Forex Fundamental News Facts for 09th July, 2024.
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[Quick Facts]
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1. Recent Israeli military actions in Gaza pose a risk to ongoing ceasefire negotiations.
2. Expectations for short-term inflation in the U.S. have decreased marginally.
3. The outcome of the French elections offers multiple avenues for forming a stable government, creating challenges for EURO.
4. Haskel opposes interest rate reductions until inflation shows consistent decline.
5. German exports have experienced a drastic decline.
6. Indian Prime Minister Narendra Modi’s Moscow visit aims to enhance India-Russia relations as a strategic move vis-à-vis China.
7. China’s problems could affect RBA’s hawkish intentions.
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[News Details]
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Israel recently launched a significant military assault on Gaza City, marking the heaviest air strikes and shelling in nine months.
Amidst this conflict, Egypt, Qatar, and the United States are actively working to broker a ceasefire agreement between Israel and Hamas.
Hamas has accepted a key part of the U.S. cease-fire proposal, but the new Israeli offensive threatens to derail negotiations.
The international community must continue pressuring Israel to halt violations against the Palestinian people.
Ceasefire Talks Affect Crude Prices:
Media reports indicated progress in ceasefire negotiations between Israel and Hamas.
Hamas had made concessions to achieve a ceasefire, but Israel continued its attacks on Gaza.
The U.S. urged Israel to reach a ceasefire, while Prime Minister Benjamin Netanyahu insisted on fighting until war objectives were met.
Chinese Economic Data and Trade War Concerns:
Market focus extended to China, the world’s largest oil importer.
Chinese trade and inflation data would provide insights into Chinese demand.
Ongoing tensions between China and the West, including steep tariffs on Chinese electric vehicle imports by the European Union, added to market uncertainty.
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The New York Fed’s Survey of Consumer Expectations (SCE) reveals changes in inflation expectations.
Median one-year-ahead and five-year-ahead inflation expectations have fallen slightly (from 3.2% to 3.0% and from 3.0% to 2.8%, respectively).
However, consumers anticipate slower price increases in gasoline, food, health care, and rent over the next 12 months.
Tropical Storm Beryl Hits Texas Oil Infrastructure:
Tropical Storm Beryl made landfall in Texas, causing widespread power outages and disruptions in the state’s oil industry.
Initially a Category 1 hurricane, Beryl weakened to a tropical storm but still posed risks to oil operations along the Gulf of Mexico.
Key export terminals in Texas were expected to be affected, although the overall impact remained uncertain.
US retailers are adapting to a tripling of spot freight prices by shipping holiday goods earlier than usual. Their bet is that robust consumer demand will offset the higher shipping costs. However, attacks on ships in the Red Sea have disrupted supply chains, leading to port congestion from Asia to the US east coast. Retailers, fearing empty shelves like during the pandemic, have moved their peak shipping season forward, shipping goods for the December holidays as early as April and May instead of the typical July to October timeframe.
Supply chain disruptions and high shipping demand have caused the composite spot rate to surge over 200 per cent since November 2023. Carriers like Maersk warn that freight rates may rise further. While this strategy makes sense individually, it risks overwhelming the liner network, creating a vicious cycle of congestion and higher rates.
Large importers like Walmart and Target have secured multiyear contracts with carriers at prices below the spot market. However, smaller shippers and freight forwarders face market volatility and must pay higher prices to receive goods earlier. Fixed rates negotiated by smaller players for the 2024 season were impacted by the Red Sea crisis, resulting in significant increases.
Despite market conditions, optimism about consumer spending has driven cargo owners to ship earlier. Retailers are surprised by healthy demand, and the National Retail Federation (NRF) expects US imports to reach their highest levels in two years this summer. Disruptions during the pandemic led consumers to start holiday shopping earlier, and recent inflationary pressures have extended the shopping season.
