IC Markets Europe Fundamental Forecast | 23 September 2024
What happened in the Asia session?
After expanding in August, Australia’s Composite PMI contracted for the second time in three months with a flash reading of 49.8 in September. As expected, business activity contraction was led by the manufacturing sector as it marked the eighth consecutive month of contraction with a flash reading of 46.7 – the lowest reading since May 2020. Services activity continued to expand for the eighth month in a row but it registered the slowest pace of expansion this year. Despite the overall slowdown in PMI activity, the Aussie remained supported as it rose strongly towards 0.6850 by midday Asia.
What does it mean for the Europe & US sessions?
Manufacturing activity in the Euro Area has remained in contraction for more than two years, highlighting the severe challenges faced by this sector. Meanwhile, services activity rebounded strongly in March and output has been solid over the past five months. The flash estimate of 50.6 for the month of September points to another seventh consecutive month of expansion for overall activity but at a slower pace. Once again, the services sector is expected to lead overall output but a softer PMI reading is likely to weigh on the Euro during the European trading hours.
Manufacturing activity in the U.K. returned to expansion in May to signal a well-balanced economy and boosting overall PMI output over the last few months. The flash estimates for September point to another robust month of robust PMI activity and a stronger-than-anticipated PMI reading will likely boost the Cable during the European trading hours.
The Dollar Index (DXY)
Key news events today
Composite PMI (1:45 pm GMT)
What can we expect from DXY today?
Composite PMI activity in the U.S. has been robust over the past four months with the services sector doing all the heavy lifting while manufacturing output contracted in July and August. The flash estimates of September point to another month of contraction for manufacturing while services activity is expected to remain strong – a stronger PMI reading is likely to function as a near-term bullish catalyst for the dollar.
Central Bank Notes:
- The Federal Funds Rate target range was reduced by 50 basis points to 4.75% to 5.00% on 18th September in an 11 to 1 vote with Governor Michelle Bowman dissenting, preferring to cut rates by a smaller amount.
- The Committee seeks to achieve maximum employment and inflation at the rate of 2% over the longer run and has gained greater confidence that inflation is moving sustainably toward 2%, and judges that the risks to achieving its employment and inflation goals are roughly in 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 slowed, and the unemployment rate has moved up but remains low.
- Inflation has made further progress toward the Committee’s 2% objective but remains somewhat elevated.
- 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 6 to 7 November 2024.
Next 24 Hours Bias
Weak Bullish
Gold (XAU)
Key news events today
Composite PMI (1:45 pm GMT)
What can we expect from Gold today?
Composite PMI activity in the U.S. has been robust over the past four months with the services sector doing all the heavy lifting while manufacturing output contracted in July and August. The flash estimates of September points to another month of contraction for manufacturing while services activity is expected to remain strong – a stronger PMI reading is likely to function as a near-term bullish catalyst for the dollar and would potentially weigh on gold prices.
Next 24 Hours Bias
Weak Bearish
The Australian Dollar (AUD)
Key news events today
Composite PMI (11:00 pm GMT 22nd September)
What can we expect from AUD today?
After expanding in August, Australia’s Composite PMI contracted for the second time in three months with a flash reading of 49.8 in September. As expected, business activity contraction was led by the manufacturing sector as it marked the eighth consecutive month of contraction with a flash reading of 46.7 – the lowest reading since May 2020. Services activity continued to expand for the eighth month in a row but it registered the slowest pace of expansion this year. Despite the overall slowdown in PMI activity, the Aussie remained supported as it hovered above 0.6815 this morning.
Central Bank Notes:
- The RBA kept the cash rate target unchanged at 4.35% on 6th August, marking the sixth consecutive pause.
- Inflation has fallen substantially since its peak in 2022, as higher interest rates have been working to bring aggregate demand and supply closer towards balance but it still remains above the midpoint of the 2 to 3% target range.
- The CPI rose by 3.9% over the year to the June quarter, demonstrating that inflation is proving persistent. In year-ended terms, underlying inflation has now been above the midpoint of the target for 11 consecutive quarters while quarterly underlying CPI inflation has fallen very little over the past year.
- The central forecasts set out in the latest SMP are for inflation to return to the target range of 2 to 3% in late 2025 and approach the midpoint in 2026. This represents a slightly slower return to target than forecast in May, based on estimates that the gap between aggregate demand and supply in the economy is larger than previously thought.
- Momentum in economic activity has been weak, as evidenced by slow growth in GDP, a rise in the unemployment rate and reports that many businesses are under pressure. In addition, there is a risk that household consumption picks up more slowly than expected, resulting in continued subdued output growth and a noticeable deterioration in the labour market.
- Inflation in underlying terms remains too high, and the latest projections show that it will be some time yet before inflation is sustainably in the target range while recent data have reinforced the need to remain vigilant to upside risks to inflation and the Board is not ruling anything in or out.
