IC Markets Europe Fundamental Forecast | 7 May 2024
What happened in the Asia session?
As widely expected, the Reserve Bank of Australia (RBA) left its cash rate on hold at 4.35%. The statement noted that recent information indicates that inflation continues to moderate but is declining more slowly than expected. Higher interest rates have been working to bring aggregate demand and supply somewhat closer towards balance but the data indicates continuing excess demand in the economy.
It was a fairly balanced statement that saw the Aussie fall from 0.6626 and briefly dip under 0.6600 before Governor Michele Bullock’s press conference drove significantly lower. She noted that the cash rate currently sits at an appropriate level that is needed to bring inflation down to the RBA’s target of 2 to 3%. She also stated that the board seems confident that they will not need to hike again – these were pretty dovish remarks that triggered a strong sell-off in the Aussie. This currency pair was trading around 0.6585 following the press conference and it looks set to slide lower for the remainder of today.
What does it mean for the Europe & US sessions?
Construction activity in the UK has rebounded quite strongly in the first quarter of 2024 to return to expansion in March. Sales pipelines and new business turned around as the economic outlook improved amidst more stable financial conditions. April’s estimate of 50.4 would mark the second consecutive month of expansion, rising slightly from 50.2 in the previous month. The Pound could receive a boost should construction activity surprise to the upside.
Retail sales in the Euro Area have been poor over the last three months as consumer spending declined strongly in December and February, falling 0.6% and 0.5% respectively MoM, while coming in flat in January. On an annualized basis, sales fell 0.7% YoY as it extended the contraction to 17 months in a row. Should sales continue to disappoint in April, it could create overhead pressures for the Euro.
The Dollar Index (DXY)
Key news events today
FOMC Member Kashkari Speaks (3:30 pm GMT)
What can we expect from DXY today?
Federal Reserve Bank of Minneapolis President Neel Kashkari will be speaking later during the US session and he could also sing a similar tune as his fellow policymakers and provide a balanced view on future monetary policy action. The DXY was trading around 105.20 as Asian markets came online and could edge higher as the day progresses.
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
Weak Bullish
Gold (XAU)
Key news events today
FOMC Member Kashkari Speaks (3:30 pm GMT)
What can we expect from Gold today?
Federal Reserve Bank of Minneapolis President Neel Kashkari will be speaking later during the US session and he could also sing a similar tune as his fellow policymakers and provide a balanced view on future monetary policy action. Prices for spot gold remained capped under $2,330/oz overnight but were falling at the beginning of the Asia session – this precious metal could slide lower today.
Next 24 Hours Bias
Weak Bearish
The Australian Dollar (AUD)
Key news events today
RBA Monetary Policy Statement (4:30 am GMT)
RBA Press Conference (5:30 am GMT)
What can we expect from AUD today?
As widely expected, the Reserve Bank of Australia (RBA) left its cash rate on hold at 4.35%. The statement noted that recent information indicates that inflation continues to moderate but is declining more slowly than expected. Higher interest rates have been working to bring aggregate demand and supply somewhat closer towards balance but the data indicates continuing excess demand in the economy.
It was a fairly balanced statement that saw the Aussie fall from 0.6626 and briefly dip under 0.6600 before Governor Michele Bullock’s press conference drove significantly lower. She noted that the cash rate currently sits at an appropriate level that is needed to bring inflation down to the RBA’s target of 2 to 3%. She also stated that the board seems confident that they will not need to hike again – these were pretty dovish remarks that triggered a strong sell-off in the Aussie. This currency pair was trading around 0.6585 following the press conference and it looks set to slide lower for the remainder of today.
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?
The Kiwi hit an overnight high of 0.6032 before pulling back towards 0.6000. This currency pair was trading around 0.6010 as Asian markets came online and is likely to take direction from its Pacific neighbour following the release of the RBA’s monetary policy statement this morning.
Central Bank Notes:
- The Monetary Policy Committee kept the OCR unchanged at 5.50% for the sixth meeting in a row.
- The Committee remains confident that the current level of the OCR is contributing to an easing in capacity pressures to ensure inflation returns to target.
- However, current consumer price inflation remains above the Committee’s 1 to 3% target range. A restrictive monetary policy stance remains necessary to further reduce capacity pressures and inflation.
- The Committee discussed upside risks to the inflation outlook: persistent services inflation remains a risk and goods price inflation remains elevated while anticipated near-term increases to local government rates, insurance, and utility costs, could also further slow the decline in headline inflation.