Treasuries and Rate-Cutting Tendency:
Treasuries experienced volatility after the presidential debate but have since stabilized.
The 10-year yield is hovering between 4.25% and 4.30%, seeking reasons to dip lower.
The upcoming June CPI report could influence further rate-cutting decisions.
May’s report prompted a shift from bearish to rate-cut expectations, and this trend may continue.
We currently estimate an 80% probability of a 25 basis point cut in September.
Despite softening data, Chair Powell’s impact on this discount remains uncertain.
Remarkably, low volatility persists despite a risk-on backdrop.
Fed Expectations:
The U.S. dollar recently hit a multi-week low against major peers due to a soft jobs report.
Traders eagerly await Federal Reserve Chair Jerome Powell’s testimony for insights on interest rate paths.
The U.S. dollar index, measuring against euro, sterling, yen, and others, remains near a 3 1/2-week trough.
Market expectations indicate a 76-80% chance of a rate cut at the September meeting, with another cut anticipated by December.
Market Watchers and Consumer Price Data:
Market attention shifts to Federal Reserve Chair Powell’s testimony before Congress.
Consumer price data on Thursday is crucial, given recent cooling from high levels earlier in the year.
Analysts closely monitor Powell’s communication on inflation risks and labor market conditions.
Auctions and Liquidity Conditions:
Upcoming auctions for 3-year, 10-year, and 30-year Treasuries need close monitoring.
Heavy demand can hinder yield reduction, but a surprise CPI report could trouble Treasuries.
Falling bank reserves (now at $3.2 trillion) hint at tightening liquidity conditions.
Oddly, $400 billion is returning to the Fed via reverse repo, suggesting excess liquidity.
Reserves should decline first, unless inertia explains players’ behaviour.
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France faces challenges in forming a stable government due to divergent political forces.
These forces hold opposing views on fiscal policy, social issues, and economic reforms.
Ideally, a moderate left-led government supported by centrists or right-of-center Republicans would provide stability, but this outcome is unlikely.
There’s also a risk of a minority government led by the center-left, which could occasionally align with the National Rally, potentially reversing reforms.
France faces a hung parliament after a left-wing surge prevented Marine Le Pen’s far-right quest for power. The New Popular Front (NFP) emerged as the dominant force in the National Assembly, but without a working majority. President Emmanuel Macron now grapples with a fragmented parliament, weakening France’s role in the EU and beyond. The left secured 182 seats, Macron’s centrist alliance 168, and Le Pen’s National Rally (RN) 143. The NFP, comprising the French Communist Party, hard-left France Unbowed, the Greens, and the Socialist Party, met to discuss their next steps. France Unbowed’s leader, Jean-Luc Melenchon, advocates for an NFP prime minister, but divisions persist. Centrist figures are open to cooperation for stability, but not with France Unbowed. The euro fell after the election, signaling legislative uncertainty. Despite setbacks, Le Pen’s RN made significant gains. The French people’s unity blocked the far right, but vigilance remains crucial to prevent future challenges.
Eurozone’s Rate-Cutting Landscape:
Unlike the US, the eurozone lacks a clear rate-cutting narrative.
The 10-year Bund yield hovers around 2.5% since April.
Mixed data complicates the economic outlook: headline inflation falls, services inflation and wage growth remain stubborn, and labor markets show resilience.
The European Central Bank may cut rates in September, but not necessarily in a series.
Front-end yield curves may stay anchored longer than in the US, limiting steepening potential.
French Election Uncertainty:
French spreads tightened slightly post-election, but conclusions remain premature.
With the left gaining strength, fiscal deficit concerns take a back seat.
The EU’s fate is unclear; both left and right in France harbor anti-EU sentiments.
OAT spreads may widen due to political inexperience, leading to volatility.
Currency Levels:
The euro remains stable around $1.0827, close to its four-week peak.
Sterling trades flat at $1.28085, having reached its strongest level since June 12.
