IC Trading Europe Fundamental Forecast | 22 November 2024
What happened in the Asia session?
PMI activity in Australia declined at quickest pace in ten months as the flash Composite reading hit a 10-month low of 49.4 as the services sector contracted for the first time since January. Manufacturing output remained depressed with this sector contracting for the 10th successive month. This decrease in activity coincided with a slowdown in new business growth while external demand remained subdued. Combined with robust demand for the greenback, the Aussie will likely face strong headwinds.
Meanwhile, business activity in Japan also fell further in November based on the flash results. Activity at Japanese firms remained in contraction for the second consecutive month with service providers recording only a slight expansion while manufacturers saw a sustained reduction in output. The yen weakened following the release of this report sending USD/JPY higher – this currency pair was rising steadily towards 154.50.
What does it mean for the Europe & US sessions?
Retail sales in the U.K. have been pretty steady over the past three months as sales at non-food stores such as computers and telecommunications retailers led the gains along with online sales in September. However, October’s estimate points to a decline of 0.3% MoM – the first in four months. Should consumer spending disappoint market forecasts, the pound could face intense overhead pressures.
Consumer spending in Canada rebounded strongly in July and August as sales grew 0.9% and 0.4% respectively month-over-month. Categories such as motor vehicles and parts dealers; clothing stores; and sporting goods stores led the higher turnover in August. September’s estimate of a 0.4%-growth points to sustained spending and another month of strong sales could bolster the Loonie later today.
The Dollar Index (DXY)
Key news events today
Composite PMI (2:45 pm GMT)
What can we expect from DXY today?
Services activity has been robust in the U.S. since May and the flash reading is likely to highlight another strong month of gains while the manufacturing sector remains under pressure. New orders for service providers grew at a solid pace which signals strong future demand – the dollar could receive additional tailwinds later today to wrap up an eighth consecutive week of higher gains.
Central Bank Notes:
- The Board of Governors of the Federal Reserve System voted unanimously to lower the Federal Funds Rate target range by 25 basis points to 4.50% to 4.75% on 7th November.
- 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.
- 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.
- Next meeting runs from 17 to 18 December 2024.
Next 24 Hours Bias
Strong Bullish
Gold (XAU)
Key news events today
Composite PMI (2:45 pm GMT)
What can we expect from Gold today?
Services activity has been robust in the U.S. since May and the flash reading is likely to highlight another strong month of gains while the manufacturing sector remains under pressure. New orders for service providers grew at a solid pace which signals strong future demand – the dollar could receive additional tailwinds later today to wrap up an eighth consecutive week of higher gains and perhaps cap the recent rise for gold prices in the near-term.
Next 24 Hours Bias
Medium Bullish
The Australian Dollar (AUD)
Key news events today
Composite PMI (10:00 pm GMT 21st November)
What can we expect from AUD today?
PMI activity in Australia declined at quickest pace in ten months as the flash Composite reading hit a 10-month low of 49.4 as the services sector contracted for the first time since January. Manufacturing output remained depressed with this sector contracting for the 10th successive month. This decrease in activity coincided with a slowdown in new business growth while external demand remained subdued. Combined with robust demand for the greenback, the Aussie will likely face strong headwinds.
Central Bank Notes:
- The RBA kept the cash rate target unchanged at 4.35% on 5th November, marking the eighth 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 but the forecasts published in today’s Statement on Monetary Policy (SMP) do not see inflation returning sustainably to the midpoint of the target until 2026.
- Headline inflation was 2.8% over the year to the September quarter, down from 3.8% over the year to the June quarter; this was as expected due to declines in fuel and electricity prices in the September quarter.
- However, this decline reflects a temporary cost of living relief; abstracting from these effects, underlying inflation (as represented by the trimmed mean) was 3.5% over the year to the September quarter and is still some way from the 2.5% midpoint of the inflation target.
- Growth in output has been weak as past declines in real disposable incomes and the ongoing effect of restrictive financial conditions continue to weigh on household consumption, particularly discretionary consumption.
