IC Markets Europe Fundamental Forecast | 31 May 2024
What happened in the Asia session?
After two months of expansion, China’s manufacturing sector slipped back into contraction as new orders and foreign sales both fell while employment levels remained weak for the month of May. The manufacturing PMI fell from 50.4 in the previous month to 49.5 while the reading for the services sector missed market expectations of 51.5 to remain relatively unchanged at 51.1. Although it marked the 17th consecutive month of expansion, it was the softest pace of expansion since January as new orders, foreign sales and employment all declined. Overall, it was a poor month for business activity which could add further downward pressures on crude oil prices today.
What does it mean for the Europe & US sessions?
Inflation in the Euro Area has eased significantly over the past 10 to 12 months with headline and core CPI coming in at 2.4% and 2.7% respectively YoY for the month of April. The flash estimates for May point to an unchanged figure for core CPI but headline CPI is anticipated to increase to 2.5% YoY. Should inflationary pressures return for this region, it is likely to function as a near-term bullish catalyst for the Euro today.
The PCE Price Index – which is the Federal Reserve’s preferred measure of inflation – could potentially ease for the month of April. Following the overall ‘soft’ CPI data that was released two weeks ago, there is a high probability that the PCE index will also report a slower rate of price increases.
Meanwhile, the Chicago PMI tumbled to 37.9 in April as it fell for the fifth consecutive month to mark the lowest reading since November 2022. Key sub-components such as new orders, production and employment all decreased once more while the estimate of 41.1 points to a slight improvement in May. Should business activity miss market expectations along with a lower PCE reading, the dollar could face strong selling pressures during the US session.
The Dollar Index (DXY)
Key news events today
PCE Price Index (12:30 pm GMT)
Chicago Business Barometer (1:45 pm GMT)
What can we expect from DXY today?
The PCE Price Index – which is the Federal Reserve’s preferred measure of inflation – could potentially ease for the month of April. Following the overall ‘soft’ CPI data that was released two weeks ago, there is a high probability that the PCE index will also report a slower rate of price increases.
Meanwhile, the Chicago PMI tumbled to 37.9 in April as it fell for the fifth consecutive month to mark the lowest reading since November 2022. Key sub-components such as new orders, production and employment all decreased once more while the estimate of 41.1 points to a slight improvement in May. Should business activity miss market expectations along with a lower PCE reading, the dollar could face strong selling pressures during the US session.
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 Bearish
Gold (XAU)
Key news events today
PCE Price Index (12:30 pm GMT)
Chicago Business Barometer (1:45 pm GMT)
What can we expect from Gold today?
The PCE Price Index – which is the Federal Reserve’s preferred measure of inflation – could potentially ease for the month of April. Following the overall ‘soft’ CPI data that was released two weeks ago, there is a high probability that the PCE index will also report a slower rate of price increases.
Meanwhile, the Chicago PMI tumbled to 37.9 in April as it fell for the fifth consecutive month to mark the lowest reading since November 2022. Key sub-components such as new orders, production and employment all decreased once more while the estimate of 41.1 points to a slight improvement in May. Should business activity miss market expectations along with a lower PCE reading, the dollar could face strong selling pressures during the US session.
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?
Sluggish economic data of the U.S. resulted in the Aussie racing towards 0.6650 overnight. This currency pair pulled back slightly and was trading around 0.6630 as Asian markets came online – these are the support and resistance levels for today.
Support: 0.6590
Resistance: 0.6670
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
Weak Bullish
The Kiwi Dollar (NZD)
Key news events today
No major news events.
What can we expect from NZD today?
The Kiwi rebounded from 0.6100 yesterday to bounce as high as 0.6130 overnight. This currency pair retreated to trade around 0.6115 at the beginning of the Asia session – these are the support and resistance levels for today.
Support: 0.6090
Resistance: 0.6170
Central Bank Notes:
- The Monetary Policy Committee kept the OCR unchanged at 5.50% for the seventh meeting in a row and agreed that interest rates need to remain at a restrictive level for a sustained period to ensure annual headline CPI inflation returns to the 1 to 3% target range.
