IC Markets Asia Fundamental Forecast | 20 December 2024
What happened in the U.S. session?
As widely expected, the Bank of England (BoE) maintained its Official Bank Rate (OBR) at 4.75% to mark the second pause over the past four meetings. The Monetary Policy Committee (MPC) voted by a majority of 6 to 3 to keep rates on hold, with three members preferring a reduction of 25 basis points which would have brought the OBR to 4.5%. With CPI inflation, wage growth and some indicators of inflation expectations rising in recent months, adding to the risk of inflation persistence, the central bank reinforced that a gradual approach to removing monetary policy restraint remains appropriate. Despite the relatively ‘hawkish’ statement, the pound sold off sharply as Cable plunged over 1% following the announcement, losing more than 130 pips in the process as it tumbled under 1.2500.
Moving over to stateside, the final GDP reading for the third quarter of this year showed the American economy growing stronger than its second estimate of 2.8% and above the second quarter’s reading. GDP expanded at an annual rate of 3.1% to mark the biggest growth rate so far this year as personal spending increased at the fastest pace since the first quarter of 2023 while fixed investment and investment in equipment also soared. Along with unemployment claims which moderated lower to 220K – a sign of labour market resilience – these macroeconomic data provided another strong tailwind for the greenback as the dollar index (DXY) surged past 108 to hit an overnight high of 108.48.
What does it mean for the Asia Session?
After moderating lower from 2.8% in August to 2.3% in October, core CPI in Japan unexpectedly accelerated to 2.7% YoY in November as it beat the estimate of 2.6%. Japan’s core inflation has consistently remained at or above the Bank of Japan’s 2% target for over two and a half years, which has contributed to their more hawkish stance this year but that was not enough as the central bank paused for the third successive meeting. The yen remained under pressure providing lift for USD/JPY which climbed above 157 on Thursday, a level last seen in July.
The Dollar Index (DXY)
Key news events today
PCE Price Index (1:30 pm GMT)
What can we expect from DXY today?
Inflation in the U.S. accelerated in November as evident in the most-recent CPI and PPI data that were released last week. The PCE Price Index – which is the Federal Reserve’s preferred gauge of inflation – also accelerated for the first time this year with headline and core PCE increasing at an annual rate of 2.3% and 2.8% respectively for the month of October. Should the PCE Price Index rise higher for the second month in a row, demand for the dollar will likely surge once more. The DXY looks all set to notch its third week of gains as it already jumped more than 1% this week alone.
Central Bank Notes:
- The Board of Governors of the Federal Reserve System voted by a majority to lower the Federal Funds Rate target range by 25 basis points to 4.25 to 4.50% on 18 December. Voting against the action was Beth M. Hammack, who preferred to maintain the target range at 4.5 to 4.75%.
- 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 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 labour market conditions have generally eased, 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.
- The Summary of Economic Projections (SEP) now indicates just two rate cuts in 2025 totalling 50 bps, compared to the full percentage point of reductions projected in the previous quarter.
- GDP growth forecasts were revised upward for 2024 (2.5% vs to 2% in the September projection) and 2025 (2.1% vs 2%), while remaining steady at 2% for 2026. Similarly, PCE inflation projections have been adjusted higher for 2024 (2.4% vs 2.3%), 2025 (2.5% vs 2.1%), and 2026 (2.1% vs 2%).
- 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.
- 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.
- The next meeting runs from 28 to 29 January 2025.
Next 24 Hours Bias
Strong Bullish
Gold (XAU)
Key news events today
PCE Price Index (1:30 pm GMT)
What can we expect from Gold today?
Inflation in the U.S. accelerated in November as evident in the most-recent CPI and PPI data that were released last week. The PCE Price Index – which is the Federal Reserve’s preferred gauge of inflation – also accelerated for the first time this year with headline and core PCE increasing at an annual rate of 2.3% and 2.8% respectively for the month of October. Should the PCE Price Index rise higher for the second month in a row, demand for the dollar will likely surge once more and potentially weigh heavily on gold prices.
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?
Robust demand for the greenback drove the Aussie briefly under 0.6200 on Thursday. This currency pair was hovering around 0.6230 as Asian markets came online on Friday but overhead pressures remain intact – these are the support and resistance levels for today.
Support: 0.6170
Resistance: 0.6290
Central Bank Notes:
- The RBA kept the cash rate target unchanged at 4.35% on 10th December, marking the ninth consecutive pause.
