IC Markets Europe Fundamental Forecast | 21 February 2025
What happened in the Asia session?
The flash Composite PMI report for Australia showed the private sector expanding at the fastest pace since August 2024, driven mainly by accelerating services activity growth. Although overall new business also rose at a quicker rate, export orders remained in contraction. The better-than-expected PMI result should continue to keep the Aussie elevated on Friday – this currency pair was floating around 0.6400 by midday in Asia.
What does it mean for the Europe & US sessions?
Consumer spending in the U.K. has been poor for most parts of 2024 as sales declined in four out of the last seven months, even in December despite stronger Christmas sales. Consumer spending fell 0.3% MoM in December but it is now expected to rebound 0.4% in January. Combined with the flash Composite PMI report that is expected to show expansion, albeit at a slower pace, the pound could be supported should the above macroeconomic data exceed market expectations.
After contracting in October and December, Composite PMI activity in the Euro Area rebounded into expansion in January with a reading of 50.2. PMI activity is now expected to mark a second consecutive month of expansion with a reading of 50.5 in February, based on the flash estimates. Should PMI activity come in stronger than anticipated, the Euro could receive a strong tailwind during the European trading hours.
Consumer spending in Canada has been steady in the second half of 2024 and it surged in December due to the traditional holiday shopping season. Sales jumped 1.6% MoM to mark the biggest gains since May 2022, based on preliminary estimates. The final estimate points to a slightly lower figure of 1.5% but it would still register a huge monthly gain for retail sales. The Loonie could receive a near-term boost later today, a result that would weigh on USD/CAD.
The Dollar Index (DXY)
Key news events today
S&P Global Composite PMI (2:45 pm GMT)
What can we expect from DXY today?
The flash Composite PMI report for the U.S. is expected to show another successive month of expansion driven primarily by the services sector. However, demand for the dollar has waned significantly as the backdrop of ongoing trade tariffs and potential de-escalation in the Russia-Ukraine war continue to overshadow key macroeconomic data for now. The DXY is likely to remain under pressure on the final trading day as it is all but certain to notch a third consecutive week of decline.
Central Bank Notes:
- The Board of Governors of the Federal Reserve System voted unanimously to maintain the Federal Funds Rate in a target range of 4.25 to 4.50% on 29 January.
- 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 the unemployment rate has stabilized at a low level in recent months, and labour market conditions remain solid. However, inflation remains somewhat elevated.
- December’s 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. 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 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.
- The Committee will roll over at auction the amount of principal payments from the Federal Reserve’s holdings of Treasury securities maturing in each calendar month that exceeds a cap of $25 billion per month and redeem Treasury coupon securities up to this monthly cap and Treasury bills to the extent that coupon principal payments are less than the monthly cap.
- In addition, the Committee will reinvest the amount of principal payments from the Federal Reserve’s holdings of agency debt and agency mortgage-backed securities (MBS) received in each calendar month that exceeds a cap of $35 billion per month into Treasury securities to roughly match the maturity composition of Treasury securities outstanding.
- The next meeting runs from 18 to 19 March 2025.
Next 24 Hours Bias
Medium Bearish
Gold (XAU)
Key news events today
No major news events.
What can we expect from Gold today?
The backdrop of ongoing trade tariffs, economic reforms in the U.S. and global geo-political tensions have kept demand for this precious metal elevated. Spot prices for gold recorded its latest high on Thursday as it eclipsed $2,954.94/oz and it will no doubt mark its eighth successive week of higher gains.
Next 24 Hours Bias
Medium Bullish
The Australian Dollar (AUD)
Key news events today
S&P Global Composite PMI (10:00 pm GMT 20th February)
What can we expect from AUD today?
The flash Composite PMI report for Australia showed the private sector expanding at the fastest pace since August 2024, driven mainly by accelerating services activity growth. Although overall new business also rose at a quicker rate, export orders remained in contraction. The better-than-expected PMI result should continue to keep the Aussie elevated on Friday – this currency pair was floating around 0.6400 by midday in Asia.
Central Bank Notes:
- The RBA reduced the cash rate by 25 basis points to bring it down to 4.10% on 18 January, marking the first rate cut since November 2020.
- Financial conditions are restrictive, which is weighing on demand and is helping to bring down underlying inflation; growth in private demand has been subdued.
- Underlying inflation has moderated over the past three quarters with trimmed mean inflation easing to 3.2% over 2024 and it is expected to reach the 2–3% target range in early 2025, which is sooner than expected at the time of the November Statement.
- The unemployment rate declined a little in late 2024 to 4% with much of the strength in the labour market underpinned by strong employment growth, which has also bolstered household incomes.
- The announcement of tariffs between the United States and other major economies poses challenges to the global outlook but the scale and incidence of the tariffs and their effects remain highly uncertain – which may itself delay some investment until the outlook becomes clearer.
- Economic activity strengthened in China but growth there is still facing structural headwinds while domestic economic growth is forecast to pick up and the labour market is forecast to remain tight.
