IC Markets Europe Fundamental Forecast | 31 October 2023
What happened in the Asia session?
The Bank of Japan (BoJ) maintained their policy rate at negative 0.1% while communicating a somewhat vague and ‘confusing’ language surrounding the target level on its Yield Curve Control (YCC) policy. The target level of 1% on the 10-year Japanese bond yield is now identified as a reference rather than a hard ceiling which gives the BoJ flexibility with regards to its future policy actions while increasing the probability of a currency intervention by the Ministry of Finance (MOF) in the not-too-distant future.
In short, the statement could be summarized as mildly hawkish with a chance of dovish interjections causing USD/JPY to surge from 149.40 to 150.10 within an hour. This currency pair is more than likely to remain elevated for the remainder of the day.
What does it mean for the Europe & US sessions?
The Employment Cost Index – which measures the growth of total employee compensation – is set to remain unchanged at 1.0% for the third quarter of 2023. Wages and salaries, benefit costs and compensation costs for civilian workers all increased in the second quarter. Any slowdown in the pace of growth for this index allows the Federal Reserve to maintain interest rates steady and potentially project a more neutral outlook on monetary policy, which could function as a bearish catalyst for the DXY.
The Dollar Index (DXY)
Key news events today
Employment Cost Index (12:30 pm GMT)
What can we expect from DXY today?
The Employment Cost Index – which measures the growth of total employee compensation – is set to remain unchanged at 1.0% for the third quarter of 2023. Wages and salaries, benefit costs and compensation costs for civilian workers all increased in the second quarter. Any slowdown in the pace of growth for this index allows the Federal Reserve to maintain interest rates steady and potentially project a more neutral outlook on monetary policy, which could function as a bearish catalyst for the DXY.
Central Bank Notes:
- The Federal Funds Rate target range remained unchanged at 5.25% to 5.50%.
- The Committee is strongly committed to returning inflation to its 2.0% 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 31 October to 1 November 2023.
Next 24 Hours Bias
Medium Bullish
Gold (XAU)
Key news events today
Employment Cost Index (12:30 pm GMT)
What can we expect from Gold today?
The Employment Cost Index – which measures the growth of total employee compensation – is set to remain unchanged at 1.0% for the third quarter of 2023. Wages and salaries, benefit costs and compensation costs for civilian workers all increased in the second quarter. Any slowdown in the pace of growth for this index allows the Federal Reserve to maintain interest rates steady and potentially project a more neutral outlook on monetary policy, which could function as a bearish catalyst for the DXY and thus potentially boost gold prices higher.
Next 24 Hours Bias
Medium Bearish
The Australian Dollar (AUD)
Key news events today
No major news events.
What can we expect from AUD today?
The Aussie hit a high of 0.6384 overnight before reversing to fall lower as Asian markets came online. With demand for the greenback picking up this morning, the Aussie continued to slide lower falling under 0.6350.
Central Bank Notes:
- The RBA kept the cash rate target unchanged at 4.10% for the fourth consecutive meeting.
- Inflation in Australia has passed its peak but is still too high and will remain so for some time yet.
- Some further tightening of monetary policy may be necessary.
- Next meeting is on 7 November 2023.
Next 24 Hours Bias
Strong Bearish
The Kiwi Dollar (NZD)
Key news events today
Labour Market Report (9:45 pm GMT)
What can we expect from NZD today?
The Labour market report for the third quarter of 2023 is likely to show employment growing 0.4% over the previous quarter while the unemployment rate edges higher from 3.6% to 3.9%. The estimates point to a mixed labour report which could negatively impact the Kiwi, especially if employment growth comes in weaker than expected.
Central Bank Notes:
- The Monetary Policy Committee kept the OCR unchanged at 5.50% for the third meeting in a row.
- The Committee agreed that the OCR needs to stay at a restrictive level to ensure that annual consumer price inflation returns to the 1 to 3% target range and to support maximum sustainable employment.
- While supply constraints in the economy continue to ease, inflation remains too high.
- Spending needs to remain subdued to better match the economy’s ability to supply goods and services, so that consumer price inflation returns to its target range.
- Next meeting is on 29 November 2023.
Next 24 Hours Bias
Medium Bearish
The Japanese Yen (JPY)
Key news events today
BoJ Monetary Policy Statement (Tentative)
BoJ Press Conference (Tentative)
What can we expect from JPY today?
