IC Markets Asia Fundamental Forecast | 10 May 2024
What happened in the US session?
As widely anticipated, the Bank of England (BoE) kept its official bank rate on hold at 5.25% – this marked the sixth consecutive meeting where policymakers left the rate unchanged. Although members of the Monetary Policy Committee (MPC) voted by a majority of 7 to 2 to maintain the official bank rate at 5.25%, the number of members who preferred to reduce the rate by 25 basis points (0.25%) increased from one to two. During his press conference, Governor Andrew Bailey noted that higher rates are reducing inflation but MPC members need to make sure that inflation comes down to 2% and stays there. He also added that although the current progress is encouraging, policymakers have not reached the point of cutting rates just yet.
It was a fair balanced report and press conference but the Cable tumbled hard upon the release of the report as markets inferred the increase in MPC members who preferred a rate cut to be a dovish signal. GBP/USD dived from 1.2485 to as low as 1.2445 with ten minutes before reversing to retrace higher as Governor Bailey’s press conference got under way half an hour after the statement release – this currency pair recovered all the initial losses to climb back above 1.2500 by the end of the US session.
Following the press conference, the dollar index (DXY) dived as higher-than-anticipated unemployment claims triggered a major sell-off in the greenback. The latest figure of 231K was the highest reading since mid-November and was also notably greater than the estimate of 212K as well as the 8-week average of 211K. The DXY was trading around 105.65 prior to the release of this data point but it swiftly fell through a trapdoor to plunge as low as 105.20 overnight.
What does it mean for the Asia Session?
As markets digest the latest monetary policy action by the BoE and the unemployment claims from the US, the DXY stabilized around 105.20 before climbing higher towards 105.40 this morning while prices for spot gold were pulling back towards $2,340/oz after surging past $2,350/oz as demand for the dollar waned overnight.
The Dollar Index (DXY)
Key news events today
FOMC Member Bowman Speaks (1:00 pm GMT)
UoM Consumer Sentiment (2:00 pm GMT)
What can we expect from DXY today?
Federal Reserve Governor Michelle Bowman will be speaking at a bankers convention in Texas where she could echo similar sentiment as Fed Chair Jerome Powell i.e. keeping interest rates elevated for a longer period than originally anticipated. Meanwhile, the University of Michigan (UoM) will release its preliminary findings on its consumer sentiment survey for the month of May. Sentiment is forecasted to remain flat, unchanged from the reading in April while inflation expectations could show another month of increase. Demand for the dollar has been strong all week and the DXY looks set to close on a strong note.
Central Bank Notes:
- The Federal Funds Rate target range remained unchanged at 5.25% to 5.50% for the sixth 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 have moved toward better balance over the past year.
- The economic outlook is uncertain, and the Committee remains highly attentive to inflation risks. Inflation has eased over the past year but remains elevated and in recent months, there has been a lack of further progress toward the Committee’s 2% inflation objective.
- Recent indicators suggest that economic activity has continued to expand at a solid pace while job gains have remained strong, and the unemployment rate has remained low.
- In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee 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.
- The Committee’s assessments will take into account a wide range of information, including readings on labour market conditions, inflation pressures and inflation expectations, and financial and international developments.
- 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 will slow 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 11 to 12 June 2024.
Next 24 Hours Bias
Weak Bullish
Gold (XAU)
Key news events today
FOMC Member Bowman Speaks (1:00 pm GMT)
UoM Consumer Sentiment (2:00 pm GMT)
What can we expect from Gold today?
Federal Reserve Governor Michelle Bowman will be speaking at a bankers convention in Texas where she could echo similar sentiment as Fed Chair Jerome Powell i.e. keeping interest rates elevated for a longer period than originally anticipated. Meanwhile, the University of Michigan (UoM) will release its preliminary findings on its consumer sentiment survey for the month of May. Sentiment is forecasted to remain flat, unchanged from the reading in April while inflation expectations could show another month of increase. Demand for the dollar has been strong all week to keep a lid on gold prices.
Next 24 Hours Bias
Weak Bearish
The Australian Dollar (AUD)
Key news events today
No major news events.
What can we expect from AUD today?
Higher-than-anticipated unemployment claims caused the Aussie to hit an overnight high of 0.6623 before reversing to drop lower. This currency pair continued to pull back as Asian markets came online and looks set to break under the threshold of 0.6600 today.
Central Bank Notes:
- The RBA kept the cash rate target unchanged at 4.35%, marking the eighth pause out of the last nine board meetings.
- The CPI grew by 3.6% over the year to the March quarter, down from 4.1% cent over the year to December. Underlying inflation was higher than headline inflation and declined by less – this was due in large part to services inflation, which remains high and is moderating only gradually.
- The central forecasts, based on the assumption that the cash rate follows market expectations, are for inflation to return to the target range of 2 to 3% in the second half of 2025, and to the midpoint in 2026.