The yen steadies at 160.91 per dollar after rebounding from a 38-year trough.
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BOE policymaker Jonathan Haskel emphasizes evidence-based decisions.
He won’t support rate cuts until there’s solid proof that underlying inflationary pressures have sustainably subsided.
Despite initial signs of inflation moderation, wage growth and hiring challenges may necessitate keeping interest rates high.
The recent 10% minimum wage increase could impact broader pay settings.
BOE chief economist Huw Pill and member Catherine Mann’s upcoming speeches may offer further market guidance.
UK-EU Relations Post-Brexit:
Prime Minister Keir Starmer rules out a return to the single market or customs union.
Efforts are underway to improve the UK’s Brexit deal, aiming for closer ties with the EU.
Foreign Secretary David Lammy collaborates with Germany to enhance UK-EU relations.
Labour seeks deals in chemical and veterinary sectors.
Barclays analysts raise Pound to Euro exchange rate forecasts, anticipating relationship improvements.
Brexit’s Impact on the Pound:
Brexit significantly influenced the Pound from 2016 to 2020.
Despite infrequent discussion, Brexit remains relevant, affecting Pound valuation.
The 2026 review of the UK-EU trade deal (TCA) offers limited scope for change.
The Centre for European Reform emphasizes the need to improve trading arrangements with the UK’s largest market for economic growth.
Brexit Premium and Pound Strength:
The weaker Pound reflects the “Brexit premium” due to economic impact.
Barclays predicts the gap can close as the Pound strengthens.
Forecasts envision substantial gains against the Euro (EURGBP reaching 0.80).
GBP/EUR forecast for Q1 2025 is 1.25.
Pound to Dollar exchange rate expected to rise to 1.33.
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Export Decline and Import Trends:
The German export industry faces challenges as it enters the second half of the year.
May saw a significant decline in exports (3.6%) compared to the previous month, reaching €131.6 billion.
Imports also fell by 6.6% in May, with economists predicting a decline of 1.0%.
Momentum Concerns and Survey Findings:
A recent Munich IFO Institute survey revealed a drop in export expectations for June (minus 1.0 points).
Klaus Wohlrabe, head of IFO surveys, emphasized the lack of clear direction in the industry.
Despite this, there is still room for growth in the export sector.
Long-Term Strategy and Funding Challenges:
To position Germany as a global competitor, the Federation of German Industries (BDI) advocates for:
– Public investments
– Bureaucracy reduction
– Corporate tax improvements
– Enhanced framework conditions
The BDI acknowledges a €400 billion shortage of funds for investments and funding programs over the next decade.
Overall Concerns and Economic Impact:
The decline in German exports in May was more significant than expected, reaching levels unseen since December.
The export industry’s momentum remains a point of concern, affecting Germany’s economic situation.
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India’s Prime Minister, Narendra Modi, is visiting Russia to strengthen ties and address concerns about Russia’s alignment with China. Despite Russia’s invasion of Ukraine in 2022, India maintains a decades-long relationship with Moscow, which is its largest arms supplier and a significant source of cheap oil. Western sanctions against Russia have pushed Moscow closer to China, but India aims to give Russia room for manoeuvre, avoiding taking sides in the conflict. India also faces a border standoff with China, making Russia’s neutrality crucial for national security. Trade between India and Russia has surged due to increased purchases of discounted oil, but this has led to a trade imbalance. India seeks to boost agricultural and pharmaceutical exports to Russia. However, the sanctions have complicated Moscow’s ability to repatriate oil revenue due to currency limitations. The US and EU efforts targeting Russian oil shipments leave India vulnerable to future sanctions. India and Russia are exploring domestic payment systems for trade, but challenges remain. Some analysts argue that India is increasingly relying on economic and military cooperation with the West, as Russia’s share of Indian arms imports declines. Modi will also raise concerns about Indian citizens conscripted into the Russian army to fight in Ukraine. Moscow’s dependence on Chinese arms supplies poses additional risks for India’s fragile relationship with Russia.
