Forex Fundamental News Facts for 26th April, 2024

Forex Fundamental News Facts for 26th April, 2024

[Quick Facts]

1. Tokyo inflation slows sharply and the BOJ will remain cautious.
   2. WSJ’s Timiraos says the dream of Fed rate cuts is slipping away.
   3. Yellen says currency market intervention should be very rare.
   4. Slower economic growth and higher inflation put the Fed in a bind.
   5. March PCE Inflation Index Forecasts Show Mixed Readings On Price Pressures.
   6. UK Consumer Confidence Improves As Inflation And Taxes Fall.
   7. Euro Turns To GDP And Inflation Data For A Lifeline.

[News Details]

Tokyo’s Inflation Rate Decreases, Causing Caution for BOJ: 

The Tokyo Consumer Price Index (CPI) for April increased by 1.8% year-on-year, and the core CPI increased by 1.6% compared to the previous year. Both these figures are significantly lower than previous data and forecasts. This decrease was largely due to education subsidies, which was a one-time factor. However, other indicators suggest a prolonged period of weakness. For instance, food inflation is declining and energy prices are not showing significant increases, indicating that the weak yen has not significantly affected import prices. As inflation decreases and real wage growth becomes positive, this could bolster consumption. However, this is not the increase in core inflation that the Bank of Japan (BOJ) is aiming for. These factors may cause the BOJ to exercise caution in its policy decisions.

Market risk appetite was negatively impacted on Thursday due to unexpectedly high U.S. inflation and weak GDP growth numbers. However, U.S. stocks managed to close off their lows on Thursday, and if Asian stocks maintain their position on Friday, they could record their best week since July of the previous year.

The BOJ is anticipated to maintain its key interest rate and forecast inflation to remain close to its 2% target in the coming years due to expected steady wage increases. However, with the yen hitting a 34-year low against the dollar, Ueda faces the challenge of maintaining a balanced approach to exiting ultra-easy policy while addressing the significant pressure on the currency.

Policymakers are reportedly considering measures to reduce the central bank’s government bond purchases, which could lead to a phase of quantitative tightening. The yen enters the BOJ decision at a 34-year low, well below 155.00 per dollar, and down 9% this year, putting it on the defensive against other Asian currencies.

U.S. Treasury Secretary Janet Yellen, in a recent interview, avoided discussing Japanese intervention but stated that such instances should ideally be rare and only in response to excessive volatility.

Timiraos Suggests that Hopes for Fed Rate Cuts are Fading: 

Nick Timiraos, the chief economics correspondent for The Wall Street Journal, noted in his recent article that the latest report on economic activity has been a wake-up call for investors and Federal Reserve policymakers who were hoping that lower inflation would allow for interest rate cuts to start this summer. The data indicates that U.S. inflation has been more persistent than anticipated for the third consecutive month after a significant decrease in the second half of last year. The growth and price data for some sectors this year have not been sufficient to significantly alter the Fed’s outlook. However, the consistently disappointing data has had a significant impact. Specifically, inflation data has been stronger than anticipated and has been revised upwards in subsequent reports in recent months. This trend has led investors and Fed officials to reconsider whether it would be appropriate to cut interest rates this year.

Yellen Advocates for Rare Currency Market Intervention: 

U.S. Treasury Secretary Janet Yellen stated that currency market intervention should be infrequent when asked about her views on Japan’s potential measures in response to the yen’s depreciation against the U.S. dollar. She explained that adjustments of exchange rates in markets are part of what allows countries to have different policies, reflecting the views of the Group of Seven nations. For large countries whose exchange rates are determined by the market, intervention should only occur on very rare occasions. She expressed hope that such intervention would be rare and would only occur in cases of excessive volatility, and that they would consult in advance.