- Inflation has fallen substantially since the peak in 2022, as higher interest rates have been working to bring aggregate demand and supply closer towards balance. However, measures of underlying inflation are around 3.5%, which is still some way from the 2.5% midpoint of the inflation target.
- The most recent forecasts published in the November Statement on Monetary Policy (SMP) do not see inflation returning sustainably to the midpoint of the target until 2026 but the Board is gaining some confidence that inflationary pressures are declining in line with these recent forecasts with risks remaining in place.
- Growth in output has been weak as the economy grew by only 0.8% in the September quarter over the past year. Outside of the COVID-19 pandemic, this was the slowest pace of growth since the early 1990s.
- A range of indicators suggest that labour market conditions remain tight; while those conditions have been easing gradually, some indicators have recently stabilised. The unemployment rate was 4.1 per cent in October, up from 3.5 per cent in late 2022.
- Wage pressures have eased more than expected in the November SMP. The rate of wages growth as measured by the Wage Price Index was 3.5% over the year to the September quarter, a step down from the previous quarter, but labour productivity growth remains weak.
- Sustainably returning inflation to target within a reasonable timeframe remains the Board’s highest priority. This is consistent with the RBA’s mandate for price stability and full employment. To date, longer term inflation expectations have been consistent with the inflation target and it is important that this remains the case.
- The Board will continue to rely upon the data and the evolving assessment of risks to guide its decisions, paying close attention to developments in the global economy and financial markets, trends in domestic demand, and the outlook for inflation and the labour market.
- The next meeting is on 18 February 2025.
Next 24 Hours Bias
Strong Bearish
The Kiwi Dollar (NZD)
Key news events today
No major news events.
What can we expect from NZD today?
After plunging as low as 0.5607 on Thursday, the Kiwi retraced higher to climb above 0.5650 overnight but intense headwinds remain firm. This currency pair was sliding towards 0.5600 at the beginning of the Asia session – these are the support and resistance levels for today.
Support: 0.5557
Resistance: 0.5770
Central Bank Notes:
- The Monetary Policy Committee (MPC) agreed to reduce the Official Cash Rate (OCR) by 50 basis points bringing it down to 4.25% on 27 November, marking the third consecutive rate cut.
- The Committee assessed that annual consumer price inflation has declined and is now close to the midpoint of the MPC’s 1 to 3% target band; inflation expectations are also close to target and core inflation is converging to the midpoint.
- Economic activity remains subdued and output continues to be below its potential. With excess productive capacity in the economy, inflation pressures have eased. If economic conditions continue to evolve as projected, the Committee expects to be able to lower the OCR further early next year.
- Domestic economic activity remains below trend, as a result of weakness in demand for durable goods consumption and investment. This has been reflected in falling activity in interest rate sensitive sectors such as construction, manufacturing, and retail trade. In contrast, some services sectors have continued to grow.
- Consistent with feedback from business visits, high frequency indicators suggest that the economy has stabilised in recent months. Economic growth is expected to recover from the December quarter, in part due to lower interest rates, but there is uncertainty around the exact timing and speed of the recovery.
- Wage growth is slowing, consistent with inflation returning to the target midpoint while employment levels and job vacancies have declined, reflecting subdued economic activity; unemployment is expected to continue rising in the near term.
- Expectations of future inflation, the pricing intentions of firms, and spare productive capacity are consistent with the inflation target being sustainably achieved, providing the context and the confidence for the Committee to further ease monetary policy restraint.
- The next meeting is on 19 February 2025.
Next 24 Hours Bias
Strong Bearish
The Japanese Yen (JPY)
Key news events today
National Core CPI (11:30 pm GMT 19th December)
What can we expect from JPY today?
After moderating lower from 2.8% in August to 2.3% in October, core CPI in Japan unexpectedly accelerated to 2.7% YoY in November as it beat the estimate of 2.6%. Japan’s core inflation has consistently remained at or above the Bank of Japan’s 2% target for over two and a half years, which has contributed to their more hawkish stance this year but that was not enough as the central bank paused for the third successive meeting. The yen remained under pressure providing lift for USD/JPY which climbed above 157 on Thursday, a level last seen in July.
Central Bank Notes:
- The Policy Board of the Bank of Japan decided on 19 December, by a 8-1 majority 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.
- Japan’s economy has recovered moderately, although some weakness has been seen in part. Exports and industrial production have been more or less flat while corporate profits have been on an improving trend and business sentiment has stayed at a favourable level.
- The employment and income situation has improved moderately while private consumption has been on a moderate increasing trend despite the impact of price rises and other factors.