- Policy will need to be sufficiently restrictive until the Board is confident that inflation is moving sustainably towards the target range and will rely upon the incoming data and the evolving assessment of risks to guide its decisions.
- Next meeting is on 24 September 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?
With the U.S. dollar bears taking the driving seat once more, the Kiwi jumped 1.3% last week, gaining almost 70 pips in the process. This currency pair was trading around 0.6235 at the beginning of the Asia session – these are the support and resistance levels for today.
Support: 0.6120
Resistance: 0.6300
Central Bank Notes:
- The Monetary Policy Committee agreed to reduce the OCR by 25 basis points, bringing it down to 5.25% in August as inflation converges on target.
- The Committee is confident that inflation is returning to within its 1-3% target band as surveyed inflation expectations, firms’ pricing behaviour, headline inflation, and a variety of core inflation measures are moving consistent with low and stable inflation.
- Economic growth remains below trend and inflation is declining across advanced economies – imported inflation into New Zealand has declined to be more consistent with pre-pandemic levels.
- Services inflation remains elevated but is also expected to continue to decline, both at home and abroad, in line with increased spare economic capacity.
- Consumer price inflation in New Zealand is expected to remain near the target mid-point over the foreseeable future.
- A broad range of high-frequency indicators point to a material weakening in domestic economic activity in recent months – these include various survey measures of business activity, electronic card transactions, vehicle traffic, house sales, filled jobs, and job vacancies; these indicators collectively provide a consistent signal that the economy contracted in recent months.
- The pace of further easing will depend on the Committee’s confidence that pricing behaviour remains consistent with a low inflation environment, and that inflation expectations are anchored around the 2% target.
- Next meeting is on 9 October 2024.
Next 24 Hours Bias
Weak Bullish
The Japanese Yen (JPY)
Key news events today
Autumn Equinox Bank Holiday (All Day)
What can we expect from JPY today?
Japan’s financial markets will be closed today for Autumn Equinox so we can probably expect slightly lighter trading volume during the Asian hours. Following last week’s monetary policy announcement by the Bank of Japan (BoJ) and Governor Kazuo Ueda’s press conference, the yen weakened considerably as Governor Ueda said that “the situation remains unstable and additional rate hikes are still far off”. After declining for two weeks in a row, USD/JPY reversed course to rise nearly 2.2% last week as it gained a whopping 315 pips. This currency pair was trading around 144.35 as Asian markets came online – these are the support and resistance levels for today.
Support: 142.00
Resistance: 147.20
Central Bank Notes:
- The Policy Board of the Bank of Japan decided, by a unanimous vote, to set the following guideline for money market operations for the intermeeting period:
- The Bank will encourage the uncollateralized overnight call rate to remain at around 0.25%
- The Bank will embark 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 consumer price index (CPI, all items less fresh food) has been in the range of 2.5 to 3.0% recently, as services prices have continued to rise moderately, reflecting factors such as wage increases, although the effects of a passthrough to consumer prices of cost increases led by the past rise in import prices have waned.
- 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 of the July 2024 Outlook for Economic Activity and Prices, it is likely to be at a level that is generally consistent with the price stability target.
- Japan’s economy has recovered moderately, although some weakness has been seen in part, but it 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 31 October 2024.
Next 24 Hours Bias
Medium Bullish
The Euro (EUR)
Key news events today
Composite PMI (8:00 am GMT)
What can we expect from EUR today?
Manufacturing activity in the Euro Area has remained in contraction for more than two years, highlighting the severe challenges faced by this sector. Meanwhile, services activity rebounded strongly in March and output has been solid over the past five months. The flash estimate of 50.6 for the month of September points to another seventh consecutive month of expansion for overall activity but at a slower pace. Once again, the services sector is expected to lead overall output but a softer PMI reading is likely to weigh on the Euro during the European trading hours.
Central Bank Notes:
- The Governing Council today decided to reduce the three key ECB interest rates on 12th September, after holding rates steady in July.
- Accordingly, the interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will be decreased to 3.65%, 3.90% and 3.50% respectively.
- Recent inflation data have come in broadly as expected, and the latest ECB staff projections see headline inflation averaging 2.5% in 2024, 2.2% in 2025 and 1.9% in 2026.
- For core inflation, the projections for 2024 and 2025 have been revised up slightly, as services inflation has been higher than expected. At the same time, staff continue to expect a rapid decline in core inflation, from 2.9% this year to 2.3% in 2025 and 2.0% in 2026.
- ECB staff projections forecast that the economy will grow by 0.8% in 2024, rising to 1.3% in 2025 and 1.5% in 2026 which is a slight downward revision compared with the June projections, mainly owing to a weaker contribution from domestic demand over the next few quarters.
- 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 17 October 2024.
Next 24 Hours Bias
Weak Bearish
The Swiss Franc (CHF)
Key news events today
No major news events.
What can we expect from CHF today?
