Forex Fundamental News Facts for 15th May, 2024

Forex Fundamental News Facts for 15th May, 2024

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[Quick Facts]
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1. Fed’s Schmid says interest rates are likely to stay high for some time.
2. Fed’s Mester says it’s too early to conclude that inflation has stalled.
3. U.S. PPI data are mixed.
4. Fed’s Powell says the Fed is likely to keep rates higher for longer.
5. ECB’s Wunsch indicates no rush for further rate cuts after the first cut in June.
6.BOJ’s Surprise Cut to Bond Buying This Week Fuels Rate-Hike Bets.
7. Preview of RBNZ: Persistent Inflation to Keep the Champagne Stoppered.
8. Pound to Euro Rate Might Struggle to Regain its 2024 Highs.
9. Can Gold Climb to a New Record High?
10. Range Trading Continues as Markets Prepare for Wednesday’s CPI.

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[News Details]
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High Interest Rates to Persist, Says Fed’s Schmid:

Jeffrey Schmid, the Kansas Fed President, indicated in a recent address that high interest rates are likely to continue for an extended period. Policymakers are awaiting signs of decreasing price pressures. Schmid emphasized patience and a focus on long-term indicators, expressing uncertainty about a return to the low-interest-rate environment of the pre-pandemic era.

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Fed’s Mester- Premature to Declare Inflation Stagnation:

Loretta Mester, Cleveland Fed President, argued that it’s too soon to assert that inflation has plateaued. She advocated for maintaining the current interest rates until further evidence of price pressure reduction emerges. She warned against hasty rate hikes, which could destabilize the financial system.

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Mixed Signals from U.S. PPI Data:

The U.S. Producer Price Index (PPI) for April, reported by the Bureau of Labor Statistics, showed a year-on-year increase of 2.2%, a record high since April 2023. This was slightly above the forecast and the previous month’s figure. The data suggests persistent inflation, although the impact may be less severe due to a downward revision of March’s data.

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Fed’s Powell Advocates for Patience:

Jerome Powell, Fed Chairman, stated at a Foreign Bankers’ Association event that the Fed needs to wait for more proof that high interest rates are curbing inflation. He noted that the U.S.’s failure to significantly curb inflation in Q1 indicates the need for patience and the continuation of restrictive policies. He also mentioned the puzzling nature of housing inflation and the strong labor market showing signs of gradual cooling.

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ECB’s Wunsch Cautions Against Hasty Rate Cuts:

Pierre Wunsch, a member of the European Central Bank (ECB) Governing Council, advised against rushing to further cut interest rates following the potential initial cut in June. He emphasized the need for a cautious, step-by-step approach, given the ongoing wage pressures and the need for businesses to reduce profit margins and increase productivity.

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BOJ’s Surprise Cut to Bond Buying This Week Fuels Rate-Hike Bets:

Investor sentiment is leaning towards a potential interest-rate increase by the Bank of Japan (BOJ) in July, following an unanticipated decrease in its bond purchases. The probability of this rate hike, as indicated by overnight indexed swaps, has risen from 50% to approximately 70%.

This shift is occurring amidst a depreciation of the yen, influenced by the significant disparity between Japan’s low-interest rates and the higher borrowing costs in the US. Speculations are also rife that the BOJ might announce a comprehensive reduction in bond buying in its June meeting, preceding the July rate hike.

The yen remained stable in Tokyo, while Japanese bonds saw minimal fluctuations. However, the yields on 20-year and 30-year debt have recently reached a ten-year high. The benchmark 10-year yield is nearing 0.975%, a level not seen since 2013.

Christopher Willcox, the head of Nomura Holdings Inc.’s trading unit, anticipates that the 10-year yield could potentially exceed 1% due to persistent inflation. He also predicts that the yen could strengthen to 140 against the dollar this year, given the BOJ’s possible announcement of “limited tightening” in October.

