IC Markets Europe Fundamental Forecast | 1 August 2024
What happened in the Asia session?
The final manufacturing PMI result for Australia showed output deteriorating amidst a strong fall in new orders while employment experienced its sharpest decline in over four years. Although the PMI reading edged slightly higher from 47.2 in June to 47.5 in July, it marked the sixth consecutive month of contraction for this sector. This currency pair remains under pressure and was edging lower towards 0.6520 this morning.
What does it mean for the Europe & US sessions?
The Bank of England (BoE) is widely expected to cut its official bank rate by 25 basis points later today, bringing it down from 5.25% to 5.00%. Headline CPI has eased significantly with a reading of 2.0% YoY while the core reading remains persistently sticky at 3.5% YoY. Despite the core reading remaining above the BoE’s inflation target of 2.0%, the bank will likely move ahead with its first rate cut as consumer spending has deteriorated over the past 12 months while the labour market has also softened considerably.
Employment change has experienced more job losses on average while the unemployment rate rose strongly from 3.8% last December to 4.4% in May. BoE Governor Andrew Bailey’s press conference will also be a closely watched event as he could shed further light on future monetary policy action – expected the Pound to face high volatility during this period.
The Dollar Index (DXY)
Key news events today
Unemployment Claims (12:30 pm GMT)
ISM Manufacturing PMI (2:00 pm GMT)
What can we expect from DXY today?
Unemployment claims have risen and remained elevated over the last eight weeks due to a slowdown in the U.S. labour market, as evident in the recent ADP employment report. The 4-week average currently stands at 234.5K while this week’s estimate is looking at 236K claims.
Meanwhile, July’s estimate of 48.8 for the ISM Manufacturing PMI points to a fourth consecutive month of contraction for this sector. Although overall PMI activity expanded in the first half of this year, output has begun to slow in the third quarter. Should claims print to the upside while the ISM Manufacturing PMI contracts more than anticipated, the dollar will likely face strong selling pressures later today.
Central Bank Notes:
- The Federal Funds Rate target range remained unchanged at 5.25% to 5.50% for the eight 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 continue to move into better balance.
- The economic outlook is uncertain, and the Committee is attentive to the risks to both sides of its dual mandate.
- Recent indicators suggest that economic activity has continued to expand at a solid pace while job gains have moderated, and the unemployment rate has moved up but remains low.
- In considering any adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks and does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2%.
- In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook and 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.
- 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 slowed 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 17 to 18 September 2024.
Next 24 Hours Bias
Medium Bearish
Gold (XAU)
Key news events today
Unemployment Claims (12:30 pm GMT)
ISM Manufacturing PMI (2:00 pm GMT)
What can we expect from Gold today?
Unemployment claims have risen and remained elevated over the last eight weeks due to a slowdown in the U.S. labour market, as evident in the recent ADP employment report. The 4-week average currently stands at 234.5K while this week’s estimate is looking at 236K claims.
Meanwhile, July’s estimate of 48.8 for the ISM Manufacturing PMI points to a fourth consecutive month of contraction for this sector. Although overall PMI activity expanded in the first half of this year, output has begun to slow in the third quarter. Should claims print to the upside while the ISM Manufacturing PMI contracts more than anticipated, the dollar will likely face strong selling pressures – a result that could function as a strong tailwind for gold later today.
Next 24 Hours Bias
Medium Bullish
The Australian Dollar (AUD)
Key news events today
S&P Global Manufacturing PMI (11:00 pm GMT 31st July)
What can we expect from AUD today?
The final manufacturing PMI result for Australia showed output deteriorating amidst a strong fall in new orders while employment experienced its sharpest decline in over four years. Although the PMI reading edged slightly higher from 47.2 in June to 47.5 in July, it marked the sixth consecutive month of contraction for this sector. This currency pair was trading around 0.6540 as Asian markets came online – these are the support and resistance levels for today.
Support: 0.6465
Resistance: 0.6570
Central Bank Notes:
- The RBA kept the cash rate target unchanged at 4.35%, marking the ninth pause out of the last ten board meetings.