Slower Economic Growth and Higher Inflation Challenge the Fed: 

The U.S. GDP grew at an annualised rate of 1.6% in the first quarter, which is significantly lower than both the previous and expected data. Meanwhile, the core PCE price index increased at an annualised rate of 3.7% in the first quarter, which is significantly higher than the previous data and forecasts. Specifically, the growth of services prices accelerated to an annualised rate of 5.4%. This suggests that the process of bringing inflation back to the target is far from over. This confirms the data of the past few months. It will take longer for services inflation to decrease, and there is some upward pressure on commodity prices, which will eventually affect headline inflation as well. This is a cyclical upturn for some commodities, but it suggests a very long deflationary process for services. When the two combine, headline inflation begins to re-accelerate. Slower economic growth with higher inflation is the worst scenario for the Fed.

March PCE Inflation Index Forecasts Show Mixed Readings On Price Pressures: 

The March Personal Consumption Expenditures (PCE) price index is expected to present a varied view of inflation trends, which could strengthen the Federal Reserve’s decision to delay interest rate increases. The overall PCE Price Index is predicted to slightly increase on a year-over-year basis to 2.6% from 2.5% in February. However, the month-over-month change is expected to decrease to 0.30% from 0.33%.

Excluding unstable food and energy costs, the core PCE inflation index is projected to rise to 2.7%, a slight decrease from February’s 2.8% year-over-year increase. The consensus estimate for core PCE inflation predicts a month-over-month increase to 0.30% from February’s 0.26%.

Although the Consumer Price Index (CPI) report usually overshadows the PCE report, the latter is the Fed’s preferred method for tracking inflation. With the CPI indicating stalled inflation progress, the PCE is gaining more attention as Fed officials express less confidence in the potential for inflation to continue its decline towards their 2% target.

Economist Kevin Cummins from NatWest Markets suggests that the core PCE deflator may have increased by another 0.3% in March. A year-over-year pace of 2.7% or 2.8% in March would be seen as insufficient progress on the Fed’s inflation mandate.

Morningstar’s chief US economist, Preston Caldwell, predicts a mixed report for March but better eventual news for the PCE. He notes that core PCE for March will be far milder than core CPI, but it’s still accelerated to an estimated 3.8% annualised in three months ending in March, up from 1.6% in prior three months. However, he expects the largest contributors to the acceleration in core PCE inflation (durables, housing, and financial services) to reverse course in the coming months. Slowing economic growth over the next year will provide another negative impulse for inflation.

Caldwell points to durable goods inflation as a key factor keeping core PCE elevated. Given that supply chain conditions remain improved, he expects durables to dip back into deflation territory. Housing inflation has remained stubbornly high, but leading-edge data still strongly points to a normalisation of housing inflation being around the corner.

To our concern, there is a high chance that US Core PCE price index data will be less than previous value. If that happens, after the news release, USD will act much weaker and it may directly reflect on commodity demands (bullish gold).
Alternatively, if the value rises than the previous, then USD will act much stronger and it may directly reflect on commodity supplies (bearish gold).

The US economy experienced a significant slowdown in growth, reaching a nearly two-year low in the last quarter, while inflation surged to levels causing discomfort. This disrupted a period of robust demand and subdued price pressures that had previously led to hopes for a smooth economic adjustment.

The Gross Domestic Product (GDP) saw a 1.6% annualized increase, falling short of all economic predictions. The primary driver of economic growth, personal spending, also grew at a slower than expected rate of 2.5%. A growing trade deficit had the most significant negative impact on growth since 2022.

A key indicator of underlying inflation rose by an unexpected 3.7%, marking the first quarterly increase in a year. These figures indicate a significant loss of economic momentum at the start of 2024, following a year of surprisingly strong performance. The rise in inflation may put additional pressure on Federal Reserve policymakers to delay any planned cuts and reassess whether the current borrowing costs are sufficiently high.

The anticipation of a delay in the Federal Reserve’s first interest rate cut of the year led to a drop in Treasury bonds and a lower opening for the S&P 500. Olu Sonola, the head of US economic research at Fitch Ratings, highlighted the significant inflation figures in the report. He suggested that if growth continues to slow down while inflation rises sharply, the prospect of a Federal Reserve interest rate cut in 2024 could become increasingly unlikely.