- However, growth in aggregate consumer demand, which includes spending by temporary residents such as students and tourists, has remained more resilient.
- A range of indicators suggest that labour market conditions remain tight, and while conditions have been easing gradually, some indicators have recently stabilised.
- Employment grew strongly over the three months to September, by an average of 0.4% per month but the unemployment rate was 4.1% in September, up from the trough of 3.5% in late 2022.
- While headline inflation has declined substantially and will remain lower for a time, underlying inflation is more indicative of inflation momentum, and it remains too high while the November SMP forecasts suggest that it will be some time yet before inflation is sustainably in the target range and approaching the midpoint.
- This reinforces the need to remain vigilant to upside risks to inflation and the Board is not ruling anything in or out.
- Policy will need to be sufficiently restrictive until the Board is confident that inflation is moving sustainably towards the target range and it will continue to rely upon the data and the evolving assessment of risks to guide its decisions.
- Next meeting is on 10 December 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?
Lower-than-expected unemployment claims restricted the Kiwi under 0.5900 overnight. This currency pair was floating above 0.5850 at the beginning of the Asia session but it could drift lower as the day progresses – the support and resistance levels for today.
Support: 0.5840
Resistance: 0.5940
Central Bank Notes:
- The Monetary Policy Committee agreed to reduce the OCR by 50 basis points, bringing it down to 4.75% in October as inflation converges to target.
- The Committee assesses that annual consumer price inflation is within its 1 to 3% inflation target range and converging on the 2% midpoint.
- Economic activity in New Zealand is subdued, in part due to restrictive monetary policy while business investment and consumer spending have been weak, and employment conditions continue to soften.
- The economy is now in a position of excess capacity, encouraging price- and wage-setting to adjust to a low-inflation economy; lower import prices have assisted the disinflation.
- High-frequency indicators point to continued subdued growth in the near term, mostly due to weak consumer spending and business investment while labour market conditions are expected to ease further, with filled jobs and advertised vacancy rates continuing to decline.
- The Committee confirmed that future changes to the OCR would depend on its evolving assessment of the economy.
- Next meeting is on 27 November 2024.
Next 24 Hours Bias
Medium Bearish
The Japanese Yen (JPY)
Key news events today
Composite PMI (12:30 am GMT)
What can we expect from JPY today?
Business activity in Japan also fell further in November based on the flash results. Activity at Japanese firms remained in contraction for the second consecutive month with service providers recording only a slight expansion while manufacturers saw a sustained reduction in output. The yen weakened following the release of this report sending USD/JPY higher – this currency pair was rising steadily towards 154.50.
Central Bank Notes:
- The Policy Board of the Bank of Japan decided on 31st October, by a unanimous 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.
- The year-on-year rate of increase in the consumer price index (CPI, all items less fresh food) is likely to be at around 2.5% for fiscal 2024 and then be at around 2% for fiscal 2025 and 2026.
- While the effects of a 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.
- Comparing the projections with those presented in the previous Outlook for Economic Activity and Prices (Outlook Report), the projected real GDP growth rates are more or less unchanged. The projected year-on-year rate of increase in the CPI (all items less fresh food) for fiscal 2025 is somewhat lower due to factors such as the recent decline in crude oil and other resource 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.
- Next meeting is on 19 December 2024.
Next 24 Hours Bias
Weak Bullish
The Euro (EUR)
Key news events today
ECB President Lagarde Speaks (8:30 am GMT)
Composite PMI (9:00 am GMT)
What can we expect from EUR today?
ECB President Christine Lagarde is due to speak at the European Banking Congress in Frankfurt where her remarks could have a strong impact on the direction of the Euro as European markets get underway. After which, the flash Composite PMI will likely show the services sector pulling up overall PMI activity. Should output show a marked improvement in November, the Euro could receive a much-needed near-term boost.