- Restrictive monetary policy is contributing to an easing in capacity pressures while headline inflation, core inflation, and most measures of inflation expectations are continuing to decline. However, domestic inflation has fallen more slowly than expected and headline CPI inflation remains above the Committee’s target band.
- Higher dwelling rents, insurance costs, council rates, and other domestic services price inflation have resulted in a slow decline in domestic inflation, posing a risk to inflation expectations.
- GDP declined by 0.1% in the December 2023 quarter with economic growth having now been negative for four of the past five quarters. High interest rates have reduced household spending, as well as residential and business investment, despite very strong population growth. Recent indicators of economic activity have been weak, as expected.
- Next meeting is on 10 July 2024.
Next 24 Hours Bias
Weak Bullish
The Japanese Yen (JPY)
Key news events today
Tokyo Core CPI (11:30 pm GMT 30th May)
What can we expect from JPY today?
After easing significantly from 2.4% to 1.6% YoY in April, Tokyo’s core CPI accelerated from a two-year low to rise 1.9% YoY in line with market forecasts. However, core inflation remains under the BoJ’s target of 2% for the second month in a row which reduces the pressure on the central bank to raise its key policy rate in the near future. The yen was somewhat unmoved by the latest inflation print as USD/JPY hovered above 156.80 and it could drift higher as the day progresses.
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
Weak Bullish
The Euro (EUR)
Key news events today
CPI (9:00 am GMT)
What can we expect from EUR today?
Inflation in the Euro Area has eased significantly over the past 10 to 12 months with headline and core CPI coming in at 2.4% and 2.7% respectively YoY for the month of April. The flash estimates for May point to an unchanged figure for core CPI but headline CPI is anticipated to increase to 2.5% YoY. Should inflationary pressures return for this region, it is likely to function as a near-term bullish catalyst for the Euro today.
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 Bullish
The Swiss Franc (CHF)
Key news events today
No major news events.
What can we expect from CHF today?
Switzerland’s economy grew from 0.3% in the fourth quarter of 2023 to 0.5% QoQ in the first quarter of this year to beat market estimates of 0.3%. This latest reading marked the fastest expansion since the second quarter of 2022 which was driven primarily by the services sector and sparked strong demand for the franc yesterday. The spike in the franc caused USD/CHF to dive under 0.9100 to hit a low of 0.9025 overnight – overhead pressures are likely to remain for this currency pair.
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
Medium Bearish
The Pound (GBP)
Key news events today
No major news events.
What can we expect from GBP today?
Cable bounced strongly off the 1.2700-level to hit an overnight high of 1.2747. This currency pair pulled back slightly to trade around 1.2730 at the beginning of the Asia session – these are the support and resistance levels for today.
Support: 1.2680
Resistance: 1.2795
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 Bullish
The Canadian Dollar (CAD)
Key news events today
GDP (12:30 pm GMT)
What can we expect from CAD today?
GDP output in Canada picked up in the last quarter of 2023 and the upward momentum has flowed into the first two months of the year. However, the estimate for March shows the monthly GDP reading remaining flat as increases in utilities, real estate, and rental and leasing were offset by decreases in manufacturing and retail trade. The Loonie could face some selling pressures during the U.S. session should markets see a weaker-than-anticipated reading.
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 Bearish
Oil
Key news events today
China Manufacturing and Services PMI (1:30 am GMT)
What can we expect from Oil today?
After two months of expansion, China’s manufacturing sector slipped back into contraction as new orders and foreign sales both fell while employment levels remained weak for the month of May. The manufacturing PMI fell from 50.4 in the previous month to 49.5 while the reading for the services sector missed market expectations of 51.5 to remain relatively unchanged at 51.1. Although it marked the 17th consecutive month of expansion, it was the softest pace of expansion since January as new orders, foreign sales and employment all declined. Overall, it was a poor month for business activity which could add further downward pressures on crude oil prices today.
Next 24 Hours Bias
Medium Bearish
