IC Markets Asia Fundamental Forecast | 31 July 2023
What happened in the US session?
The PCE Price Index, which is the Fed’s preferred measure of inflation, was released on Friday, 28th July. The headline reading dropped to 3.0% YoY in June, down from 3.8% in May, while the core reading finally edged lower to 4.1% YoY after remaining stubbornly sticky at 4.6% for the past 3 months. This first meaningful drop in the core reading highlights the strong disinflationary trend in the US. Further declines in the coming months could very well signal the return of inflation to its 2% target by 2024. Falling inflation will create weakness in the US dollar but robust economic growth is likely to pull it up, potentially causing see-saw price action in the coming months.
Meanwhile, the final results from the University of Michigan’s Consumer Sentiment survey showed an overall improvement in consumer confidence levels with July’s reading coming in at 71.6. Consumer sentiment rose for the second consecutive month, reaching its most favourable reading since October 2021. In addition, it was an 11% increase over June’s figure.
The dollar index (DXY) closed in the green for the second week in a row as it bounced strongly off 99.60 in mid-July. However, the 102-level could act as a key overhead resistance in the near-term and we could see the DXY retreat from this level today.
What does it mean for the Asia Session?
Focus will now shift onto the latest PMI readings from China where the services sector is likely to be pulling up overall growth once more. Manufacturing activity has been contracting for the past three months and has weighed on crude oil prices for most parts of 2023. However, the prospect of stimulus measures by the Chinese government has lifted crude prices over the last two weeks and stronger-than-expected PMI figures could propel WTI oil above $80 per barrel.
The Dollar Index (DXY)
Key news events today
Chicago PMI (1:45 pm GMT)
What can we expect from DXY today?
The Chicago PMI has been contracting for the past ten months and June’s reading will be no different as business conditions from the Chigaco survey are not expected to show any significant improvement. The DXY could run into serious resistance close to the 102-mark and potentially retreat from the level.
Central Bank Notes:
- The federal funds rate target range will be 5.25% to 5.50%.
- The Committee is strongly committed to returning inflation to its 2% target.
- The Committee will adjust monetary policy if risks emerge that could hinder achieving its goals.
- Various factors will be considered, including labour market conditions, inflation pressures, inflation expectations, and international and financial developments.
- Next meeting runs from 19 to 20 September 2023.
Next 24 Hours Bias
Weak Bearish
Gold (XAU)
Key news events today
No major news events.
What can we expect from Gold today?
After hitting a high of $1,980/oz last week, gold prices came under heavy selling pressures as a much stronger than expected GDP reading and a weak unemployment claims figure provided a strong catalyst for the dollar bulls. Should the DXY remain under 102, spot prices could find support around the $1,950-region before climbing higher.
Next 24 Hours Bias
Weak Bullish
The Australian Dollar (AUD)
Key news events today
No major news events.
What can we expect from AUD today?
After falling for most parts of last week, the Aussie dollar found support around 0.6650 last Friday to open strongly this morning. With the DXY potentially looking weak this morning, this currency pair could continue to rise.
Central Bank Notes:
- The RBA did not raise the cash rate and kept the target at 4.10%.
- Inflation in Australia has passed its peak but remains high at 7% and needs to return to the target range.
- Further tightening of monetary policy may be necessary.
- Next meeting on 1 August 2023.
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?
Similarly to its neighbour, the Kiwi kicked off the first trading day of the week on a strong foot as it found support around the 0.6150-region last Friday and is expected to climb higher as the day progresses.
Central Bank Notes:
- The Monetary Policy Committee has raised the OCR from 5.25% to 5.50%.
- The Committee believes that interest rates at a restrictive level for some time will bring inflation back within the target range while supporting maximum sustainable employment.
- The Committee voted by a majority of five to two to increase the OCR by 25 basis points to 5.50%.
- Interest rates must remain restrictive to ensure inflation returns to the target range while supporting maximum sustainable employment.
- Next meeting is on 16 August 2023.
Next 24 Hours Bias
Medium Bullish
The Japanese Yen (JPY)
Key news events today
Retail Sales (11:50 pm GMT 30th July)
What can we expect from JPY today?
