IC Markets Asia Fundamental Forecast | 14 December 2023
What happened in the US session?
As widely expected, the Federal Reserve kept its Fed Funds rate unchanged at 5.25% to 5.50% at the last FOMC meeting of 2023 to mark a third consecutive pause. The statement stated that the committee “will assess the extent of any additional policy firming” while the dot-plot points to three deeper-than-expected rate cuts amounting to a total of 75 basis points in 2024.
The press conference also indicated a dovish outlook with Chairman Jerome Powell stating that policymakers are “very focused now on not making the mistake of keeping policy restrictive for too long as inflation falls”.
In all, this was the most dovish FOMC statement and press conference till date which supports the market view that the Fed is done raising rates and the peak has been reached. Combined with further easing of PPI – which measures wholesale inflation – both the US dollar and Treasury bond yields plunged in the aftermath of yesterday’s meeting with the dollar index (DXY) nose diving to as low as 102.80, losing 100 pips in the process.
What does it mean for the Asia Session?
As Asian markets digest the dovish statement and press conference of the final FOMC meeting of 2023, the DXY remains under pressure but it could retrace higher as some short-covering could take place in the initial part of the day before the downturn resumes.
The Dollar Index (DXY)
Key news events today
Retail Sales (1:30 pm GMT)
Unemployment Claims (1:30 pm GMT)
What can we expect from DXY today?
Despite the official holiday shopping period kicking off with Black Friday sales at the end of last month, November’s estimate of -0.1% points to another month of decline for US retail sales. A weaker-than-expected sales figure could add further downward pressure on the DXY later today.
Meanwhile, unemployment claims have edged higher over the past two weeks and another print that is higher than the forecast of 219k could keep this uptrend intact and potentially provide some lift for the DXY.
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
Strong Bearish
Gold (XAU)
Key news events today
Retail Sales (1:30 pm GMT)
Unemployment Claims (1:30 pm GMT)
What can we expect from Gold today?
Following the dovish FOMC statement and press conference, gold prices surged with spot prices rocketing as high as $2,040/oz overnight. As the value of the US dollar and Treasury yields both plunged, they provided the bullish catalyst for this precious metal.
Despite the official holiday shopping period kicking off with Black Friday sales at the end of last month, November’s estimate of -0.1% points to another month of decline for US retail sales. A weaker-than-expected sales figure could add further downward pressure on the DXY later today. Meanwhile, unemployment claims have edged higher over the past two weeks and another print that is higher than the forecast of 219k could keep this uptrend intact and potentially provide some lift for the DXY. Any fluctuation in the DXY is all but certain to impact the direction of gold during the US session.
Next 24 Hours Bias
Strong Bullish
The Australian Dollar (AUD)
Key news events today
Labour Force Report (12:30 am GMT)
What can we expect from AUD today?
Australia’s labour force report, which is the equivalent of the US NFPs, will be released this morning. Estimates point to an increase of nearly 11k jobs while the unemployment rate edges higher from 3.7% to 3.8% for the month of November. A robust report could provide additional lift for the Aussie, especially after the spike following yesterday’s dovish FOMC statement and press conference.
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
Strong Bullish
The Kiwi Dollar (NZD)
Key news events today
No major news events.
What can we expect from NZD today?
Following the dovish FOMC statement and press conference, the Kiwi surged to hit a high of 0.6214 gaining 90 pips in the process overnight. This currency hit 0.6224 at the start of the Asian session before pulling back towards 0.6220 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
Strong Bullish
The Japanese Yen (JPY)
Key news events today
No major news events.
What can we expect from JPY today?
Following the dovish FOMC statement and press conference, USD/JPY dived as low as 142.10 shedding 300 pips in the process overnight. Overheard pressures remain for this currency pair but it could retrace higher as some short-covering could take place in the initial part of the day before the downturn resumes.
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.