- Over the year to April, the monthly CPI indicator rose by 3.6% in headline terms, and by 4.1% excluding volatile items and holiday travel, which was similar to its pace in December 2023.
- The central forecasts published in May were for inflation to return to the target range of 2–3% in the second half of 2025 and to the midpoint in 2026 while there have been indications that momentum in economic activity is weak, including slow growth in GDP, a rise in the unemployment rate and slower-than-expected wages growth.
- Inflation is easing but has been doing so more slowly than previously expected and it remains high and the Board expects that it will be some time yet before inflation is sustainably in the target range.
- 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 6 August 2024.
Next 24 Hours Bias
Weak Bullish
The Kiwi Dollar (NZD)
Key news events today
No major news events.
What can we expect from NZD today?
Following the dovish statements by Federal Reserve Charmain Jerome Powell during the FOMC press conference, demand for the dollar tanked which caused the Kiwi to spike overnight. This currency pair surged past the threshold of 0.5900 and continued rising towards 0.5960 at the beginning of the Asia session – these are the support and resistance levels for today.
Support: 0.5920
Resistance: 0.5980
Central Bank Notes:
- The Monetary Policy Committee kept the OCR unchanged at 5.50% for the eighth meeting in a row and agreed that restrictive monetary policy is reducing domestic demand and consumer price inflation.
- The Committee is confident that inflation will return to within its 1-3% target range over the second half of 2024.
- The decline in inflation reflects receding domestic pricing pressures, as well as lower inflation for goods and services imported into New Zealand while recent monthly Selected Price Indexes suggest weakening in some of the more volatile inflation components, while survey measures of cost pressures and pricing intentions have continued to decline.
- Non-performing bank loans and corporate insolvencies have increased from low levels in line with declining economic activity while bank credit growth also remains very subdued, in line with weakness in the domestic economy and low business and consumer confidence.
- Next meeting is on 14 August 2024.
Next 24 Hours Bias
Medium Bullish
The Japanese Yen (JPY)
Key news events today
S&P Global Manufacturing PMI (12:30 am GMT)
What can we expect from JPY today?
The final manufacturing PMI result for Japan signals a marginal deterioration for the first time in three months as output and new orders fell based on the preliminary data. Following yesterday’s BoJ’s rate hike, the yen strengthened significantly as USD/JPY reversed sharply from 153.90 to dive under 150 by the end of the U.S. session. Demand for the yen remains elevated and further downside action for this currency pair can be expected as the day progresses.
Central Bank Notes:
- The Policy Board of the Bank of Japan decided, by a 7-2 majority vote, to set the following guideline for money market operations for the intermeeting period and decided on the following measures:
- The Bank will encourage the uncollateralized overnight call rate to remain at around 0.25% while reducing its purchase amount of Japanese government bonds (JGB) by a unanimous vote.
- The Bank decided, by a unanimous vote, on a plan to reduce the amount of its monthly outright purchases of JGBs so that it will be about 3 trillion yen in January-March 2026; the amount will be cut down by about 400 billion yen each calendar quarter in principle.
- The year-on-year rate of increase in the CPI (all items less fresh food) is likely to be at around 2.5% for fiscal 2024 and then be at around 2% for fiscal 2025 and 2026.
- Meanwhile, underlying CPI inflation is expected to increase gradually, since it is projected that the output gap will improve and that medium- to long-term inflation expectations will rise with a virtuous cycle between wages and prices continuing to intensify.
- In the second half of the projection period, it is likely to be at a level that is generally consistent with the price stability target of 2%.
- Japan’s economy is likely to keep growing at a pace above its potential growth rate, with overseas economies continuing to grow moderately and as a virtuous cycle from income to spending gradually intensifies against the background of factors such as accommodative financial conditions.
- Next meeting is on 20 September 2024.
Next 24 Hours Bias
Medium Bearish
The Euro (EUR)
Key news events today
S&P Global Manufacturing PMI (8:00 am GMT)
What can we expect from EUR today?