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Market Focus on China:
The post non-farm payrolls week tends to be quieter as the market digests recent developments.
This week, apart from Fed Chairman Powell’s testimony and the US CPI release, the market could focus on countries away from the spotlight, particularly China.
China’s main issue remains the housing sector, with slow supply destocking and housing prices dropping to the lowest level since July 2015.
Measures announced in May 2024 have yet to make an impact, raising the possibility of further action from Chinese authorities.
Communist Party’s Plenary Session:
The third plenary session of the 20th Communist Party of China (CPC) Central Committee will be held on July 15-18.
Boosting domestic demand is the primary target, with discussions on housing sector developments.
Speculation suggests further support measures may be announced during the plenary.
Bond Market and Economic Issues:
A storm is brewing in the bond market, with sovereign bond yields dropping aggressively.
Demand for safe assets has increased due to investor concerns about another stock market crash and commercial banks seeking safe investments.
The People’s Bank of China (PBoC) may intervene, but addressing underlying economic issues is crucial.
Inflation and Domestic Demand:
Recent public and private PMI surveys have been mixed.
The inflation report for June will be published, showing signs of improving domestic demand.
The RBA (Reserve Bank of Australia) remains hawkish, considering tight labor markets and a 4% May CPI.
Focus on Inflation-Related Data:
The Westpac consumer confidence indicator and consumer inflation expectations index are critical.
Despite a downward trend, the latter jumped to 4.4% in June.
The RBA awaits the July inflation report for Q2 2024, which could unlock a rate hike if there’s an upside surprise.
Aussie/US Dollar Pair Testing Highs:
The AUD/USD pair broke above the 0.6681 resistance level.
Weak US labor market data, expectations of a September Fed rate cut, and RBA hawkishness favor the Aussie.
Strong Chinese and Australian data could boost the pair further, but a dovish appearance from Chairman Powell or a weak US CPI print could change the dynamics.
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🔥Important News releases on This WEEK :
02/07 Tue 7:30am AUD Monetary Policy Meeting Minutes
02/07 Tue Tentative NZD GDT Price Index
02/07 Tue 3:00pm EUR Core CPI Flash Estimate y/y
02/07 Tue 7:30pm CAD Manufacturing PMI
02/07 Tue 7:30pm EUR ECB President Lagarde Speaks
02/07 Tue 7:30pm USD Fed Chair Powell Speaks
02/07 Tue 8:00pm USD JOLTS Job Openings
03/07 Wed 7:30am AUD Retail Sales m/m
03/07 Wed 6:15pm USD ADP Non-Farm Employment Change
03/07 Wed 6:30pm CAD Trade Balance
03/07 Wed 6:30pm USD Unemployment Claims
03/07 Wed 6:30pm USD Trade Balance
03/07 Wed 7:45pm USD Final Services PMI
03/07 Wed 8:00pm USD ISM Services PMI
03/07 Wed 8:15pm EUR ECB President Lagarde Speaks
03/07 Wed 8:30pm USD Crude Oil Inventories
03/07 Wed 10:00pm USD Natural Gas Storage
04/07 Thu 12:00am USD FOMC Meeting Minutes
04/07 Thu 12:30pm CHF CPI m/m
04/07 Thu All Day GBP Parliamentary Elections
04/07 Thu 2:30pm GBP Construction PMI
04/07 Thu All Day USD Bank Holiday
05/07 Fri 3:40pm USD FOMC Member Williams Speaks
05/07 Fri 6:30pm CAD Employment Change & Unemployment Rate
05/07 Fri 6:30pm USD Average Hourly Earnings m/m & Non-Farm Employment Change & Unemployment Rate
05/07 Fri 8:00pm CAD Ivey PMI
05/07 Fri 11:15pm EUR ECB President Lagarde Speaks
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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