IC Markets Europe Fundamental Forecast | 22 December 2023
What happened in the Asia session?
The combination of the release of the Bank of Japan’s (BoJ) minutes from its recent monetary policy meeting and softer-than-expected CPI readings triggered a sell-off in the Japanese yen, causing USD/JPY to surge past 142.50. Despite demand for the dollar waning, this currency pair could remain elevated today.
What does it mean for the Europe & US sessions?
With both headline and core PCE Price Index readings continuing to ease steadily over the last few months, another round of ‘softer’ data for the month of November could potentially provide further impetus to the Federal reserve to adopt an even more dovish outlook with regards to monetary policy – resulting in a move that could trigger a strong dollar sell-off.
Meanwhile, the University of Michigan will release its final findings on consumer sentiment for the month of December. No major revisions are expected and the index is likely to show a reading of 69.4 to mark the first increase in sentiment following four consecutive months of decline. Inflation expectations are also expected to ease from 4.5% YoY in November to 3.1% YoY in December, another potential bearish catalyst for the DXY.
The Dollar Index (DXY)
Key news events today
PCE Price Index (1:30 pm GMT)
UoM Consumer Sentiment (3:00 pm GMT)
What can we expect from DXY today?
With both headline and core PCE Price Index readings continuing to ease steadily over the last few months, another round of ‘softer’ data for the month of November could potentially provide further impetus to the Federal reserve to adopt an even more dovish outlook with regards to monetary policy – resulting in a move that could trigger a strong dollar sell-off.
Meanwhile, the University of Michigan will release its final findings on consumer sentiment for the month of December. No major revisions are expected and the index is likely to show a reading of 69.4 to mark the first increase in sentiment following four consecutive months of decline. Inflation expectations are also expected to ease from 4.5% YoY in November to 3.1% YoY in December, another potential bearish catalyst for the DXY.
Central Bank Notes:
- The Federal Funds Rate target range remained unchanged at 5.25% to 5.50% for the third meeting in a row.
- The Committee seeks to achieve maximum employment and inflation at the rate of 2.0% over the longer run.
- The Committee will continue to assess additional information and its implications for monetary policy.
- In determining the extent of any additional policy firming that may be appropriate to return inflation to 2.0% over time, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments.
- In addition, the Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities, as described in its previously announced plans.
- Next meeting runs from 30 to 31 January 2024.
Next 24 Hours Bias
Weak Bearish
Gold (XAU)
Key news events today
PCE Price Index (1:30 pm GMT)
UoM Consumer Sentiment (3:00 pm GMT)
What can we expect from Gold today?
With both headline and core PCE Price Index readings continuing to ease steadily over the last few months, another round of ‘softer’ data for the month of November could potentially provide further impetus to the Federal reserve to adopt an even more dovish outlook with regards to monetary policy – resulting in a move that could trigger a strong dollar sell-off.
Meanwhile, the University of Michigan will release its final findings on consumer sentiment for the month of December. No major revisions are expected and the index is likely to show a reading of 69.4 to mark the first increase in sentiment following four consecutive months of decline. Inflation expectations are also expected to ease from 4.5% YoY in November to 3.1% YoY in December, another potential bearish catalyst for the dollar and thus lift gold prices.
Next 24 Hours Bias
Weak Bullish
The Australian Dollar (AUD)
Key news events today
No major news events.
What can we expect from AUD today?
The Aussie briefly climbed above the 0.6800-threshold as the surprise miss in Q3 GDP growth in the US drove this currency higher. However, the Aussie appears to have hit a resistance around this threshold and could pull back slightly on the final trading day before the Christmas holidays.
Central Bank Notes:
- The RBA kept the cash rate target unchanged at 4.35%, marking the fifth pause out of the last six board meetings.
- Inflation in Australia has passed its peak but is still too high and the progress in bringing inflation back to the target range of 2% to 3% was looking slower than earlier forecast.
- Any further tightening of monetary policy to ensure that inflation returns to target in a reasonable timeframe will depend upon the data and the evolving assessment of risks.
- Next meeting is on 6 February 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 remains capped under the 0.6300-threshold after hitting a high of 0.6299 overnight. In a similar situation to its Pacific neighbour, the Kiwi appears to have hit a resistance around this threshold as well and could pull back slightly on the final trading day before the Christmas holidays.
Central Bank Notes:
- The Monetary Policy Committee kept the OCR unchanged at 5.50% for the fourth meeting in a row.
- The Committee is confident that the current level of the OCR is restricting demand. However, ongoing excess demand and inflationary pressures are of concern, given the elevated level of core inflation.
- If inflationary pressures were to be stronger than anticipated, the OCR would likely need to increase further.
- The Committee agreed that interest rates will need to remain at a restrictive level for a sustained period of time, so that consumer price inflation returns to target and to support maximum sustainable employment.
- Next meeting is on 28 February 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?
