we expect from EUR today?
The ZEW Economic Sentiment has increased quite steadily since November 2023 with February’s reading of 25 points marking the highest level in a year. The estimate of 25.4 for the month of March points to another month of increase albeit at a slower rate – the Euro could see some lift should the ZEW index print higher than the forecast.
Central Bank Notes:
- The ECB kept the three key interest rates unchanged for a fourth consecutive meeting, keeping the main refinancing rate on hold at 4.50%.
- Since the last Governing Council meeting in January, inflation has declined further while the latest ECB staff projections show inflation has been revised down, in particular for 2024, which mainly reflects a lower contribution from energy prices.
- The projections for inflation excluding energy and food have also been revised down and average 2.6% for 2024, 2.1% for 2025 and 2.0% for 2026. Although most measures of underlying inflation have eased further, domestic price pressures remain high, in part owing to strong growth in wages.
- Financing conditions are restrictive and the past interest rate increases continue to weigh on demand, which is helping push down inflation. Staff have revised down their growth projection for 2024 to 0.6%, with economic activity expected to remain subdued in the near term.
- The Governing Council will continue to follow a data-dependent approach to determining the appropriate level and duration of restriction. In particular, the Governing Council’s interest rate decisions will be based on its assessment of the inflation outlook in light of the incoming economic and financial data, the dynamics of underlying inflation and the strength of monetary policy transmission.
- Next meeting is on 11 April 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 return of the dollar bulls has pushed USD/CHF higher since Friday with this currency pair rising above 0.8880 overnight. Strong tailwinds continue to build for USD/CHF and it is expected to remain elevated 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
No major news events.
What can we expect from GBP today?
The Pound has taken a back seat as a resurgence of the dollar bulls have driven GBP/USD lower since the second week of March. This currency pair dipped under 1.2750 yesterday and could slide lower towards 1.2700 as the day progresses.
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 Bearish
The Canadian Dollar (CAD)
Key news events today
CPI (12:30 pm GMT)
What can we expect from CAD today?
Inflation in Canada has eased quite significantly over the past ten months edging closer to the target of 2% for both the headline and core readings. Should inflationary pressures continue to dissipate further, the Loonie could run into headwinds and potentially provide a boost for USD/CAD during the US session.
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 grew in the fourth quarter by more than expected, although the pace remained weak and below potential.
- CPI inflation eased to 2.9% in January as goods price inflation moderated further but shelter price inflation remains elevated and is the biggest contributor to inflation.
- Underlying inflationary pressures persist: year-over-year and three-month measures of core inflation are in the 3.0% to 3.5% range, and the share of CPI components growing above 3.0% declined but is still above the historical average. The Bank continues to expect inflation to remain close to 3.0% during the first half of this year before gradually easing.
- 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
Medium Bullish
Oil
Key news events today
API Crude Oil Stock (8:30 pm GMT)
What can we expect from Oil today?
The API stockpiles have indicated higher demand for crude oil in the US in recent weeks. Should markets see a larger-than-expected draw later today, it could provide another lift for prices. WTI oil briefly climbed above $83 per barrel overnight but prices dipped under this level as Asian markets came online. However, this commodity is expected to remain buoyed today.
Next 24 Hours Bias
Medium Bullish