Central Bank Notes:
- The Governing Council reduced the three key ECB interest rates by 25 basis points on 17th October to mark the second 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 3.40%, 3.65% and 3.25% respectively.
- The incoming information on inflation shows that the disinflationary process is well on track while the inflation outlook is also affected by recent downside surprises in indicators of economic activity.
- Inflation is expected to rise in the coming months, before declining to target in the course of next year. Domestic inflation remains high, as wages are still rising at an elevated pace. At the same time, labour cost pressures are set to continue easing gradually, with profits partially buffering their impact on inflation.
- 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 Council is determined to ensure that inflation returns to its 2% medium-term target in a timely manner and will keep policy rates sufficiently restrictive for as long as necessary to achieve this aim and is not pre-committing to a particular rate path.
- Next meeting is on 12 December 2024.
Next 24 Hours Bias
Medium Bearish
The Swiss Franc (CHF)
Key news events today
SNB Chairman Schlegel Speaks (12:40 pm GMT)
What can we expect from CHF today?
SNB Governing Board Chairman Martin Schlegel will deliver a speech titled “Managing Inflation in a Small Open Economy with a Safe Currency” at the SNB and its watchers conference in Zurich where audience questions are expected. Although his speech does not appear to focus on monetary policy, Chairman Schlegel could face questions on the outlook for future monetary policy action in Switzerland.
Central Bank Notes:
- The SNB eased monetary policy by lowering its key policy rate by 25 basis points for the third consecutive meeting, going from 1.25% to 1.00% in September.
- Inflationary pressure has again decreased significantly compared to the previous quarter, reflecting the appreciation of the Swiss franc over the last three months.
- Inflation in the period since the last monetary policy assessment was lower than expected, standing at 1.1% in August compared to 1.4% in May.
- The new conditional inflation forecast is significantly lower than that of June: 1.2% for 2024, 0.6% for 2025 and 0.7% for 2026, based on the assumption that the SNB policy rate is 1.0% over the entire forecast horizon.
- Swiss GDP growth was solid in the second quarter of 2024 as momentum in the chemicals/pharmaceuticals industry was particularly strong.
- However, growth is likely to remain rather modest in the coming quarters due to the recent appreciation of the Swiss franc and the moderate development of the global economy.
- The SNB anticipates GDP growth of around 1% this year while currently expecting growth of around 1.5% for 2025.
- Further cuts in the SNB policy rate may become necessary in the coming quarters to ensure price stability over the medium term.
- Next meeting is on 12 December 2024.
Next 24 Hours Bias
Medium Bullish
The Pound (GBP)
Key news events today
Retail Sales (7:00 am GMT)
Composite PMI (9:30 am GMT)
What can we expect from GBP today?
Retail sales in the U.K. have been pretty steady over the past three months as sales at non-food stores such as computers and telecommunications retailers led the gains along with online sales in September. However, October’s estimate points to a decline of 0.3% MoM – the first in four months. Should consumer spending disappoint market forecasts, the pound could face intense overhead pressures.
Following which, the flash Composite PMI report for November is expected to show a return to expansion for the manufacturing sector, albeit at a marginal pace, while services activity continues to pull up overall PMI activity. Should the flash figures miss market consensus, the pound could depreciate even further.
Central Bank Notes:
- The Bank of England’s Monetary Policy Committee (MPC) voted by a majority of 8 to 1 to reduce the Bank Rate by 25 basis points, to 4.75% on 7th November 2024 – one member preferred to maintain the Bank rate at 5.0%.
- 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.
- Twelve-month CPI inflation fell to 1.7% in September but is expected to increase to around 2.5% by the end of the year as weakness in energy prices falls out of the annual comparison; services consumer price inflation has declined to 4.9%.
- CPI inflation is expected to increase to around 2.75% by the second half of 2025 as weakness in energy prices falls out of the annual comparison, revealing more clearly the continuing persistence of domestic inflationary pressures.