- In the near term, inflation is forecast to be higher because of the recent rise in domestic petrol prices, and higher than expected services price inflation, which is now forecast to decline more slowly over the rest of the year.
- Inflation is, however, expected to decline over 2025 and 2026.
- 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 18 June 2024.
Next 24 Hours Bias
Medium Bearish
The Kiwi Dollar (NZD)
Key news events today
No major news events.
What can we expect from NZD today?
The Kiwi surged overnight to hit 0.6040 following the higher-than-expected unemployment claims from the US. However, this currency pair reversed towards the end of the US session and continued to slide lower at the beginning of the Asia session. The Kiwi was trading around 0.6045 this morning and overhead pressures could continue to build as the day progresses.
Central Bank Notes:
- The Monetary Policy Committee kept the OCR unchanged at 5.50% for the sixth meeting in a row.
- The Committee remains confident that the current level of the OCR is contributing to an easing in capacity pressures to ensure inflation returns to target.
- However, current consumer price inflation remains above the Committee’s 1 to 3% target range. A restrictive monetary policy stance remains necessary to further reduce capacity pressures and inflation.
- The Committee discussed upside risks to the inflation outlook: persistent services inflation remains a risk and goods price inflation remains elevated while anticipated near-term increases to local government rates, insurance, and utility costs, could also further slow the decline in headline inflation.
- The Committee discussed downside risks to the inflation outlook: ongoing restrictive monetary policy in an environment of weak global growth could lead to a more rapid decline in inflation than expected. Business and consumer confidence remain particularly weak which could lead to more unemployment and financial stress than expected while structural challenges facing the economy in China remain a concern given its importance for the global economy and for New Zealand’s trade.
- Next meeting is on 10 July 2024.
Next 24 Hours Bias
Medium Bearish
The Japanese Yen (JPY)
Key news events today
No major news events.
What can we expect from JPY today?
Despite intervention measures by the Bank of Japan (BoJ) last week, USD/JPY stabilized around 152.50 before steadily climbing higher this week. This currency pair hit a high of 155.95 yesterday before higher claims from the US caused it to retreat under 155.50. USD/JPY was rising strongly towards 155.80 as Asian markets came online and it should close the week in the green, barring any surprise intervention measures on the final trading day.
Central Bank Notes:
- The Bank considers that the policy framework of Quantitative and Qualitative Monetary Easing (QQE) with Yield Curve Control and the negative interest rate policy to date have fulfilled their roles. With the price stability target of 2%, it will conduct monetary policy as appropriate, guiding the short-term interest rate as a primary policy tool.
- The Bank of Japan decided on the following measures:
- The Bank will encourage the uncollateralized overnight call rate to remain at around 0 to 0.1% while continuing its JGB purchases with broadly the same amount as before.
- In addition, the Bank will discontinue purchases of exchange-traded funds (ETFs) and Japan real estate investment trusts (J-REITs) and will also gradually reduce the amount of purchases of CP and corporate bonds and will discontinue the purchases in about one year.
- In a quarterly outlook, the committee revised higher CPI prints for FY 2024 to 2.8% from January’s projections of 2.4%, due to the waning effects of higher import prices and fewer government support measures.
- For 2025, the board expects core inflation to hit 1.9%, slightly higher than its earlier estimates of 1.8%, reflecting a recent rise in oil prices.
- Policymakers cut their 2023 GDP growth forecast to 1.3% from 1.8% and for FY 2024, the bank also slashed its GDP outlook to 0.8% from 1.2%, mainly reflecting lower private consumption.
- Next meeting is on 14 June 2024.
Next 24 Hours Bias
Medium Bullish
The Euro (EUR)
Key news events today
No major news events.
What can we expect from EUR today?
Higher-than-anticipated unemployment claims caused the Euro to rise as high as 1.0785 before stalling by the end of the US session. This currency pair proceeded to retreat slightly as Asian markets came online and was trading around 1.0775.
Central Bank Notes:
- The ECB kept the three key interest rates unchanged for a fifth consecutive meeting, keeping the main refinancing rate on hold at 4.50%.
- Inflation has continued to fall, led by lower food and goods price inflation with most measures of underlying inflation easing, wage growth is gradually moderating, and firms are absorbing part of the rise in labour costs in their profits.
- Financing conditions remain restrictive and the past interest rate increases continue to weigh on demand, which is helping to push down inflation but domestic price pressures are strong and are keeping services price inflation high.
- The Governing Council is determined to ensure that inflation returns to its 2% medium-term target in a timely manner and if the Council’s updated assessment of the inflation outlook, the dynamics of underlying inflation and the strength of monetary policy transmission were to further increase its confidence that inflation is converging to the target in a sustained manner, it would be appropriate to reduce the current level of monetary policy restriction.
