IC Markets Europe Fundamental Forecast | 23 August 2023
What happened in the Asia session?
The flash Composite PMI reading for Japan released this morning showed overall output growing quickly as solid service sector expansion pulls up sluggish manufacturing activity. However, input prices increased at the fastest pace in four months which could be a real concern for the Bank of Japan moving forward, especially with core CPI increasing in the month of July in yesterday’s data release. The Japanese yen could strengthen in the short-term causing USDJPY to pull back further.
What does it mean for the Europe & US sessions?
The dollar index (DXY) continues to slide lower as Europe comes online. With a barrage of flash PMI data coming up during the Europe and US sessions, economic activity for the services and manufacturing sectors are likely to show conditions in the Eurozone as well the UK worsening while US readings should fare better than its European counterparts.
The Dollar Index (DXY)
Key news events today
Composite PMI (1:45 pm GMT)
What can we expect from DXY today?
Flash PMI data will be released today which should indicate the services sector lifting overall economic activity as manufacturing remains in the doldrums. The respective inflation measures will also provide insight into the level of prices for each sector, with demand for services remaining relatively strong. Stronger than expected PMI data could lift the DXY in the latter part of the day.
Central Bank Notes:
- The federal funds rate target range will be 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 19 to 20 September 2023.
Next 24 Hours Bias
Medium Bearish
Gold (XAU)
Key news events today
No major news events.
What can we expect from Gold today?
After hitting a low of $1,890/oz yesterday, gold prices bounced quite strongly to hit the key $1,900-level. Should demand for the US dollar continue to wane, gold could finally manage to stay above this threshold.
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 flash Composite PMI released yesterday pointed to another month of contraction for this index, hitting a 19-month low as new orders fell for the first time since March. Price pressures eased for the services sector while manufacturing input costs rose. The Aussie has recently found relatively strong support above the 0.6400 level as it attempts to break above 0.6450 in a convincing fashion.
Central Bank Notes:
- The RBA kept the cash rate target unchanged at 4.10% for the second consecutive meeting.
- Inflation in Australia has passed its peak and is trending lower but needs to return to the target range.
- Further tightening of monetary policy may be necessary.
- Next meeting on 5 September 2023.
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?
Both headline and core retail sales fell more than their respective forecasts as slower consumer spending gains traction in New Zealand. From an inflation perspective, this signals a positive outcome from the effects of higher interest rates but could weaken an already fragile economy. The Kiwi has managed to find strong support above the 0.5900-level recently and is making a push towards 0.5990.
Central Bank Notes:
- The Monetary Policy Committee kept the OCR unchanged at 5.50% for the third meeting in a row.
- The Committee believes that interest rates at a restrictive level for some time will bring inflation back within the 1% to 3% target range while supporting maximum sustainable employment.
- Headline inflation and inflation expectations have declined but the core reading remains too high.
- Next meeting is on 4 October 2023.
Next 24 Hours Bias
Medium Bullish
The Japanese Yen (JPY)
Key news events today
Composite PMI (12:30 am GMT)
What can we expect from JPY today?
The flash Composite PMI reading for Japan released this morning showed overall output growing quickly as solid service sector expansion pulls up sluggish manufacturing activity. However, input prices increased at the fastest pace in four months which could be a real concern for the Bank of Japan moving forward, especially with core CPI increasing in the month of July in yesterday’s data release. The Japanese yen could strengthen in the short-term causing USDJPY to pull back further.
Central Bank Notes:
- The bank will continue with QQE with Yield Curve Control to achieve the price stability target of 2.0%.
- 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 around +0.5%.
- Inflation is expected to decelerate temporarily but is projected to accelerate moderately later, supported by improvements in the output gap and inflation expectations.
- Japan’s economy is expected to recover gradually.
- Next meeting is on 22 September 2023.
Next 24 Hours Bias
Weak Bearish
The Euro (EUR)
Key news events today
Composite PMI (8:00 am GMT)
What can we expect from EUR today?