- On the price front, the year-on-year rate of increase in the consumer price index (CPI, all items less fresh food) has been in the range of 2.0-2.5% 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; inflation expectations have risen moderately.
- With regard to the CPI (all items less fresh food), while the effects of the pass-through to consumer prices of cost increases led by the past rise in import prices are expected to wane, 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.
- 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.
- The next meeting is on 24 January 2025.
Next 24 Hours Bias
Strong Bullish
The Euro (EUR)
Key news events today
No major news events.
What can we expect from EUR today?
After tumbling as low as 1.0343 on Thursday, the Euro retraced higher towards 1.0430 before running out of steam overnight. This currency pair promptly fell under the 1.0400-level once more as Asian markets came online – these are the support and resistance levels for today.
Support: 1.0240
Resistance: 1.0460
Central Bank Notes:
- The Governing Council reduced the three key ECB interest rates by 25 basis points on 12 December to mark the third successive rate cut.
- 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 3.15%, 3.40% and 3.00% respectively.
- The disinflation process is well on track and most measures of underlying inflation suggest that inflation will settle at around the Governing Council’s 2% medium-term target on a sustained basis.
- Staff see headline inflation averaging 2.4% in 2024, 2.1% in 2025, 1.9% in 2026 and 2.1% in 2027 when the expanded EU Emissions Trading System becomes operational. For inflation excluding energy and food, staff project an average of 2.9% in 2024, 2.3% in 2025 and 1.9% in both 2026 and 2027.
- Staff now expect a slower economic recovery than in the September projections. Although growth picked up in the third quarter of this year, survey indicators suggest it has slowed in the current quarter – the economy is expected to grow by 0.7% in 2024, 1.1% in 2025, 1.4% in 2026 and 1.3% in 2027
- 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 Governing Council stands ready to adjust all of its instruments within its mandate to ensure that inflation stabilises sustainably at its 2% target over the medium term and to preserve the smooth functioning of monetary policy transmission.
- The next meeting is on 30 January 2025.
Next 24 Hours Bias
Medium Bearish
The Swiss Franc (CHF)
Key news events today
No major news events.
What can we expect from CHF today?
After hitting a high of 0.9021 on Thursday, USD/CHF pulled back towards 0.8960 but remained elevated. This currency pair resumed the uptrend as it raced towards the threshold of 0.9000 once again and it should climb above this level on the final trading day of the week – these are the support and resistance levels for today.
Support: 0.8920
Resistance: 0.9040
Central Bank Notes:
- The SNB eased monetary policy by lowering its key policy rate by 50 basis points, going from 1.00% to 0.50% on 12 December, marking for the fourth consecutive reduction.
- Underlying inflationary pressure has decreased again this quarter.
- Inflation in the period since the last monetary policy assessment has again been lower than expected as it decreased from 1.1% in August to 0.7% in November; both goods and services contributed to this decline.
- In the shorter term, the new conditional inflation forecast is below that of September: 1.1% for 2024, 0.3% for 2025 and 0.8% for 2026, based on the assumption that the SNB policy rate is 0.5% over the entire forecast horizon.
- GDP growth in Switzerland was only modest in the third quarter of 2024 with growth in the services sector was again somewhat stronger, while value added in manufacturing declined.
- There was a further slight increase in unemployment, and employment growth was subdued while the utilisation of overall production capacity was
- normal.
- The SNB anticipates GDP growth of around 1% this year while currently expecting growth of between 1.0% and 1.5% for 2025.
- The SNB will continue to monitor the situation closely, and will adjust its monetary policy if necessary to ensure inflation remains within the range consistent with price stability over the medium term.
- The next meeting is on 20 March 2025.
Next 24 Hours Bias
Medium Bullish
The Pound (GBP)
Key news events today
Retail Sales (1:30 pm GMT)
What can we expect from GBP today?
After Thursday’s pause by the Bank of England (BoE), focus will now shift to consumer spending in the U.K. which registered its first monthly decline in four months as sales fell 0.7% MoM in October. However, sales now expected to rebound 0.5% in November and higher figures could provide the pound with a much-needed lift for Cable.
Central Bank Notes:
- The Bank of England’s Monetary Policy Committee (MPC) voted by a majority of 6 to 3 to maintain the Bank Rate at 4.75% on 19 December 2024 – three members preferred to reduce the Bank rate by 25 basis points, bringing it down to 4.50%.
- 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, starting in October 2024. On 18 December 2024, the stock of UK government bonds held for monetary policy purposes was £655B.
