IC Markets Europe Fundamental Forecast | 20 December 2023
What happened in the Asia session?
The DXY edged higher while spot gold prices failed to break above the $2,050/oz and were drifting lower as Asian markets came online. Meanwhile, crude oil prices remain buoyed by the recent drone attacks on tankers and container ships in the Red Sea.
What does it mean for the Europe & US sessions?
Inflation in the UK dropped sharply in October as CPI fell from 6.7% YoY to 4.6% YoY, led mostly by a recent reduction in energy prices. November’s estimate of 4.3% YoY points to further easing of inflation and a softer-than-expected reading is likely to add downward pressure on the Pound.
The Dollar Index (DXY)
Key news events today
CB Consumer Confidence (3:00 pm GMT)
What can we expect from DXY today?
After three consecutive months of decline, the Conference Board Consumer Confidence Index increased in November as consumer expectations turned less gloomy. December’s estimate of 104.6 points to further improvement in confidence levels of the American consumer, especially after the Federal Reserve’s dovish FOMC meeting last week. With the dollar and Treasury yields tumbling hard following this meeting, consumer confidence is likely to receive another boost. Overhead pressures remain for the DXY but relief rallies should not be ruled out.
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 Bullish
Gold (XAU)
Key news events today
CB Consumer Confidence (3:00 pm GMT)
What can we expect from Gold today?
After three consecutive months of decline, the Conference Board Consumer Confidence Index increased in November as consumer expectations turned less gloomy. December’s estimate of 104.6 points to further improvement in confidence levels of the American consumer, especially after the Federal Reserve’s dovish FOMC meeting last week. With the dollar and Treasury yields tumbling hard following this meeting, consumer confidence is likely to receive another boost. Overhead pressures remain for the DXY which could lift gold prices but further pullbacks should be expected along the way.
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?
The Aussie was one of the strongest performing currencies this morning as Asian markets came online. This currency climbed above 0.6770 overnight and is expected to remain elevated today.
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
No major news events.
What can we expect from NZD today?
Along with its Pacific neighbour, the Kiwi was another strong performing currency as it rose above 0.6270 overnight and is likely to remain elevated 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?
Following the Bank of Japan’s (BoJ) final monetary policy meeting of 2023, the Japanese yen tumbled hard as USD/JPY surged strongly but could not break above the 145.00-threshold on Tuesday. This currency pair pulled back under 144.00 overnight but the upturn could continue once more today.
Central Bank Notes:
- The Bank will continue with QQE with Yield Curve Control, aiming to achieve the price stability target of 2.0%, as long as it is necessary for maintaining that target in a stable manner.
- The Bank of Japan decided on the following measures:
- Yield curve control: 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 have risen moderately with underlying CPI inflation likely to increase gradually towards achieving the price stability target, 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 23 January 2024.
Next 24 Hours Bias
Medium Bullish
The Euro (EUR)
Key news events today
Germany PPI (7:00 am GMT)
What can we expect from EUR today?
The Producer Price Index (PPI) – which measures wholesale inflation – has decelerated sharply in Germany with the annualized reading falling to -11.0% YoY in October. November’s estimate points to further deceleration and a softer than expected reading could dampen the Euro.
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 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 significantly versus the dollar in recent months as USD/CHF fell under the key threshold of 0.8600 for the first time since July. This currency pair climbed above this threshold as Asian markets came online but overhead pressures remain.
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
CPI (7:00 am GMT)
What can we expect from GBP today?
Inflation in the UK dropped sharply in October as CPI fell from 6.7% YoY to 4.6% YoY, led mostly by a recent reduction in energy prices. November’s estimate of 4.3% YoY points to further easing of inflation and a softer-than-expected reading is likely to add downward pressure on 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%.
- 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 Bearish
The Canadian Dollar (CAD)
Key news events today
BoC Summary of Deliberations (6:30 pm GMT)
What can we expect from CAD today?
The Bank of Canada (BoC) will release its detailed record of the Governing Council’s most recent meeting, providing in-depth insights into the economic conditions that influenced their decision on where they set the overnight rate. If these deliberations were to communicate a hawkish tone, it could potentially function as a bearish catalyst for USD/CAD.
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 Bullish
Oil
Key news events today
EIA Crude Oil Inventories (3:30 pm GMT)
What can we expect from Oil today?
The API stockpile posted an unexpected build of nearly a million barrels versus the estimate of a 2.2M drawdown overnight. However, this surprise build could not cap crude oil prices as the recent drone attacks on tankers and container ships in the Red Sea continue to provide a lift for this commodity.
EIA crude oil inventories are up on the calendar later today and should this inventory post a third consecutive week of decline, it could function as another tailwind for prices. WTI oil climbed above $74.00 per barrel overnight for the second time this week and a move higher can not be ruled out, especially if the situation in the Red Sea escalates.
Next 24 Hours Bias
Medium Bullish