Flash PMI data will be released today which is likely to show overall activity in the Eurozone contracting once more, signalling a shrinking economy. After stagnating in June, the Eurozone economy started the third quarter with the fastest contraction in business activity since November last year. The Euro fell sharply yesterday hitting a low of 1.0830 before finding support around 1.0850 – it could continue to retrace higher as the day progresses.
Central Bank Notes:
- The ECB raised the three key interest rates by 25 basis points.
- Economic growth projections have been slightly lowered.
- The Governing Council will ensure interest rates are sufficiently restrictive to achieve the inflation target and keep them at those levels as long as needed.
- Rate decisions will be data-dependent, considering inflation outlook, economic data, underlying inflation dynamics, and monetary policy transmission strength.
- Next meeting on 14 September 2023.
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?
Switzerland’s trade surplus decreased further in July to CHF 2.6B from CHF 3.2B in June – this was the smallest trade surplus since April as exports dropped more than imports. The narrowing trade surplus put pressure on the Swiss franc as USDCHF tumbled as low as 0.8765 before rebounding above 0.8800. This currency pair fell under this key resistance level this morning and could slide lower.
Central Bank Notes:
- SNB has tightened its monetary policy further, raising the SNB policy rate by 0.25 percentage points to 1.75%.
- The new forecast predicts average annual inflation at 2.2% for 2023 and 2024 and 2.1% for 2025. Without the rate increase, the estimates would be even higher.
- 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 GDP is projected to grow around 1.0% this year.
- Next meeting on 21 September 2023.
Next 24 Hours Bias
Weak Bearish
The Pound (GBP)
Key news events today
Composite PMI (8:30 am GMT)
What can we expect from GBP today?
Business volumes reduced in July after five months of growth and the flash PMI data for August is likely to show this overall slowdown in activity continuing to gain traction. Stronger-than-expected inflation data have supported the Pound recently as it manages to stay above 1.2700.
Central Bank Notes:
- The Bank of England’s Monetary Policy Committee (MPC) voted to increase the Bank Rate by 0.25 percentage points to 5.25%.
- One member preferred to maintain the Bank Rate at 5.0% while another two preferred to increase it by 0.5 percentage points.
- CPI inflation is expected to fall significantly to around 5% by the end of the year, accounted for by lower energy prices but services price inflation is projected to remain elevated in the near term.
- The updated projections show that CPI inflation is expected to decline to 2.0% and 1.9% at the two and three-year horizons respectively.
- Next meeting on 21 September 2023.
Next 24 Hours Bias
Medium Bullish
The Canadian Dollar (CAD)
Retail Sales (12:30 pm GMT)
What can we expect from CAD today?
Retail sales have been mixed for most parts of 2023 with readings for March and April declining on a monthly basis. The forecast for July’s print points to sales remaining flat and could signal that Canadian consumers are beginning to tighten their wallets. USDCAD has traded between 1.3500 and 1.3550 since mid-August – a range that is likely to be respected in the near-term.
Central Bank Notes:
- The Bank of Canada increased its target for the overnight rate to 4.75%.
- Canada’s economy was more substantial than expected in the first quarter of 2023, with GDP growth of 3.1%.
- The Bank expects CPI inflation to ease to around 3.0% in the summer, but concerns have increased about inflation staying above the 2.0% target.
- Next meeting on 6 September 2023.
Next 24 Hours Bias
Weak Bearish
Oil
Key news events today
EIA Crude Oil Inventories (2:30 pm GMT)
What can we expect from Oil today?
After last week’s drawdown of over 6M barrels, API stockpiles fell by 2.4M which was slightly lower than the estimate of a 2.9M-barrel decline. Crude prices were already falling prior to this news release with WTI oil dropping to $79.40 per barrel in the aftermath. The upcoming EIA inventories are expected to decline 2.3M and higher drawdown could provide some lift to crude oil prices.
Next 24 Hours Bias
Weak Bearish