- Twelve-month CPI inflation had increased to 2.6% in November from 1.7% in September, slightly higher than previous expectations while services consumer price inflation had remained elevated, at 5.0%, while core goods price inflation had risen to 1.1%.
- Headline CPI inflation was slightly higher than previous expectations, owing in large part to stronger inflation in core goods and food, and is expected to continue to rise slightly in the near term.
- Most indicators of UK near-term activity have declined with Bank staff expecting GDP growth to be weaker at the end of the year than originally projected in the November Monetary Policy Report.
- Bank staff now expected zero GDP growth in 2024 Q4, weaker than the 0.3% that had been incorporated in the November Report, broadly consistent with the latest combined steer from business surveys and the available official data.
- The Committee now judges that the labour market is broadly in balance as annual private sector regular average weekly earnings growth picked up quite sharply in the three months to October but there remains significant uncertainty around developments in the labour market.
- Monetary policy has been guided by the need to squeeze remaining inflationary pressures out of the economy to achieve the 2% target both in a timely manner and on a lasting basis. Over recent quarters there has been progress in disinflation, particularly as previous external shocks have abated, although remaining domestic inflationary pressures are resolving more slowly.
- The Committee continues to monitor closely the risks of inflation persistence and will assess the extent to which the evolving evidence is consistent with more constrained supply, which could sustain inflationary pressures, or with weaker demand, which could lead to the emergence of spare capacity in the economy and push down inflation; a gradual approach to removing monetary policy restraint remains appropriate.
- 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 and the Committee will decide the appropriate degree of monetary policy restrictiveness at each meeting.
- The next meeting is on 6 February 2025.
Next 24 Hours Bias
Strong Bearish
The Canadian Dollar (CAD)
Key news events today
Retail Sales (1:30 pm GMT)
What can we expect from CAD today?
Retail sales in Canada have grown steadily since July with October’s estimate of 0.7% pointing to a fourth consecutive month of higher consumer spending. This would also mark the second highest sales growth of this year. The Loonie has depreciated significantly in 2024 causing USD/CAD to soar more than 9% as it hit a high of 1.4466 on Thursday. Stronger-than-expected sales could provide a near-term boost for the Loonie and potentially rein in the astronomical rise for USD/CAD.
Central Bank Notes:
- The Bank of Canada reduced its target for the overnight rate by 50 basis points bringing it down to 3.25% while continuing its policy of balance sheet normalization on 11 December; this marked the fifth consecutive meeting where rates were reduced.
- Canada’s economy grew by 1% in the third quarter, somewhat below the Bank’s October projection, and the fourth quarter also looks weaker than projected. Third-quarter GDP growth was pulled down by business investment, inventories and exports.
- The unemployment rate rose to 6.8% in November as employment continued to grow more slowly than the labour force while wage growth showed some signs of easing, but remains elevated relative to productivity.
- Headline CPI has declined significantly from 2.7% in June to 1.6% in September while shelter costs inflation remains elevated but has begun to ease; the preferred measures of core inflation are now below 2.5%.
- CPI inflation has been about 2% since the summer, and is expected to average close to the 2% target over the next couple of years. Since October, the upward pressure on inflation from shelter and the downward pressure from goods prices have both moderated as expected.
- Looking ahead, the GST holiday will temporarily lower inflation but that will be unwound once the GST break ends. In addition, the possibility the incoming US administration will impose new tariffs on Canadian exports to the United States has increased uncertainty and clouded the economic outlook
- With inflation around 2%, the economy in excess supply, and recent indicators tilted towards softer growth than projected, the Governing Council decided to reduce the policy rate by a further 50 basis points to support growth and keep inflation close to the middle of the 1-3% target range.
- The Governing Council has reduced the policy rate substantially since June and going forward, they will be evaluating the need for further reductions in the policy rate one decision at a time.
- The Bank is committed to maintaining price stability for Canadians by keeping inflation close to the 2% target.
- The next meeting is on 29 January 2025.
Next 24 Hours Bias
Medium Bullish
Oil
Key news events today
No major news events.
What can we expect from Oil today?
Prices for crude oil remain under pressure as WTI oil tumbled 1.7% on Thursday as dour economic outlook adds to oversupply concerns – softening economic activity could deepen a slowdown in oil demand growth in 2025. WTI oil looks set to fall under the $69-mark and looks to be on course for a 3.5% weekly decline.
Next 24 Hours Bias
Medium Bearish