The final manufacturing PMI result for the Euro Area is expected to show activity in this sector contract for the 16th consecutive month as production and new orders declined at a sharper rate based on the preliminary data. Should July’s PMI activity come in worse than the flash reading, the Euro could come under pressure before the start of the European trading hours.
Central Bank Notes:
- The Governing Council today decided to keep the three key ECB interest rates unchanged in July, following a 25 basis points cut in June.
- Accordingly, the interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will remain unchanged at 4.25%, 4.50% and 3.75% respectively.
- Monetary policy is keeping financing conditions restrictive but at the same time, domestic price pressures are still high, services inflation is elevated and headline inflation is likely to remain above the target well into next year.
- While some measures of underlying inflation ticked up in May owing to one-off factors, most measures were either stable or edged down in June.
- The incoming information indicates that the euro area economy grew in the second quarter, but likely at a slower pace than in the first quarter.
- Services continue to lead the recovery, while industrial production and goods exports have been weak – investment indicators point to muted growth in 2024, amid heightened uncertainty.
- The Eurosystem no longer reinvests all of the principal payments from maturing securities purchased under the pandemic emergency purchase programme (PEPP), reducing the PEPP portfolio by €7.5 billion per month on average and the Governing Council intends to discontinue reinvestments under the PEPP at the end of 2024.
- The Council is determined to ensure that inflation returns to its 2% medium-term target in a timely manner and will keep policy rates sufficiently restrictive for as long as necessary to achieve this aim and is not pre-committing to a particular rate path.
- Next meeting is on 12 September 2024.
Next 24 Hours Bias
Weak Bullish
The Swiss Franc (CHF)
Key news events today
Swiss National Day (Bank Holiday)
What can we expect from CHF today?
Following the dovish statements by Federal Reserve Charmain Jerome Powell during the FOMC press conference, demand for the dollar tanked pulling down USD/CHF with it. This currency pair initially climbed as high as 0.8818 before swiftly reversing to fall under 0.8780 and was sliding lower towards 0.8750 at the beginning of the Asia session – these are the support and resistance levels for today.
Support: 0.8770
Resistance: 0.8810
Central Bank Notes:
- The SNB eased monetary policy by lowering its key policy rate by 25 basis points for the second consecutive meeting, going from 1.50% to 1.25% in June.
- The underlying inflationary pressure has decreased again compared to the previous quarter but inflation had risen slightly since the last monetary policy assessment, and stood at 1.4% in May.
- The inflation forecast puts average annual inflation at 1.3% for 2024, 1.1% for 2025 and 1.0% for 2026, based on the assumption that the SNB policy rate is 1.25% over the entire forecast horizon.
- Swiss GDP growth was moderate in the first quarter of 2024 with the services sector continuing to expand, while manufacturing stagnated.
- Growth is likely to remain moderate in Switzerland in the coming quarters as the SNB anticipates GDP growth of around 1% this year while currently expecting growth of around 1.5% for 2025.
- Next meeting is on 26 September 2024.
Next 24 Hours Bias
Weak Bearish
The Pound (GBP)
Key news events today
BoE Monetary Policy Report (11:00 am GMT)
BoE Press Conference (11:30 am GMT)
What can we expect from GBP today?
The Bank of England (BoE) is widely expected to cut its official bank rate by 25 basis points later today, bringing it down from 5.25% to 5.00%. Headline CPI has eased significantly with a reading of 2.0% YoY while the core reading remains persistently sticky at 3.5% YoY. Despite the core reading remaining above the BoE’s inflation target of 2.0%, the bank will likely move ahead with its first rate cut as consumer spending has deteriorated over the past 12 months while the labour market has also softened considerably.
Employment change has experienced more job losses on average while the unemployment rate rose strongly from 3.8% last December to 4.4% in May. BoE Governor Andrew Bailey’s press conference will also be a closely watched event as he could shed further light on future monetary policy action – expected the Pound to face high volatility during this period.
