IC Markets Europe Fundamental Forecast | 2 August 2023
What happened in the Asia session?
Despite the downgrading of the US credit market by the ratings agency Fitch and weaker than expected job openings in the latest JOLTS report, the dollar index (DXY) bounced off its overnight lows of 101.95 to rise as high as 102.25. These two data points should have continued to add further selling pressure for the DXY but it did not materialize during the Asia session.
What does it mean for the Europe & US sessions?
With a pretty quiet European calendar, markets will be looking forward to the ADP numbers during the US session. Should the ADP NFPs print weaker than the forecast, this could accelerate the sell-off in the US dollar later today.
The Dollar Index (DXY)
Key news events today
ADP NFPs (12:15 pm GMT)
What can we expect from DXY today?
The ADP report is expected to add 191k jobs for the month of July. After June’s staggering gain of nearly 500k jobs, we can safely assume that that was a one-off reading which is likely not to be observed again for the rest of the year. Should the ADP NFPs print weaker than the forecast, this could accelerate the sell-off in the US dollar later today.
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
ADP NFPs (12:15 pm GMT)
What can we expect from Gold today?
The ‘softer’ labour market data by JOLTS and the employment component in the ISM PMI report caused gold spot prices to gap up at $1,950/oz this morning, going as high as $1,952/oz before pulling back slightly. This precious metal may close the gap first before proceeding to climb higher as the downgrade of US credit rating could fuel the sell-off in the US dollar as markets digest this information. In addition, should the ADP NFPs print weaker than the forecast, this could accelerate the sell-off in the US dollar later today and potentially lift gold.
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?
Yesterday’s hold on the cash rate by the Reserve Bank of Australia (RBA) drove the Aussie dollar as low as 0.6600 but the latest downgrade of the US credit rating offered some level of support for this currency pair in the early part of the Asia session. However, the Aussie continued to slide lower and broke below 0.6600 at midday during the Asia session.
Central Bank Notes:
- The RBA kept the cash rate target unchanged at 4.10% for the second consecutive meeting.
- Inflation in Australia has passed its peak and is trending lower but needs to return to the target range.
- Further tightening of monetary policy may be necessary.
- Next meeting on 5 September 2023.
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?
The latest labour force report in New Zealand showed the unemployment rate rising from 3.4% to 3.6% while employment figures only grew 1.0% QoQ – both highlighting the weakness in the labour market. Despite the downgrade of the US credit rating, the weaker employment figures have dominated the flows as the Kiwi tumbled as low as 0.6125 during the Asia session.
Central Bank Notes:
- The Monetary Policy Committee held the OCR steady at 5.50%.
- The Committee believes that interest rates at a restrictive level for some time will bring inflation back within the annualized target range of 1% to 3% while supporting maximum sustainable employment.
- The Committee reached consensus to leave the OCR unchanged at 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
Strong Bearish
The Japanese Yen (JPY)
Key news events today
No major news events.
What can we expect from JPY today?
After the surprise bond-buying announcement by the Bank of Japan (BoJ) yesterday, USDJPY broke through 143.00 to hit a high of 143.50 but the downgrade by Fitch Ratings on the US credit markets caused this currency pair to pull back quite sharply. It fell under 143.00 this morning and could potentially slide lower.
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
Weak Bearish
The Euro (EUR)
Key news events today
No major news events.
What can we expect from EUR today?
The unemployment rate in the Eurozone edged lower from 6.5% to 6.4% while manufacturing activity continues to contract quite deeply. However, the downgrade of the US credit rating caused the Euro break above 1.1000 overnight and it could climb higher in the latter part of the day should the ADP NFPs print ‘soft’ reading.
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
Manufacturing PMI (7:30 am GMT)
What can we expect from CHF today?
The downgrade by Fitch Ratings on the US credit market caused USDCHF to dive from a high of 0.8780 to 0.8710, shedding nearly 60 pips overnight. This pair could slide lower in the latter part of the day should the ADP NFPs print ‘soft’ reading.
Central Bank Notes:
- 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
Weak Bearish
The Pound (GBP)
Key news events today
No major news events.
What can we expect from GBP today?
Just like its European counterparts, manufacturing activity in the UK continues to contract but the downgrade by Fitch Ratings on the US credit market caused the pound to bounce strongly off its low of 1.2740 to briefly hit 1.2800 overnight. This pair could climb higher in the latter part of the day should the ADP NFPs print ‘soft’ reading.
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?
As expected, manufacturing activity in Canada contracted for the third consecutive month but the downgrade by Fitch Ratings on the US credit market caused USDCAD to drop as low as 1.3260. This pair could slide lower in the latter part of the day should the ADP NFPs print ‘soft’ reading.
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
Weak Bearish
Oil
Key news events today
EIA Crude Oil Inventories (2:30 pm GMT)
What can we expect from Oil today?
After a surprise increase in stockpiles last week, the API weekly crude oil stock fell by over 15M barrels versus the estimate of a meagre 900k drawdown. This massive drawdown surprise in inventory levels buoyed crude oil prices as WTI climbed above the $82 per barrel mark for the first time since mid-April. Combined with the weakness in the US dollar due to the downgrade by Fitch Ratings on the US credit market, crude prices are likely to remain elevated, especially if EIA inventories fall more than the forecast of 900k barrels.
Next 24 Hours Bias
Strong Bullish