- If the cash rate follows the market path, underlying inflation is projected to be a little above 2.5% over most of the forecast period. The anticipated recovery of GDP growth and lingering tightness in labour market conditions are expected to sustain some upward pressure on inflation.
- 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.
- 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 1 April 2025.
Next 24 Hours Bias
Medium Bullish
The Kiwi Dollar (NZD)
Key news events today
No major news events.
What can we expect from NZD today?
Despite making a jumbo 50-basis point (bps) reduction in the Official Cash Rate on Wednesday, the Kiwi strengthened as the RBNZ signalled less aggressive rate cuts for 2025. This currency pair has climbed 1.3% since the monetary policy announcement and it remained elevated at around 0.5760 as Asian markets came online on Friday.
Central Bank Notes:
- The Monetary Policy Committee (MPC) agreed to reduce the Official Cash Rate (OCR) by 50 basis points bringing it down to 3.75% on 19 February, marking the fourth consecutive rate cut.
- The Committee assessed that annual consumer price inflation remains near the midpoint of the MPC’s 1 to 3% target band; inflation expectations are at target and core inflation continues to fall towards the target mid-point.
- Economic activity in New Zealand remains subdued and with spare productive capacity, domestic inflation pressures continue to ease. Price and wage-setting behaviours are adapting to a low-inflation environment while the price of imports has fallen, also contributing to lower headline inflation.
- Economic growth is expected to recover during 2025 as lower interest rates will encourage spending, although elevated global economic uncertainty is expected to weigh on business investment decisions. Higher prices for some key commodities and a lower exchange rate will increase export revenues and employment growth is expected to pick up in the second half of the year as the domestic economy recovers.
- Global economic growth is expected to remain subdued in the near term as geopolitics, including uncertainty about trade barriers, is likely to weaken global growth. Global economic activity is also likely to remain fragile over the medium term given increasing geoeconomic fragmentation.
- Consumer price inflation is expected to be volatile in the near term, due to a lower exchange rate and higher petrol prices. Nevertheless, the Committee is well placed to maintain price stability over the medium term.
- The economic outlook remains consistent with inflation remaining in the band over the medium term, giving the Committee confidence to continue lowering the OCR. If economic conditions continue to evolve as projected, the Committee has scope to lower the OCR further through 2025.
- The next meeting is on 9 April 2025.
Next 24 Hours Bias
Medium Bullish
The Japanese Yen (JPY)
Key news events today
S&P Global Composite PMI (12:30 am GMT)
What can we expect from JPY today?
PMI activity in Japan expanded at the strongest rate in five months based on the flash estimates for February. The Composite index rose to 51.6, this modest improvement was driven by sustained growth in services activity, while manufacturing output declined at a softer rate. Coupled with speculation that the Bank of Japan (BoJ) will hike interest rates sooner rather than later, the yen has strengthened significantly causing USD/JPY to tumble under 150 overnight. Downward pressures remain for this currency pair and it is likely to slide lower as the day progresses.
Central Bank Notes:
- The Policy Board of the Bank of Japan decided on 24 January, by an 8-1 majority vote, to set the following guidelines for money market operations for the inter-meeting period:
- The Bank will encourage the uncollateralized overnight call rate to remain at around 0.5%.
- 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 moderately 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 at around 3% recently, as services prices have continued to rise moderately, reflecting factors such as wage increases, although the effects of a pass-through to consumer prices of cost increases led by the past rise in import prices have waned.
- Inflation expectations have risen moderately while underlying CPI inflation has been increasing gradually toward the price stability target of 2%. With wages continuing to rise, there has been an increase in moves to reflect higher costs, such as increased personnel expenses and distribution costs, in selling prices.
- 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 19 March 2025.
Next 24 Hours Bias
Medium Bearish
The Euro (EUR)
Key news events today
S&P Global Composite PMI (9:00 am GMT)
What can we expect from EUR today?
After contracting in October and December, Composite PMI activity in the Euro Area rebounded into expansion in January with a reading of 50.2. PMI activity is now expected to mark a second consecutive month of expansion with a reading of 50.5 in February, based on the flash estimates. Should PMI activity come in stronger than anticipated, the Euro could receive a strong tailwind during the European trading hours.
Central Bank Notes:
- The Governing Council reduced the three key ECB interest rates by 25 basis points on 30 January to mark the fourth 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 2.90%, 3.15% and 2.75% respectively.
- The disinflation process is well on track and inflation is set to return to the Governing Council’s 2% medium-term target in the course of this year. Most measures of underlying inflation suggest that inflation will settle at around the 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 asset purchase programme (APP) and pandemic emergency purchase programme (PEPP) portfolios are declining at a measured and predictable pace, as the Eurosystem no longer reinvests the principal payments from maturing securities.
- 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 6 March 2025.
Next 24 Hours Bias
Weak Bullish
The Swiss Franc (CHF)
Key news events today
No major news events.
What can we expect from CHF today?
The franc saw strong inflows on Thursday as USD/CHF fell over 0.6% to hit a low of 0.8975. However, this currency pair stabilized on Friday around this level to rebound and looks set to climb above the threshold of 0.9000 once more.