Central Bank Notes:
- The Bank of England’s Monetary Policy Committee (MPC) voted by a majority of 7-to-2 to maintain its Official Bank Rate at 5.25% for the seventh consecutive meeting.
- Two members preferred to reduce the Bank Rate by 25 basis points to 5%, an increase of one from the previous meeting.
- Twelve-month CPI inflation fell to 2.0% in May from 3.2% in March, close to the May Monetary Policy Report projection. CPI inflation is expected to rise slightly in the second half of this year, as declines in energy prices last year fall out of the annual comparison.
- Reflecting a margin of slack in the economy, CPI inflation had been projected to be 1.9% in two years’ time and 1.6% in three years.
- UK GDP appears to have grown more strongly than expected during the first half of this year. Business surveys, however, remain consistent with a slower pace of underlying growth, of around 0.25% per quarter.
- UK real GDP had increased by 0.6% in 2024 Q1, 0.2% stronger than had been expected in the May Monetary Policy Report and Bank staff now expect GDP growth of 0.5% in 2024 Q2 as a whole, stronger than the 0.2% rate that had been incorporated in the May Report.
- The MPC remains prepared to adjust monetary policy as warranted by economic data to return inflation to the 2% target sustainably. It will therefore continue to monitor closely indications of persistent inflationary pressures and resilience in the economy as a whole, including a range of measures of the underlying tightness of labour market conditions, wage growth and services price inflation.
- Next meeting is on 1 August 2024.
Next 24 Hours Bias
Weak Bullish
The Canadian Dollar (CAD)
Key news events today
S&P Global Manufacturing PMI (1:30 pm GMT)
What can we expect from CAD today?
After yesterday’s GDP result which showed the Canadian economy growing for the fourth time in five months as it increased 0.2% MoM in May, following a gain of 0.4% in April. However, manufacturing activity has contracted over the last 14 months as output and new orders continued to decline in June. Should July’s reading result in another month of contraction, the Loonie could come under pressure to potentially function as a tailwind for USD/CAD.
Central Bank Notes:
- The Bank of Canada reduced its target for the overnight rate by 25 basis points to 4.50% while continuing its policy of balance sheet normalization.
- Canada’s economic growth likely picked up to about 1.5% through the first half of this year and is forecasted to increase in the second half of 2024 and through 2025.
- Overall, the Bank forecasts GDP growth of 1.2% in 2024, 2.1% in 2025, and 2.4% in 2026, reflecting stronger exports and a recovery in household spending and business investment as borrowing costs ease.
- CPI inflation moderated to 2.7% in June after increasing in May as broad inflationary pressures eased.
- The Bank’s preferred measures of core inflation have been below 3% for several months and the breadth of price increases across components of the CPI is now near its historical norm but shelter price inflation remains high, driven by rent and mortgage interest costs, and is still the biggest contributor to total inflation.
- These preferred measures of core inflation are expected to slow to about 2.5% in the second half of 2024 and ease gradually through 2025 and CPI inflation is expected to come down below core inflation in the second half of this year, largely because of base year effects on gasoline prices.
- There are signs of slack in the labour market with the unemployment rate rising to 6.4%, as employment continues to grow more slowly than the labour force and job seekers taking longer to find work. Wage growth is showing some signs of moderation, but remains elevated.
- The Governing Council’s future monetary policy decisions will be guided by incoming information and assessment of their implications for the inflation outlook.
- Recent data has increased the council’s confidence that inflation will continue to move towards the 2% target. Nonetheless, risks to the inflation outlook remain.
- Next meeting is on 4 September 2024.
Next 24 Hours Bias
Weak Bearish
Oil
Key news events today
No major news events.
What can we expect from Oil today?
The combination of a potential geo-political escalation in the Middle East along with higher-than-anticipated drawdowns in U.S. inventories – both the API and EIA stockpiles declined for the fifth consecutive week – functioned as a major tailwind for crude oil yesterday. WTI oil jumped 5.1% as this benchmark surged past the $79-mark overnight and continued its upward ascend towards $79.50 per barrel as Asian markets came online.
Next 24 Hours Bias
Medium Bullish