- Medium- to long-term inflation expectations have risen moderately. Even as actual inflation decelerates, inflation expectations are expected to rise moderately toward the end of the projection period, with the output gap turning positive and changes in firms’ wage- and price-setting behaviour and in labour-management wage negotiations. This will likely lead to a sustained rise in prices accompanied by wage increases.
- 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 December 2023.
Next 24 Hours Bias
Strong Bearish
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 the fourth and last major central bank that will announce its monetary policy statement this week. They are widely expected to keep their main refinancing rate on hold at 4.50%, marking a second consecutive pause. Following which, ECB President Christine Lagarde will deliver her press conference where any neutral or dovish-sounding remarks could potentially weaken the Euro.
Central Bank Notes:
- The ECB kept the three key interest rates unchanged.
- Inflation is still expected to stay too high for too long, and domestic price pressures remain strong.
- The Governing Council’s past interest rate increases continue to be transmitted forcefully into financing conditions.
- The Governing Council will continue to follow a data-dependent approach to determining the appropriate level and duration of restriction.
- Next meeting is on 14 December 2023.
Next 24 Hours Bias
Strong Bullish
The Swiss Franc (CHF)
Key news events today
SNB Monetary Policy Assessment (8:30 am GMT)
SNB Press Conference (9:00 am GMT)
What can we expect from CHF today?
Following the Federal Reserve, the Swiss National Bank (SNB) is the second major central bank with a monetary policy event this week. It is anticipated that the SNB will keep its policy rate on hold at 1.75% for the second consecutive meeting. Neutral or dovish-sounding remarks during SNB’s Chairman Thomas Jordan could weaken the Swiss franc and potentially provide some support for USD/CHF after the sharp decline overnight.
Central Bank Notes:
- The SNB unexpectedly kept the policy rate unchanged at 1.75% in September.
- Inflation forecasts remain unchanged at 2.2% for both 2023 and 2024 while it was lowered from 2.1% to 1.9% for 2025.
- 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 projection for GDP growth this year remained unchanged at 1.0%.
- Next meeting is on 14 December 2023.
Next 24 Hours Bias
Strong Bearish
The Pound (GBP)
Key news events today
Monetary Policy Summary (12:00 pm GMT)
What can we expect from GBP today?
The Bank of England (BoE) is the third major central bank set to release its monetary policy decision this week and they are widely expected to maintain the official bank rate at 5.25% – this would mark the third meeting in a row where rates have been kept on hold. Following dovish rhetoric from yesterday’s FOMC meeting, the Pound could pull back during the Europe session should the statement communicate a neutral or dovish outlook.
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, but is expected to continue to fall sharply, to 4¾% in 2023 Q4, 4½% in 2024 Q1 and 3¾% in 2024 Q2.
- This decline is expected to be accounted for by lower energy, core goods and food price inflation and, beyond January, by some fall in services inflation.
- The mean projection for CPI inflation is 2.2% and 1.9% at the two and three-year horizons respectively.
- Next meeting is on 14 December 2023.
Next 24 Hours Bias
Strong Bullish
The Canadian Dollar (CAD)
Key news events today
No major news events.
What can we expect from CAD today?
Following the outcome of yesterday’s FOMC meeting, USD/CAD plunged as low as 1.3495 shedding 90 pips in the process. With crude oil prices edging higher overnight, the Loonie is likely to strengthen and potentially cause this currency pair to drift lower today.
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
Strong Bearish
Oil
Key news events today
No major news events.
What can we expect from Oil today?
Following the larger-than-expected drawdown in API stockpiles on Tuesday, EIA crude oil inventories dropped by 4.3M barrels versus the estimate of a 1.5M draw. Larger drawdowns typically signal stronger demand for crude oil in the US and can provide a boost to oil prices.
WTI oil hit a high of $70.30 per barrel at the start of the Asia session and this commodity is likely to edge higher today, buoyed by a dovish Federal Reserve overnight.
Next 24 Hours Bias
Medium Bullish