- The MPC’s latest projections for activity and inflation are also set out in the accompanying November Report; this forecast is based on the second case where CPI inflation is projected to fall back to around the 2% target in the medium term as a margin of slack emerges later in the forecast period that acts against second-round effects in domestic prices and wages.
- GDP had grown by 0.5% in 2024 Q2, 0.2% weaker than had been expected in the August Report, and 0.1% weaker than the earlier outturn had indicated at the time of the MPC’s previous meeting. Through the second half of 2024, GDP was projected to grow at a somewhat slower rate than in Q2 – headline GDP growth is expected to fall back to its recent underlying pace of around 0.25% per quarter over the second half of this year.
- The combined effects of the measures announced in Autumn Budget 2024 are provisionally expected to boost the level of GDP by around 0.75% at their peak in a year’s time, relative to the August projections, while the Budget is provisionally expected to boost CPI inflation by just under 0.5% at the peak.
- Annual private sector regular average weekly earnings growth has continued to fall but remained elevated at 4.8% in the three months to August; the MPC judges that the labour market continues to loosen, although it appears relatively tight by historical standards.
- Based on the evolving evidence, a gradual approach to removing policy restraint remains appropriate but 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.
- The Committee continues to monitor closely the risks of inflation persistence and will decide the appropriate degree of monetary policy restrictiveness at each meeting.
- Next meeting is on 19 December 2024.
Next 24 Hours Bias
Medium Bearish
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 rebounded strongly in July and August as sales grew 0.9% and 0.4% respectively month-over-month. Categories such as motor vehicles and parts dealers; clothing stores; and sporting goods stores led the higher turnover in August. September’s estimate of a 0.4%-growth points to sustained spending and another month of strong sales could bolster the Loonie later today.
Central Bank Notes:
- The Bank of Canada reduced its target for the overnight rate by 50 basis points bringing it down to 3.75% while continuing its policy of balance sheet normalization on 23rd October; this marked the fourth consecutive meeting where rates were reduced.
- Canada’s economy grew at around 2% in the first half of the year and growth of 1.75% is expected in the second half; consumption has continued to grow but is declining on a per person basis while exports have been boosted by the opening of the Trans Mountain Expansion pipeline.
- Overall, the Bank forecasts GDP growth of 1.2% in 2024, 2.1% in 2025, and 2.3% in 2026 – as the economy strengthens, excess supply is gradually absorbed.
- The labour market remains soft with unemployment at 6.5% in September while wage growth remains elevated relative to productivity growth. Overall, the economy continues to be in excess supply.
- 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%.
- Excess supply elsewhere in the economy has reduced inflation in the prices of many goods and services while the drop in global oil prices has led to lower gasoline prices – these factors have all combined to bring inflation down.
- The Bank expects inflation to remain close to the target over the projection horizon, with the upward and downward pressures on inflation roughly balancing out; the upward pressure from shelter and other services gradually diminishes, and the downward pressure on inflation recedes as excess supply in the economy is absorbed.
- With inflation now back around the 2% target, the Governing Council decided to reduce the policy rate by 50 basis points to support economic growth and keep inflation close to the middle of the 1% to 3% range.
- If the economy evolves broadly in line with the latest forecast, further reduction of the policy rate can be expected but the timing and pace of additional reductions in the policy rate will be guided by incoming information and assessment of its implications for the inflation outlook.
- The Bank is committed to maintaining price stability for Canadians by keeping inflation close to the 2% target.
- Next meeting is on 11 December 2024.
Next 24 Hours Bias
Weak Bullish
Oil
Key news events today
No major news events.
What can we expect from Oil today?
Crude oil prices rose 2% on Thursday as heightened tensions between Russia and Ukraine raised supply concerns, especially if the conflict widened. In addition, OPEC+ may delay output increases again when it meets on 1st December due to weak global oil demand, said three OPEC+ sources familiar with the discussions. WTI rallied strongly on Thursday to surge past the $70-mark and was trading around $70.20 per barrel as Asian markets came online.
Next 24 Hours Bias
Medium Bullish