The Bank of Japan (BoJ) maintained their policy rate at negative 0.1% while communicating a somewhat vague and ‘confusing’ language surrounding the target level on its Yield Curve Control (YCC) policy. The target level of 1% on the 10-year Japanese bond yield is now identified as a reference rather than a hard ceiling which gives the BoJ flexibility with regards to its future policy actions while increasing the probability of a currency intervention by the Ministry of Finance (MOF) in the not-too-distant future.
In short, the statement could be summarized as mildly hawkish with a chance of dovish interjections causing USD/JPY to surge from 149.40 to 150.10 within an hour. This currency pair is more than likely to remain elevated for the remainder of the day.
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 Bullish
The Euro (EUR)
Key news events today
CPI (10:00 am GMT)
What can we expect from EUR today?
The preliminary data for Eurozone CPI is set to show headline inflation retreating significantly from 4.3% YoY to 3.1% YoY in October while the core reading is expected to edge lower as well, from 4.5% YoY to 4.2% YoY. Inflationary pressures continue to moderate steadily and allows the ECB to become less hawkish, which could cause the Euro to fall during European trading hours.
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
Medium Bearish
The Swiss Franc (CHF)
Key news events today
Retail Sales (7:30 am GMT)
What can we expect from CHF today?
Retail sales in Switzerland fell 1.8% YoY in August as sales continued to decline, albeit at a slower pace. The estimate for September of -1.2% points to another month of declines on an annualized basis. USD/CHF remained above 0.9000 overnight and weaker-than-expected sales figures could cause this currency pair to climb higher.
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
Weak Bullish
The Pound (GBP)
Key news events today
No major news events.
What can we expect from GBP today?
The Pound hit a high of 1.2176 overnight before reversing to fall lower as Asian markets came online. With demand for the greenback picking up this morning, the Pound tumbled under 1.2150 and is likely to remain depressed today.
Central Bank Notes:
- The Bank of England’s Monetary Policy Committee (MPC) voted by a majority of 5-to-4 to maintain its Official Bank Rate at 5.25%.
- Four members preferred to increase the Bank Rate by 0.25 percentage points, to 5.5%.
- CPI inflation is expected to fall significantly further in the near term, reflecting lower annual energy inflation, despite the renewed upward pressure from oil prices, and further declines in food and core goods price inflation. Services price inflation, however, is projected to remain elevated in the near term.
- The mean projection for CPI inflation remained unchanged and is expected to decline to 2.0% and 1.9% at the two and three-year horizons, respectively.
- Next meeting is on 2 November 2023.
Next 24 Hours Bias
Medium Bearish
The Canadian Dollar (CAD)
Key news events today
GDP (12:30 pm GMT)
What can we expect from CAD today?
Canada’s economy grew 0.1% MoM in August and the estimate for September points to another monthly increase of 0.1%. Any significant higher rate of growth could function as a bullish catalyst for the Canadian dollar and potentially put downward pressure on USD/CAD later today.
Central Bank Notes:
- The Bank of Canada held its target for the overnight rate at 5.0%, for the second meeting in a row.
- Canada’s economy has weakened with growth forecast for 2023 lowered to 1.2% from 1.8%
- Economic growth is expected to continue to be weak, growing 0.9% and 2.5% in 2024 and 2025 respectively.
- The Bank expects CPI inflation to average around 3.5% through the middle of 2024 before gradually easing to 2.0% in 2025.
- However, the near-term path for CPI is higher because of energy prices and ongoing persistence in core inflation.
- Next meeting is on 6 December 2023.
Next 24 Hours Bias
Weak Bullish
Oil
Key news events today
API Weekly Crude Oil Stock (2:00 pm GMT)
What can we expect from Oil today?
After tumbling yesterday, crude oil prices rose at the beginning of the Asian trading hours. WTI oil declined by nearly 2.7% to hit a low of $81.49 per barrel but prices have since rebounded to climb above the $82-mark. Although there was no immediate escalation in the ongoing Middle East conflict, markets remained wary of any new developments that could trigger a rise in crude prices, especially as Israel launched a large-scale ground offensive in Gaza.
Over to the US, API stockpiles have experienced stronger-than-expected drawdowns over the last couple of weeks and another outsized drawdown could function as a bullish catalyst for crude prices later today.
Next 24 Hours Bias
Weak Bullish