- Next meeting is on 6 June 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?
The franc surged overnight following the higher-than-expected unemployment claims from the US, causing USD/CHF to reverse sharply from 0.9098 and drop as low as 0.9051 overnight. However, this currency pair stabilized around this level before retracing higher at the beginning of the Asia session to trade around 0.9070.
Central Bank Notes:
- The SNB eased monetary policy by lowering its key policy rate by 25 basis points, going from 1.75% to 1.50% in March.
- For some months now, inflation has been back below 2% and thus in the range the SNB equates with price stability.
- According to the new forecast, inflation is also likely to remain in this range over the next few years.
- The forecast puts average annual inflation at 1.4% for 2024, 1.2% for 2025 and 1.1% for 2026, based on the assumption that the SNB policy rate is 1.5% over the entire forecast horizon.
- Swiss GDP growth was moderate in the fourth quarter of last year and it is likely to remain modest in the coming quarters.
- Overall, Switzerland’s GDP is likely to grow by around 1% this year.
- Next meeting is on 20 June 2024.
Next 24 Hours Bias
Weak Bullish
The Pound (GBP)
Key news events today
GDP (6:00 am GMT)
What can we expect from GBP today?
After declining in the last quarter of 2023 by 0.2% YoY, GDP output looks primed to rebound in the first quarter of this year as evident in the strong expansionary Composite PMI readings over the past five months. The monthly estimate of 0.1% points to another month of expansion in March, albeit at a slower rate as compared to the previous two months. Should GDP output surprise to the upside, it could provide Cable with a much-needed boost before European markets get under way.
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 sixth 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 3.2% in March from 3.4% in February and is expected to return to close to the 2% target in the near term, but increase slightly in the second half of this year to around 2.5% owing to the unwinding of energy-related base effects.
- CPI inflation is projected to be 1.9% in two years’ time and 1.6% in three years in the May Report. With respect to indicators of inflation persistence, services consumer price inflation has declined but remains elevated at 6% in March.
- Following modest weakness last year, UK GDP is expected to have risen by 0.4% in 2024 Q1 and to grow by 0.2% in Q2, stronger than expected in the February Report. Despite picking up during the forecast period, demand growth is expected to remain weaker than potential supply growth throughout most of that period.
- The MPC remains prepared to adjust monetary policy as warranted by economic data to return inflation to the 2% target sustainably and 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 20 June 2024.
Next 24 Hours Bias
Weak Bearish
The Canadian Dollar (CAD)
Key news events today
Labour Force Survey (12:30 pm GMT)
What can we expect from CAD today?
Canada will release the results of its Labour Force Survey for the month of April today where 21K jobs are expected to be added to the labour market while the unemployment rate is estimated to edge higher from 6.1% to 6.2%. Employment growth has been steady over the past 12 months, averaging around 27K jobs per month. However, the unemployment rate has started to pick up in 2024, rising from 5.7% in January to signal a potential weakening of the Canadian labour market. Should the survey point to an overall weak outcome, the Loonie could come under pressure and thus provide a boost for USD/CAD later today.
Central Bank Notes:
- The Bank of Canada held its target for the overnight rate at 5.0% for the fifth meeting in a row while continuing its policy of quantitative tightening.
- Canada’s economy stalled in the second half of last year and the economy moved into excess supply but economic growth is forecasted to pick up in 2024. Overall, the Bank forecasts GDP growth of 1.5% in 2024, 2.2% in 2025, and 1.9% in 2026.
- CPI inflation slowed to 2.8% in February, with easing in price pressures becoming more broad-based across goods and services. However, shelter price inflation is still very elevated, driven by growth in rent and mortgage interest costs.
- Core measures of inflation, which had been running around 3.5%, slowed to just over 3% in February, and 3-month annualized rates are suggesting downward momentum. The Bank expects CPI inflation to be close to 3% during the first half of this year, move below 2.5% in the second half, and reach the 2% inflation target in 2025.
- The Governing Council is particularly watching the evolution of core inflation, and continues to focus on the balance between demand and supply in the economy, inflation expectations, wage growth, and corporate pricing behaviour.
- While inflation is still too high and risks remain, CPI and core inflation have eased further in recent months and the Council will be looking for evidence that this downward momentum is sustained.
- Next meeting is on 5 June 2024.
Next 24 Hours Bias
Weak Bullish
Oil
Key news events today
No major news events.
What can we expect from Oil today?
Higher crude oil imports by China for the month of April kept prices for oil elevated as oil exports and imports both returned to growth, indicating an increase in demand at home and overseas. China’s improving trade balance keeps the upside momentum going for this commodity. WTI oil rose above $79.50 per barrel overnight and could climb above the threshold of $80 by the end of the day.
Next 24 Hours Bias
Weak Bullish