Retail sales in Japan grew 5.9% YoY, much stronger than the estimate of 5.4%. Despite Governor Kazuo Ueda surprising markets by tweaking the yield curve control (YCC) to allow the 10-yearJGB yields to rise as high as+0.5% during Friday’s monetary policy meeting, demand for the Japanese yen was short-lived as the USDJPY rebounded strongly after a hitting a low of 138.10. This currency pair is likely to test 142 today.
Central Bank Notes:
- The bank will continue with QQE with Yield Curve Control to achieve the price stability target of 2%.
- 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 around +0.5%.
- Inflation is expected to decelerate temporarily but is projected to accelerate moderately later, supported by improvements in the output gap and inflation expectations.
- Japan’s economy is expected to recover gradually.
- Next meeting is on 22 September 2023.
Next 24 Hours Bias
Medium Bullish
The Euro (EUR)
Key news events today
CPI (9:00 am GMT)
What can we expect from EUR today?
Flash CPI for the Eurozone will be released today which is likely to show the headline CPI decelerating while the core reading remains stubbornly sticky. Should overall inflation come in stronger than expected, the Euro could see some gains in the latter part of the day.
Central Bank Notes:
- The ECB raised the three key interest rates by 25 basis points.
- Economic growth projections have been slightly lowered.
- The Governing Council will ensure interest rates are sufficiently restrictive to achieve the inflation target and keep them at those levels as long as needed.
- Rate decisions will be data-dependent, considering inflation outlook, economic data, underlying inflation dynamics, and monetary policy transmission strength.
- Next meeting on 14 September 2023.
Next 24 Hours Bias
Weak Bullish
The Swiss Franc (CHF)
Key news events today
Retail Sales (6:30 am GMT)
What can we expect from CHF today?
Swiss retail sales have been contracting on an annualised basis since the end of 2022 and the latest reading for the month of June is likely to decline once more. With demand for the US dollar remaining strong, USDCHF is pushing higher towards 0.8750
- SNB has tightened its monetary policy further, raising the SNB policy rate by 0.25 percentage points to 1.75%.
- The new forecast predicts average annual inflation at 2.2% for 2023 and 2024 and 2.1% for 2025. Without the rate increase, the estimates would be even higher.
- SNB predicts modest growth for the rest of the year due to subdued foreign demand, loss of purchasing power from inflation, and stricter financial conditions. The GDP is projected to grow around 1% this year.
- Next meeting on 21 September 2023.
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 British pound fell under 1.2800 last week as strong US economic data drove demand for the greenback. The pound has since rebounded strongly to 1.2850 but could pull back first before climbing higher.
Central Bank Notes:
- The Bank of England’s Monetary Policy Committee (MPC) voted to increase the Bank Rate by 0.5 percentage points to 5%.
- Two members preferred to maintain the Bank Rate at 4.5%.
- CPI inflation is expected to fall significantly due to developments in energy prices.
- The updated projections show that CPI inflation is expected to decline slightly above 1% at the two and three-year horizons, below the 2% target.
- Next meeting on 3 August 2023.
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?
With the DXY making strong gains over the last two weeks, USDCAD is attempting to break above 1.3250 this morning and could remain elevated for the first half of the day.
Central Bank Notes:
- The Bank of Canada increased its target for the overnight rate to 4.75%.
- Canada’s economy was more substantial than expected in the first quarter of 2023, with GDP growth of 3.1%.
- The Bank expects CPI inflation to ease to around 3% in the summer, but concerns have increased about inflation staying above the 2% target.
- Next meeting on 6 September 2023.
Next 24 Hours Bias
Medium Bullish
Oil
Key news events today
China Composite PMI (1:30 am GMT)
What can we expect from Oil today?
China will release its Composite PMI findings today where the services sector is likely to be pulling up overall growth once more. Manufacturing activity has been contracting for the past three months and has weighed on crude oil prices for most parts of 2023. However, the prospect of stimulus measures by the Chinese government has lifted crude prices over the last two weeks and stronger-than-expected PMI figures could propel WTI oil above $80 per barrel.
Next 24 Hours Bias
Medium Bullish
