IC Markets Europe Fundamental Forecast | 25 January 2024
What happened in the Asia session?
The dollar index (DXY) traded within a narrow range from 103.30 to 103.40 while spot gold prices remained relatively unchanged at $2,015/oz. Crude oil prices are buoyed by this week’s larger-than-expected drawdowns in the API and EIA inventories, spurring WTI oil towards the level of $76 per barrel.
What does it mean for the Europe & US sessions?
The ECB is widely expected to keep its main refinancing rate on hold at 4.5% today – this would mark the third consecutive meeting where the central bank has paused its hiking cycle. Economic activity in the EU has been quite sluggish while inflation has eased quite significantly, allowing the ECB to take its foot off the rate-hike pedal.
President Christine Lagarde’s press conference will be closely watched as she will provide further insights into the outlook for future monetary policy action. Should she paint a neutral or dovish outlook, it is likely to function as a bearish catalyst for the Euro.
The Dollar Index (DXY)
Key news events today
GDP (1:30 pm GMT)
Unemployment Claims (1:30 pm GMT)
What can we expect from DXY today?
The advance estimate for the fourth quarter of 2023 points to the US economy growing at an annualized rate of 2.0%. Despite higher interest rates, the American economy has been chugging along quite smoothly. Meanwhile, unemployment claims have been trending lower since mid-November. Should claims once again print lower than the latest weekly estimate, it is likely to function as a bullish catalyst for the dollar – especially if GDP growth comes in stronger than anticipated.
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
GDP (1:30 pm GMT)
Unemployment Claims (1:30 pm GMT)
What can we expect from Gold today?
The advance estimate for the fourth quarter of 2023 points to the US economy growing at an annualized rate of 2.0%. Despite higher interest rates, the American economy has been chugging along quite smoothly. Meanwhile, unemployment claims have been trending lower since mid-November. Should claims once again print lower than the latest weekly estimate, it is likely to function as a bullish catalyst for the dollar and put further pressure on gold – especially if GDP growth comes in stronger than anticipated.
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?
Stronger demand for the dollar has kept the Aussie under pressure with the threshold of 0.6600 acting as a recent resistance level. This currency is likely to slide lower as the day progresses.
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 Bearish
The Kiwi Dollar (NZD)
Key news events today
No major news events.
What can we expect from NZD today?
The Kiwi has also come under heavy selling pressures in 2024 but it has found recent support around the region of 0.6070. This currency could retrace higher today before resuming the downturn.
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
Tokyo Core CPI (11:30 pm GMT)
What can we expect from JPY today?
Tokyo’s core inflation readings have trended lower over the past 12 months with December’s figure easing to 2.1% YoY. January’s estimate of 1.9% points to further moderation, allowing the Bank of Japan to maintain its ultra-dovish monetary policy stance – a move that puts pressure on the Japanese yen and keeps USD/JPY elevated.
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
Medium Bullish
The Euro (EUR)
Key news events today
ECB Monetary Policy Statement (1:15 pm GMT)
ECB Press Conference (1:45 pm GMT)
What can we expect from EUR today?
The ECB is widely expected to keep its main refinancing rate on hold at 4.5% today – this would mark the third consecutive meeting where the central bank has paused its hiking cycle. Economic activity in the EU has been quite sluggish while inflation has eased quite significantly, allowing the ECB to take its foot off the rate-hike pedal.
President Christine Lagarde’s press conference will be closely watched as she will provide further insights into the outlook for future monetary policy action. Should she paint a neutral or dovish outlook, it is likely to function as a bearish catalyst for 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
Medium Bearish
The Swiss Franc (CHF)
Key news events today
No major news events.
What can we expect from CHF today?
The Swiss franc gained significantly overnight causing USD/CHF to tumble as low as 0.8610. This currency pair rebounded off this level to rise as high as 0.8650 at the beginning of the Asis session but the downturn could resume 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?
The Pound has shown relatively strong resilience in the face of a stronger demand for the dollar. This currency has ranged approximately between 1.2600 and 1.2780 thus far in 2024 and the threshold of 1.2700 is likely to offer support today.
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?
As widely expected, the Bank of Canada (BoC) kept its overnight rate on hold at 5.00% for the fourth consecutive meeting in a row, while continuing its policy of quantitative tightening.
Although Governor Tiff Macklem’s press conference with Senior Deputy Governor Carloyn Rogers was quite hawkish as they both repeated several times that they will not cut the overnight rate soon, the Canadian dollar weakened significantly causing USD/CAD to surge from 1.3430 to a high of 1.3533 overnight.
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
Medium Bullish
Oil
Key news events today
No major news events.
What can we expect from Oil today?
EIA crude oil inventories surprised markets by experiencing a huge drawdown of 9.2M barrels of crude versus the estimate of only a 2.2M-draw. This significant decline in US inventories, which signal stronger demand, kept oil prices elevated overnight with WTI oil hitting a high of $75.75 per barrel.
Next 24 Hours Bias
Medium Bullish