Following last week’s FOMC meeting, the franc registered marginal losses versus the dollar nudging USD/CHF higher as it shed almost 0.14% last week. This currency pair was trading around 0.8510 as Asian markets came online – these are the support and resistance levels for today.
Support: 0.8430
Resistance: 0.8560
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 Bullish
The Pound (GBP)
Key news events today
Composite PMI (8:30 am GMT)
What can we expect from GBP today?
Manufacturing activity in the U.K. returned to expansion in May to signal a well-balanced economy and boosting overall PMI output over the last few months. The flash estimates for September point to another robust month of robust PMI activity and a stronger-than-anticipated PMI reading will likely boost the Cable during the European trading hours.
Central Bank Notes:
- The Bank of England’s Monetary Policy Committee (MPC) voted by a majority of 8 to 1 to maintain Bank Rate at 5.0% while one member preferred to reduce Bank Rate by 25 basis points to 4.75%, on19th September 2024.
- The MPC also voted unanimously to reduce the stock of UK government bond purchases held for monetary policy purposes, and financed by the issuance of central bank reserves, by £100B over the next 12 months to a total of £558B.
- Twelve-month CPI inflation had been 2.2% in August and July, slightly lower than August Report expectations. Consumer core goods and food price inflation had remained subdued as the cost pressures from previous global shocks had unwound further, and producer price levels had been broadly flat while energy prices had continued to drag on CPI inflation.
- Services price inflation had increased to 5.6% in August compared to 5.2% in July and 5.7% in June. This was slightly lower in August than had been expected at the time of the August Report. There had been volatility in a number of services sub-components in the July and August outturns, including accommodation and catering prices and airfares.
- GDP had increased by 0.6% in 2024 Q2, 0.1 percentage points lower than had been expected in the August Monetary Policy Report. That had followed 0.7% growth in Q1, but Bank staff judged that the underlying pace of growth had been somewhat weaker during the first half of the year.
- Headline GDP growth was expected to return to its underlying pace of around 0.3% per quarter in the second half of the year. Based on a broad set of indicators, the MPC judged that the labour market continued to loosen but that it remained tight by historical standards.
- Monetary policy decisions have been guided by the need to squeeze persistent inflationary pressures out of the system so as to return CPI inflation to the 2% target both in a timely manner and on a lasting basis; policy has been acting to ensure that inflation expectations remain well anchored.
- In the absence of material developments, a gradual approach to removing policy restraint remains appropriate while monetary policy will need to continue to remain restrictive for sufficiently long until the risks to inflation returning sustainably to the 2% target in the medium term have dissipated further.
- The Committee continues to monitor closely the risks of inflation persistence and will decide the appropriate degree of monetary policy restrictiveness at each meeting.
- Next meeting is on 7 November 2024.
Next 24 Hours Bias
Weak Bearish
The Canadian Dollar (CAD)
Key news events today
No major news events.
What can we expect from CAD today?
As crude oil prices rebounded last week, demand for the Loonie picked up to put some downward pressure on USD/CAD as it bucked two weeks of gains to close in the red last Friday. This currency pair was trading around 1.3560 at the beginning of the Asia session – these are the support and resistance levels for today.
Support: 1.3490
Resistance: 1.3650
Central Bank Notes:
- The Bank of Canada reduced its target for the overnight rate by 25 basis points for the third consecutive meeting to 4.25% while continuing its policy of balance sheet normalization on 4th September.
- Canada’s economy grew 2.1% in the second quarter of 2024, led by government spending and business investment.
- This second quarter GDP growth was slightly stronger than forecast in July, but preliminary indicators suggest that economic activity was soft through June and July.
- As expected, inflation slowed further to 2.5% in July. The Bank’s preferred measures of core inflation averaged around 2.5% and the share of components of the consumer price index growing above 3% is roughly at its historical norm.
- High shelter price inflation is still the biggest contributor to total inflation but is starting to slow while inflation also remains elevated in some other services.
- The labour market continues to slow, with little change in employment in recent months. Wage growth, however, remains elevated relative to productivity.
- The Governing Council is carefully assessing these opposing forces on inflation and monetary policy decisions will be guided by incoming information and our assessment of their implications for the inflation outlook.
- The Bank remains resolute in its commitment to restoring price stability for Canadians.
- Next meeting is on 23 October 2024.
Next 24 Hours Bias
Weak Bullish
Oil
Key news events today
No major news events.
What can we expect from Oil today?
Crude oil prices rebounded strongly as WTI oil rose nearly 5.2% to notch its second successive week of closing in the green. This benchmark hit a high of $71.92 per barrel last Tuesday before settling at $71.00 on Friday. The recent decision by OPEC+ to extend its production cuts through the end of 2024 is a positive sign for this commodity and has supported prices since mid-September. However, concerns on slower global demand for this commodity remain while any geo-political escalation in the Middle East keeps traders on their toes – these are the support and resistance levels for today.
Support: 65.50
Resistance: 72.00
Next 24 Hours Bias
Weak Bullish