However, investor opinions diverge regarding the outlook post-July. While some traders anticipate only one additional rate hike this year, Pacific Investment Management Co. foresees the possibility of three more. Ales Koutny of Vanguard Group Inc. expects rate hikes to reach around 0.75% by year-end, while Goldman Sachs Group Inc. predicts biannual rate hikes until they reach 1.25% to 1.5%.

There’s a split opinion on whether the BOJ will significantly increase interest rates, as companies accustomed to extremely low borrowing costs might reduce spending. Conversely, some believe that ignoring rate hikes could further weaken the yen and inflate import costs. Tadashi Matsukawa of PineBridge Investments Japan Co. suggests that if the BOJ raises interest rates biannually, the yield on medium-term bonds, particularly five-year notes, will be impacted.

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Preview of RBNZ: Persistent Inflation to Keep the Champagne Stoppered:

The Reserve Bank of New Zealand (RBNZ) is likely to maintain its “Watch, Worry and Wait” strategy, which has been in place since May 2023. The Official Cash Rate (OCR) is expected to stay at 5.5% for a significant period to achieve the inflation target of 1-3%. Despite the weak economic growth, the inflation pressures are still high.

The RBNZ forecasts that inflation will approach 2% by the end of 2025, based on a forward OCR profile. This profile suggests a 40% chance of a further OCR increase in 2024, but an initial cut to the OCR to 5.25% by mid-2025 is also expected.

Since the February Monetary Policy Statement, several key developments have occurred:

GDP Growth: The GDP growth in Q4 2023 was slightly weaker than forecast, and the economy was 0.2% smaller than forecast due to cumulative revisions. This might slightly reduce the RBNZ’s starting point output gap.

Economic Indicators: Forward indicators for GDP growth in H1 2024 remain weak. Retail spending indicators, PMIs, business and consumer confidence have all taken a step lower after a boost in January and February 2024. The RBNZ might revise down their 2024 growth projection (1.6%y/y for 2024) to better reflect the current weak growth momentum.

Inflation Expectations: Business inflation expectations have fallen, but household inflation expectations and sticky price intentions indicators remain elevated. The RBNZ will need to see all these indicators at more normal levels to be comfortable with policy easing.

Labour Market: The unemployment rate in Q1 was slightly higher than forecast, and the Labour Cost Index was in line with projections.

CPI Inflation Components: The RBNZ forecast a low 0.4% quarterly outcome for the Q1 CPI (3.8% y/y) in its February Statement versus the outcome of 0.6% for the quarter (4.0% y/y). Non-tradable inflation drove the forecast miss, indicating the potential for more persistent inflation looking ahead.

Oil Prices: Oil prices are around 4% higher than the level assumed for Q2 2024 in the February Statement, which will lift the RBNZ’s near-term CPI forecasts.

Terms of Trade: The terms of trade in Q4 2023 were notably weaker than expectations.

NZD TWI: The NZD TWI is now around 1.5% below the H1 24 level that had been assumed.

The RBNZ’s formal projections will continue to be based on those in the Treasury’s Half Year Economic and Fiscal Update (HYEFU) as Budget 2024 is not tabled until 30 May. However, the Treasury will have briefed the RBNZ on the key macro features of Budget 2024.

The RBNZ’s analysis concluded that it was unclear whether the net effect of the new Government’s policies would be inflationary or deflationary. As no big surprises are expected in Budget 2024, the RBNZ should continue with this line in the May Statement.

The RBNZ is expected to be happy with the current level of financial conditions. They will want the market to respond to the data – especially the inflation data – that emerges over the next 6 months. They are not expected to give the market a sense that their strategy has changed from that of holding the OCR at current levels for the foreseeable future.

Three main scenarios are seen:

Baseline case (70% probability): The RBNZ retains a similar OCR track as in the February MPS i.e., a peak OCR in Q3 consistent with 40% chance of an OCR increase to 5.75%. The forward profile in 2025 would also be similar with current persistence in domestic inflation balanced by weaker growth.