The inflation increase in the first quarter was driven by a 5.1% surge in the service sector’s inflation rate, excluding housing and energy, nearly twice the rate of the previous quarter. Data for March on inflation, consumer spending, and income are due to be released on Friday.

To our concern, there is a high chance that US UOM consumer Sentiment news data will be less than previous value. If that happens, after the news release, USD will act much weaker and it may directly reflect on commodity demands (bullish gold).
Alternatively, if the value rises than the previous, then USD will act much stronger and it may directly reflect on commodity supplies (bearish gold).

For the first time in two years, federal government spending had a negative impact on the GDP. Business inventories also declined for the second consecutive quarter. After adjusting for inventories, government spending, and trade, the final sales to private domestic purchasers, a crucial measure of underlying demand, increased at a rate of 3.1%.

The GDP report showed that spending on services, particularly healthcare and financial services, increased the most since the third quarter of 2021. In contrast, spending on goods declined for the first time in over a year, primarily due to a decrease in spending on motor vehicles and gasoline.

Residential investment saw a nearly 14% annual increase, the fastest since the end of 2020, highlighting efforts by builders to increase inventory. At the Federal Reserve meeting next week, traders will be looking for hints in Chair Jerome Powell’s comments about potential policy changes. Powell has previously stated that growth can occur at a faster rate without causing inflation due to supply-side improvements like immigration, which is increasing the workforce size.

Separate data released on Thursday showed that initial applications for unemployment benefits dropped to 207,000 last week, the lowest level in two months, and continuing claims also decreased. The GDP and inflation data present additional challenges for President Joe Biden, who has been trying to convince Americans that he is effectively managing the economy. Consumer sentiment has remained stagnant in recent months, and voters in key swing states have a pessimistic outlook on the economy.

UK Consumer Confidence Improves As Inflation And Taxes Fall:

UK consumer confidence has seen a slight increase this month, driven by a decrease in inflation and the potential for additional tax cuts, which have encouraged consumers to spend more, according to a survey. GfK Ltd. reported that its primary indicator of household sentiment rose to -19, an improvement of 2 percentage points from March and significantly better than the -30 recorded in April of the previous year during the cost-of-living crisis.

This improvement coincided with a month that saw inflation drop to its lowest level since 2021, a reduction in national insurance payroll taxes, and the lowest domestic energy prices in two years. There were also indications that the economy is rebounding from the mild recession of the previous year.

This is positive news for Prime Minister Rishi Sunak, who is relying on improving living standards to create a positive atmosphere ahead of an anticipated election in the fall. With his Conservative Party lagging in opinion polls, Sunak has openly expressed his intention to further reduce taxes before the election.

Joe Staton, client director at GfK, suggested that with the arrival of spring, consumer confidence might finally be slowly improving and moving in the right direction. Four out of the five components of the index increased this month, with consumers expressing less pessimism about the economic outlook and showing a greater willingness to spend on high-value items.

An index that tracks how Britons feel about their financial future remained at +2, indicating that more people expect things to improve rather than worsen in the coming year. However, GfK warned that overall confidence still has a long way to go to reach the positive levels last seen before the Brexit referendum in 2016.

Expectations that the Bank of England might lower interest rates as early as the summer are diminishing due to warnings from policymakers about the risk of persistent inflation. The markets are now predicting just two rate cuts this year, a significant decrease from the six predicted in January.

Linda Ellett, UK head of consumer, retail and leisure at KPMG, noted that while it’s encouraging to see rising confidence levels, households are still feeling the pinch, so this hasn’t yet translated into a consistent and significant increase in consumer spending.

Euro Turns To GDP And Inflation Data For A Lifeline:

The euro has had a challenging year, depreciating 3% against the dollar due to the economic disparity between the Eurozone and the United States. This has led investors to believe that the European Central Bank (ECB) will reduce interest rates more quickly and significantly than the Federal Reserve.