- The Committee discussed downside risks to the inflation outlook: ongoing restrictive monetary policy in an environment of weak global growth could lead to a more rapid decline in inflation than expected. Business and consumer confidence remain particularly weak which could lead to more unemployment and financial stress than expected while structural challenges facing the economy in China remain a concern given its importance for the global economy and for New Zealand’s trade.
- Next meeting is on 10 July 2024.
Next 24 Hours Bias
Weak Bearish
The Japanese Yen (JPY)
Key news events today
Services PMI (00:30 am GMT)
What can we expect from JPY today?
The services sector has expanded strongly in Japan, especially in the first quarter of 2024. This sector has remained in expansion for 20 months in a row and April’s flash reading of 54.6 marked the strongest pace since May 2023. New orders – a leading indicator for future business activity – rose the most in 10 months along with overseas orders while employment also grew solidly. The final PMI print is expected to remain unchanged and could potentially strengthen the yen. USD/JPY was rising towards 154.50 at the beginning of the Asia session and should remain elevated 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.
- 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
Retail Sales (9:00 am GMT)
What can we expect from EUR today?
Retail sales in the Euro Area have been poor over the last three months as consumer spending declined strongly in December and February, falling 0.6% and 0.5% respectively MoM, while coming in flat in January. On an annualized basis, sales fell 0.7% YoY as it extended the contraction to 17 months in a row. Should sales continue to disappoint in April, it could create overhead pressures for the Euro during the European trading hours.
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
Weak Bullish
The Swiss Franc (CHF)
Key news events today
Unemployment Rate (5:45 am GMT)
What can we expect from CHF today?
The unemployment rate in Switzerland has edged higher since the fourth quarter of 2023, rising from 2% in October to 2.4% in March. Should unemployment figures increase in April, it could push the Swiss National Bank (SNB) towards a second successive rate cut at its upcoming monetary policy meeting in June. USD/CHF was trading around 0.9070 as Asian markets came online and looks set to climb higher today.
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
Construction PMI (8:30 am GMT)
What can we expect from GBP today?
Construction activity in the UK has rebounded quite strongly in the first quarter of 2024 to return to expansion in March. Sales pipelines and new business turned around as the economic outlook improved amidst more stable financial conditions. April’s estimate of 50.4 would mark the second consecutive month of expansion, rising slightly from 50.2 in the previous month. The Pound could receive a boost should construction activity surprise to the upside.
Central Bank Notes:
- The Bank of England’s Monetary Policy Committee (MPC) voted by a majority of 8-to-1 to maintain its Official Bank Rate at 5.25% for the fifth consecutive meeting.
- One member preferred to reduce the Bank Rate by 25 basis points to 5.0%.
- Twelve-month CPI inflation fell to 3.4% in February from 4.0% in January and December while Services consumer price inflation has declined but remains elevated, at 6.1% in February.
- CPI inflation is projected to fall to slightly below the 2% target in 2024 Q2, marginally weaker than previously expected owing to the freeze in fuel duty announced in the Budget.
- In the February Report projection, CPI inflation had been expected to fall temporarily to the 2% target in 2024 Q2 before increasing again in Q3 and Q4, to around 2.75%.
- Having declined through the second half of last year, UK GDP and market sector output are expected to start growing again during the first half of this year while the fiscal measures in Spring Budget 2024 are likely to increase the level of GDP by around 0.25% over coming years.
- Next meeting is on 9 May 2024.
Next 24 Hours Bias
Weak Bullish
The Canadian Dollar (CAD)
Key news events today
Ivey PMI (2:00 pm GMT)
What can we expect from CAD today?
The Ivey PMI has expanded strongly in Canada since August of last year. The reading for the month of March came in at 57.5 – not only did this figure mark the eight consecutive month of increase, but it was also the highest print in a year. April’s estimate of 58.1 points to another strong month of expansion which could boost the Loonie and potentially apply downward pressure on 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
API Crude Oil Stock (8:30 pm GMT)
What can we expect from Oil today?
Prices for crude oil edged higher overnight as Israel struck the city of Rafah in Gaza despite ongoing negotiations for a ceasefire. There appears to be no resolution in sight for now and further attacks could keep prices supported, WTI oil rebounded from $78.30 to rise above $79 per barrel.
Moving over to inventories, the API stockpiles have increased strongly in three out of the last four weeks to signal weaker demand for crude oil in the US. Should stockpiles experience another round of stronger-than-anticipated inventory build, it could increase the overhead pressures for this commodity later today.
Next 24 Hours Bias
Weak Bearish