Hawkish case (20% probability): The OCR profile returns to where it was in November 2023 which implied around a 75% chance of a rate hike in Q3 2024. This would occur if the RBNZ concludes that domestic inflation is sufficiently sticky such that a return of inflation close to 2% in 2025 now looks remote.

Dovish case (10% probability): The RBNZ downgrades its outlook for growth and dismisses concerns about non-tradable inflation concerns. The OCR profile shifts to bring forward an easing to Q1 2025. The earlier start to easing could imply an OCR at 4.5% by year end 2025. This would occur if the RBNZ is confident that weak growth momentum and a widening output gap will generate lower nontradable inflation outcomes as the year progresses.

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Pound to Euro Rate Might Struggle to Regain its 2024 Highs:

Investors are currently predicting a slightly more than 50% chance of a rate cut by the Bank of England (BoE) in June, indicating that the market has not fully priced in this possibility. This leaves room for further adjustments, which could potentially weaken the Pound Sterling.

In contrast, the market has fully accounted for a rate cut by the European Central Bank in June, providing some insulation for the Euro from the eventual move. This positions the Pound as the variable factor in the GBP/EUR outlook.

Derek Halpenny, Head of Research for Global Markets EMEA at MUFG Bank, suggests a new long EUR/GBP trade idea, reflecting their view that the Pound faces downside risks in the near term. They foresee the possibility for the UK rate market to price in more than two rate cuts from the BoE this year.

Last week, the BoE signaled a dovish policy stance, with Dave Ramsden and Swati Dhingra advocating for an immediate 25 basis point cut. Huw Pill, a significant member of the Monetary Policy Committee (MPC), indicated he might join Ramsden in voting for a cut at the next meeting.

The BoE recently downgraded its inflation forecasts, predicting headline inflation to be comfortably below 2.0% in the medium term, based on the assumption of two rate cuts before year-end. This suggests the BoE believes it can cut rates twice without jeopardizing the descent of inflation to below the 2.0% target.

MUFG is targeting a move in Euro-Pound to 0.87, implying a Pound-Euro target of 1.15. Another downside risk for the Pound could arise if the market increases the total number of expected cuts from the BoE over 2024 and 2025.

Paul Dales, Chief UK Economist at Capital Economics, predicts that the BoE will first cut rates at the next meeting in June. He anticipates that due to inflation falling to only 1.0% later this year, the BoE will reduce rates to 3.00% next year, rather than to the 3.75-4.00% currently expected by investors.

However, economists at ING Bank still prefer August as the starting date for the BoE’s rate-cutting cycle. They believe that a distinctly more optimistic outlook on inflation means a June cut remains a possibility. The BoE reiterated in its policy guidance that it will continue to monitor the data before considering a rate cut.

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Can Gold Climb to a New Record High?:

Geopolitical Factors and Gold Prices: Gold prices, after reaching a peak of about $2,430 on April 12, underwent a correction due to a decrease in geopolitical tensions, leading investors to reduce their safe-haven positions. However, this trend was short-lived as gold rebounded due to new safe-haven inflows following Israel’s evacuation orders in parts of Gaza’s Rafah, raising concerns about a potential ground assault. Despite hawkish comments from several Federal Reserve policymakers, gold’s recovery remained unaffected, defying the market’s significant repricing since the start of the year.

Chinese Demand for Gold: A key driver of gold prices, apart from geopolitics, has been China. The People’s Bank of China has been amassing large quantities of gold to reduce its dollar dependency. However, despite strong net demand from central banks in the first quarter of 2024, the PBoC’s purchases have slowed down, with Turkey notably increasing its pace. Additionally, retail demand in China may have also slowed recently, as indicated by the comparison of the Shanghai gold benchmark price to international gold prices.

Temporary Slowdown?: The slowdown in Chinese demand for gold could be temporary. The PBoC may accelerate its purchases as the US elections in November approach, given the risk of worsening US-China relations if Trump wins. Consequently, Chinese policymakers may continue to reduce their dollar dependency to minimize potential economic damage if the US decides to weaponize its currency. With the subdued Chinese stock market and the ban on cryptocurrencies, gold may have been one of the few profitable investment vehicles for local investors.