Eurozone’s economic growth has been stagnant for about a year, and inflation has rapidly cooled to 2.4% in March. Consequently, ECB officials have clearly indicated their intention to cut rates in June. The main question is their strategy following this.

Recent leading indicators have shown promising signs, with business surveys suggesting a resurgence in growth and inflation. If official data confirms this, the ECB may decide to slow down any further rate cuts after June.

Next week, attention will be on the first estimate of Eurozone’s Q1 GDP growth and April’s inflation statistics, both due on Tuesday. The March unemployment rate will be released on Friday. Business surveys suggest a 0.3% expansion in GDP in the first quarter compared to the previous quarter when growth was flat. The same surveys indicate that inflation increased again in April as companies raised their selling prices faster, reflecting rising wage and energy costs.

A resurgence in both growth and inflation could provide much-needed support to the euro, strengthening the single currency as traders reverse some bets on rapid ECB rate cuts. However, the euro/dollar pair has been trading below a downtrend line this year, indicating a negative prevailing trend.

Strong data could allow the recent recovery to continue, possibly towards 1.0800, a region reinforced by the 50- and 200-day simple moving averages (SMAs). On the downside, disappointing upcoming data could renew selling interest in the pair. A potential drop back below the 1.0690 zone would shift the focus towards the April lows near 1.0600.

In the broader picture, the euro’s losses this year have been primarily against the strong US dollar. Against the British pound, the single currency has only lost 1%, while it has risen almost 7% against the declining Japanese yen. Given the economic performance, these patterns can continue. The US economy is the strongest in terms of growth, so the dollar may continue to outperform in the foreseeable future, especially if stock markets remain unstable. The Eurozone and UK economies are in similar shape, suggesting that these two currencies could continue to trade almost in lockstep. Therefore, the euro’s best chance at further gains may be against the yield-starved Japanese yen. The main risk here is the prospect of foreign exchange intervention by Tokyo. However, the yen might need to fall even further before authorities step in.

Consumer confidence in Germany has risen to its highest level in two years, reaching -24.2 in May from -27.3 in April. German consumers have become more optimistic about their income expectations, and their willingness to spend and save has slightly increased, suggesting a cautious optimism.

The German economy has entered a period of cyclical improvements, as indicated by the Ifo index and hard macro data from the first two months of the year. The current improvement has been driven by a rebound in industrial activity, trade, and increased activity in the construction sector due to weather conditions. However, private consumption has lagged behind. Retail sales have been falling for four consecutive months since November of the previous year, and consumer confidence has been subdued. The recent improvement in consumer confidence suggests that private consumption could gradually improve in the coming months.

Looking forward, with a 7% year-on-year increase in nominal wages in the first quarter, 2024 is expected to see the strongest increase in real wages in nearly a decade. A recovery in private consumption is expected after the winter months’ consumption slump. However, due to high prices, geopolitical and domestic policy uncertainties, and changes in the labor market, it is likely that German consumers will prefer to save as a precaution.

Despite a long period of disappointing macroeconomic news from Germany, optimism has finally returned. The cyclical downturn is behind us, but this does not necessarily mean that a strong recovery is imminent, as structural weaknesses persist. In fact, one potential downside of this cyclical improvement is that it could lead to policy complacency, which could further delay necessary structural improvements

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🔥News releases on This WEEK :

26/04 Fri Tentative JPY Monetary Policy Statement

26/04 Fri 6:30pm USD Core PCE Price Index m/m

26/04 Fri 8:00pm USD Revised UoM Consumer Sentiment

N.B. Time mentioned here is on Gmt +6

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Sources :
– CNBC, Bloomberg, Reuters, Fastbull, Yahoo Finance, CNN, ForexFactory News, Myfxbook News etc

Prepared to you by “Akif Matin“

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