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 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 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
Weak Bullish
The Pound (GBP)
Key news events today
Retail Sales (7:00 am GMT)
S&P Global Composite PMI (9:30 am GMT)
What can we expect from GBP today?
Consumer spending in the U.K. has been poor for most parts of 2024 as sales declined in four out of the last seven months, even in December despite stronger Christmas sales. Consumer spending fell 0.3% MoM in December but it is now expected to rebound 0.4% in January. Combined with the flash Composite PMI report that is expected to show expansion, albeit at a slower pace, the pound could be supported should the above macroeconomic data exceed market expectations.
Central Bank Notes:
- The Bank of England’s Monetary Policy Committee (MPC) voted by a majority of 7 to 2 to reduce the Bank Rate by 25 basis points (bps) to bring it down to 4.50% on 6 February 2025, while two members preferred to reduce it by 50 bps.
- 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.
- CPI inflation was 2.5% in 2024 Q4 as domestic inflationary pressures moderated but remained somewhat elevated while some indicators eased more slowly than expected. Higher global energy costs and regulated price changes are expected to push up headline CPI inflation to 3.7% in 2025 Q3, even as underlying domestic inflationary pressures are expected to wane further.
- While CPI inflation is expected to fall back to around the 2% target thereafter, the Committee will pay close attention to any consequent signs of more lasting inflationary pressures.
- GDP growth has been weaker than expected at the time of the November Monetary Policy Report, and indicators of business and consumer confidence have declined – GDP growth is expected to pick up from the middle of this year.
- The labour market has continued to ease and is judged to be broadly in balance. Productivity growth has been weaker than previously estimated, and the Committee judges that growth in the supply capacity of the economy has weakened.
- Based on the Committee’s evolving view of the medium-term outlook for inflation, a gradual and careful approach to the further withdrawal of monetary policy restraint is appropriate and it will continue to monitor closely the risks of inflation persistence and what the evolving evidence may reveal about the balance between aggregate supply and demand in the economy.
- 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 8 May 2025.
Next 24 Hours Bias
Weak Bullish
The Canadian Dollar (CAD)
Key news events today
Retail Sales (1:30 pm GMT)
What can we expect from CAD today?
Consumer spending in Canada has been steady in the second half of 2024 and it surged in December due to the traditional holiday shopping season. Sales jumped 1.6% MoM to mark the biggest gains since May 2022, based on preliminary estimates. The final estimate points to a slightly lower figure of 1.5% but it would still register a huge monthly gain for retail sales. The Loonie could receive a near-term boost later today, a result that would weigh on USD/CAD.
Central Bank Notes:
- The Bank of Canada reduced its target for the overnight rate by 25 basis points bringing it down to 3% on 29 January; this marked the sixth consecutive meeting where rates were reduced.
- The bank announced its plan to complete the normalization of its balance sheet, ending quantitative tightening, and will restart asset purchases in early March, beginning gradually so that its balance sheet stabilizes and then grows modestly, in line with growth in the economy.
- Past cuts to interest rates have started to boost the economy and the recent strengthening in both consumption and housing activity is expected to continue. However, business investment remains weak while the outlook for exports is being supported by new export capacity for oil and gas.
- The Bank forecasts GDP growth will strengthen in 2025 and now projects GDP will grow by 1.8% in both 2025 and 2026, somewhat higher than potential growth.
- The labour market remains soft, with the unemployment rate at 6.7% in December. Job growth has strengthened in recent months, after lagging growth in the labour force for more than a year. Wage pressures, which have proven sticky, are showing some signs of easing.
- CPI inflation remains close to 2%, with some volatility due to the temporary suspension of the GST/HST on some consumer products. Shelter price inflation is still elevated but it is easing gradually, as expected
- A broad range of indicators, including surveys of inflation expectations and the distribution of price changes among components of the CPI, suggests that underlying inflation is close to 2% with forecasts that CPI inflation will be around the 2% target over the next two years.
- 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 a further 25 basis points to support growth and keep inflation close to the middle of the 1-3% target range.
- The cumulative reduction in the policy rate since last June is substantial as lower interest rates are boosting household spending and the economy is expected to strengthen gradually and inflation to stay close to target. However, if broad-based and significant tariffs were imposed, the resilience of Canada’s economy would be tested.
- The Bank is committed to maintaining price stability for Canadians by keeping inflation close to the 2% target.
- The next meeting is on 12 March 2025.
Next 24 Hours Bias
Weak Bullish
Oil
Key news events today
No major news events.
What can we expect from Oil today?
Despite the EIA crude oil inventories increasing higher than forecasts for the fourth week in a row as seen in the overnight report, crude oil rose for the third successive day as disruptions to oil supply in Russia and Ukraine as a result of attacks on pipeline infrastructure and production facilities kept prices elevated. WTI oil has climbed almost 3% this week and it looks set to break above the $73 mark on the final trading day of the week.
Next 24 Hours Bias
Medium Bullish