The combination of the release of the Bank of Japan’s (BoJ) minutes from its recent monetary policy meeting and softer-than-expected CPI readings triggered a sell-off in the Japanese yen, causing USD/JPY to surge towards 142.50 as Asian markets came online.
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.
- Inflation expectations have risen moderately with underlying CPI inflation likely to increase gradually towards achieving the price stability target, as the output gap turns positive and as medium- to long-term inflation expectations and wage growth rise.
- 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 23 January 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?
The Euro hit a high of 1.1013 overnight, a level that has functioned as a pretty significant resistance zone since the end of November. The Euro was retreating away from the level as Asian markets came online but it could regain the bullish momentum during the Europe and US sessions.
Central Bank Notes:
- The ECB kept the three key interest rates unchanged for a second consecutive meeting, keeping the main refinancing rate on hold at 4.50%.
- While inflation has dropped in recent months, it is likely to pick up again temporarily in the near term.
- Underlying inflation has eased further but domestic price pressures remain elevated, primarily owing to strong growth in unit labour costs.
- The past interest rate increases continue to be transmitted forcefully to the economy as tighter financing conditions are dampening demand, and this is helping to push down inflation.
- The Governing Council will continue to follow a data-dependent approach to determining the appropriate level and duration of restriction.
- Next meeting is on 25 January 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?
After falling under the 0.8600-threshold at the beginning of the week, USD/CHF remains under heavy selling pressure – this currency pair is expected to drift lower but retracements to the upside can be expected.
Central Bank Notes:
- The SNB kept the policy rate unchanged at 1.75% for a second consecutive meeting in December.
- The inflation forecast puts average annual inflation at 2.1% for 2023, 1.9% for
2024 and 1.6% for 2025.
- GDP growth is likely to be weak in the coming quarters; subdued demand from abroad and the tighter financing conditions are having a dampening effect.
- Switzerland’s GDP is likely to grow by around 1% this year. For 2024, the SNB currently expects growth of between 0.5% and 1%.
- Next meeting is on 21 March 2024.
Next 24 Hours Bias
Weak Bearish
The Pound (GBP)
Key news events today
Retail Sales (7:00 am GMT)
What can we expect from GBP today?
After declining over the last couple of months, retail sales in the UK are expected to grow 0.4% MoM. This would mark only the second month of growth in five months, highlighting the weakness in consumer spending. Should sales figures surprise to the upside, it could provide a significant tailwind for the Pound.
Central Bank Notes:
- The Bank of England’s Monetary Policy Committee (MPC) voted by a majority of 6-to-3 to maintain its Official Bank Rate at 5.25%.
- Three members preferred to increase the Bank Rate by 0.25 percentage points to 5.5%.
- CPI inflation remains well above the 2% target, with twelve-month CPI inflation falling sharply from 6.7% in September to 4.6% in October while services price inflation declined to 6.6%.
- The decline in CPI inflation over recent months could largely be attributed to falls in energy, food, and core goods price inflation, as external cost pressures had continued to abate. Services price inflation had remained elevated, however.
- The mean projection for CPI inflation is 2.2% and 1.9% at the two- and three-year horizons respectively.
- Next meeting is on 1 February 2024.
Next 24 Hours Bias
Weak Bullish
The Canadian Dollar (CAD)
Key news events today
GDP (1:30 pm GMT)
What can we expect from CAD today?
Canada’s economy is expected to grow for the third consecutive month with November’s monthly GDP estimate indicating a growth of 0.2% MoM. Should this figure surprise to the upside, it could potentially function as a bullish catalyst for the Loonie and thus drive USD/CAD lower during the US session.
Central Bank Notes:
- The Bank of Canada held its target for the overnight rate at 5.0% for the third meeting in a row while continuing its policy of quantitative tightening.
- Canada’s economy stalled through the middle quarters of 2023 with real GDP contracting at a rate of 1.1% in the third quarter, following a growth of 1.4% in the second quarter.
- The slowdown in the economy is reducing inflationary pressures in a broadening range of goods and services prices, leading to the easing of CPI inflation to 3.1% YoY in October.
- The Governing Council is still concerned about risks to the outlook for inflation and remains prepared to raise the policy rate further if needed and would also like to see further and sustained easing in core inflation.
- Next meeting is on 24 January 2024.
Next 24 Hours Bias
Weak Bearish
Oil
Key news events today
No major news events.
What can we expect from Oil today?
Crude oil prices slipped overnight as Angola decided to leave OPEC following a dispute over oil production quotas after 16 years of membership. This latest departure – following recent exits by Qatar, Indonesia, and Ecuador – shrinks the cartel down to 12 nations as they grapple to shore up oil prices.
WTI oil initially shed as much as 3.5% to fall as low as $72.55 per barrel but it then reversed to climb back above $74.00 as Asian market came online – prices remain lifted by the recent attacks in the Red Sea which is causing global trade disruptions as well as increased supply chain costs.
Next 24 Hours Bias
Medium Bullish