Future Prospects: If incoming Chinese data boosts confidence in the economic recovery, retail investors may shift some investments from gold to the stock market. However, if the economic recovery is short-lived, the opposite may occur. Even if Chinese retailers decide to reduce their exposure to gold, the result could be another corrective retreat rather than a full-scale bearish reversal, as other supportive variables remain.

US Interest Rates and Technical Outlook: The future direction of US interest rates, with most Fed policymakers seeing a rate-hike resumption as very unlikely, may be keeping gold traders at ease. The technical outlook also suggests that the latest uptrend in gold is not over yet. If investors remain willing to buy gold at current levels, they may aim for the record high of $2,430 again. A dip below the $2,280 area and the 50-day EMA could signal the beginning of a larger bearish correction, but any speculation about a long-lasting trend reversal may be premature.

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Range Trading Continues as Markets Prepare for Wednesday’s CPI:

Dollar’s Performance in May: The currency market is currently in a holding pattern, awaiting the crucial US inflation report. The US dollar has managed to recover from its initial underperformance against the euro, now trading below the 1.08 level and facing significant resistance. Despite this recovery, the dollar has generally underperformed throughout the first half of the month, with the exception of its performance against the yen.

Market Response to Fed Meeting: The recent Federal Reserve meeting, which effectively eliminated concerns about rate hikes in 2024, has had a calming effect on the stock market. The S&P 500 index is nearing its all-time high, and despite clear economic differences between the US and the Eurozone, European equity indices continue to reach new highs, outperforming their US counterparts.
Today’s Economic Indicators: The Producer Price Index (PPI) for April will be released today. Both the headline and core indicators have significantly eased from their 2022 highs but remain at the upper end of their pre-Covid range. They have been trending upwards recently, indicating potential inflationary pressures in the near term.

Fed Speakers and UK Labour Data: Fed speakers are expected to increase their public appearances following the release of the US CPI. Two Fed members are scheduled to speak today, including Chairman Powell. In the UK, the April Claimant Count report showed a smaller than expected increase, potentially disappointing those at the Bank of England hoping for a rate cut in June.
Political Developments and US Economic Calendar: Political developments could pose challenges for the Bank of England and the pound. The outcome of recent local elections could lead to a potentially disastrous result for the Conservative party in the national elections. Later in the Wednesday session, the US CPI Report will be the focus, with economists predicting the annual inflation rate to ease from 3.5% to 3.4% in April.

US Retail Sales Figures and Other Stats: US retail sales figures will also be of interest to investors. Economists predict a 0.4% increase in retail sales in April, up from a 0.7% increase in March. Other statistics, including the NY Empire State Manufacturing Index and housing sector data, will likely be overshadowed by the CPI Report and retail sales numbers. Investors should also monitor comments from FOMC members Neel Kashkari and Michelle Bowman.

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🔥News releases on THIS WEEK :

15/05 Wed 7:30am AUD Wage Price Index q/q

15/05 Wed 6:30pm USD CPI+Retails Sales m/m & Core CPI+Retail Sales

15/05 Wed 8:00pm USD Business Inventories m/m

15/05 Wed 8:30pm USD Crude Oil Inventories

16/05 Thu 5:50am JPY Prelim GDP q/q

16/05 Thu 7:30am AUD Employment Change

16/05 Thu 6:30pm USD Unemployment Claims & Building Permits & Philly Fed Manufacturing Index

16/05 Thu 7:15pm USD Industrial Production m/m

16/05 Thu 8:00pm USD FOMC Member Barr Speaks

16/05 Thu 8:30pm USD Natural Gas Storage

17/05 Fri 8:00am CNY Industrial Production y/y & Retail Sales y/y

17/05 Fri 8:15pm USD FOMC Member Waller 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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