Forex Fundamental News Facts for 21st May, 2024

Forex Fundamental News Facts for 21st May, 2024

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[Quick Facts]
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1. Fed’s Jefferson says it’s too early to tell if the disinflation process will last.
2. Fed’s Mester says economic conditions don’t support three rate cuts.
3. Fed’s Bostic expects only one rate cut this year.
4. Six reasons the Fed won’t be cutting rates anytime soon.
5. Oil Prices Fall On Demand Fears Over Fed’s Rates Path.
6. Warnings of a Negative Shock That Would “Sink” Pound Sterling Against Euro and Dollar.
7. Could RBNZ Support Kiwi’s Recent Strength?.
8. RBA Keeps Door Open to Another Interest Rate Hike.
9. Iran’s President Raisi Dead-What Does the Leadership Void Mean for the Country and the World?

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[News Details]
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Jefferson’s Uncertainty on Disinflation’s Longevity:

Federal Reserve Vice Chair, Philip Jefferson, expressed on May 20 that it’s premature to conclude if the recent disinflation slowdown will persist. He pointed out that housing inflation, particularly the slow transition of rent price changes to PCE, has been a persistent issue for the Fed. The ongoing impact of the pandemic-induced surge in market rents on existing rents could keep housing services inflation high for some time. However, Jefferson remains hopeful that the fight against inflation can continue while allowing economic growth and job creation.

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Mester’s Stance Against Three Rate Cuts:

Cleveland Fed President, Loretta Mester, previously agreed with the median forecast of three rate cuts. However, given the current economic developments, she no longer finds this appropriate. She highlighted that inflation risks have increased since Q1. While the policy is restrictive, she believes Fed officials should wait for more concrete evidence on inflation’s trajectory before altering interest rates. She hasn’t decided her position on the June Summary of Economic Projections’ dot plot. While a rate hike is a possibility, it’s not her primary expectation.

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Bostic Foresees a Single Rate Cut:

On May 20, Atlanta Fed President, Raphael Bostic, noted a gradual slowdown in the U.S. economy, which he believes will help inflation to slowly decrease. He anticipates a continued decline in inflation this year and into 2025, albeit at a slower rate than many predict. He emphasized the importance of certainty that inflation is steadily moving towards 2% over the number of cuts this year. He believes it will take some time to gain this certainty. Bostic maintains his forecast of a single rate cut in Q3.

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Six Reasons Against Immediate Rate Cuts:

Markets currently anticipate nearly 50 basis points of rate cuts by the Fed this year, but they might be let down. Bank of America outlined six reasons why interest rates might not be reduced shortly: Q1’s high inflation; the need for more than a single month of economic data for comfort, especially if the annualized inflation rate exceeds the Fed’s target; the solid state of the economy, including services spending; the tight labor market; potential fading of supply tailwinds; and the upcoming U.S. election.

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Oil Prices Fall On Demand Fears Over Fed’s Rates Path:

Brent crude futures and U.S. West Texas Intermediate crude (WTI) experienced a slight decrease, with each falling by 0.68% and 0.73% respectively. This drop was less than 1% and occurred as Federal Reserve officials indicated they were waiting for more evidence of inflation slowing down before contemplating interest rate cuts.

Analyst Toshitaka Tazawa from Fujitomi Securities attributed the selling to fears of reduced demand as the possibility of a Fed rate cut seemed less likely. Federal Reserve Vice Chair Philip Jefferson stated it was premature to determine if the inflation slowdown would be enduring. Vice Chair Michael Barr and Atlanta Fed President Raphael Bostic echoed similar sentiments, suggesting that restrictive policies need more time and it would take some time for the central bank to be sure that the slowdown in price growth is sustainable.

The comments from the Fed officials suggest that interest rates may remain high for a longer period than the markets anticipate. This could impact the oil market as higher borrowing costs could restrict funds, potentially hampering economic growth and the demand for crude oil.

Despite political uncertainties in two major oil-producing countries, Iran and Saudi Arabia, the market seemed largely unaffected. IG market strategist Yeap Jun Rong noted that while there was an initial increase due to uncertainties in Iran, prices have since adjusted as investors anticipate the status quo in terms of policies for now and believe that any broader regional conflict is unlikely.

The death of Iranian President Ebrahim Raisi and health concerns of Saudi Arabia’s King did not significantly impact the market, as it is uncertain whether these events will immediately affect energy policy, according to Fujitomi’s Tazawa.

Investors are currently focusing on the supply from the Organization of the Petroleum Exporting Countries and its affiliates, collectively known as OPEC+. They are set to meet on June 1 to decide on output policy, including the possibility of extending some members’ voluntary cuts of 2.2 million barrels per day. IG’s Yeap mentioned that prices are waiting for a catalyst to break out of the current range, with attention still on any geopolitical developments and oil inventory data this week. It was previously reported to Reuters that OPEC+ might prolong some voluntary output cuts if demand does not increase.

The oil market is currently experiencing fluctuations, with prices attempting to climb above key thresholds. Here are the main points:

Price Trends: Despite a recent decline, oil prices remain volatile. The market is closely watching attempts to breach $80/bbl for WTI and $84/bbl for Brent crude.

Global Factors: Surprisingly, oil is weakening even after the death of Iran’s president, which would typically reinforce risk premiums. Additionally, strong rallies in metals and other commodities due to China’s stimulus measures have not significantly impacted oil prices.

US Oil Industry: Recent data from Baker Hughes indicates relative stagnation in the US oil industry. The total number of oil rigs has hovered around 497, with fluctuations since last October.

Production Levels: The US Energy Information Administration’s weekly report confirms stagnant production at 13.1 million barrels per day (bpd) over the past ten weeks. This volume represents the average output since mid-September.

Industry Neutrality: Current oil prices are neutral for the industry. While they don’t incentivize increased production, they also don’t cause a decline.

Technical Analysis: The price chart reveals a balanced market. Oil has been moving in an ascending channel since December, briefly falling out of this range last week but recovering. Bulls are attempting to regain control, but the 200-day moving average remains a critical level.

Bearish Signals: Increased selling near the 200-day moving average suggests that bears still influence the market. A consolidation below $76.5 could confirm this downward trend. A failure below $70-$71 might trigger a significant decline.

Bullish Scenario: A rebound above $80 would signal a bullish recovery, potentially leading to further gains, reaching $85 in the short term and possibly exceeding $92 by mid-summer

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Warnings of a Negative Shock That Would “Sink” Pound Sterling Against Euro and Dollar:

Ahead of the crucial UK inflation print on Wednesday, market analyst Robert Howard anticipates a strengthening likelihood of a summer interest rate cut. The markets have already factored in a rate cut by August, but the prospect of two consecutive cuts could significantly recalibrate the market and impact Pound exchange rates.

Howard warns that consecutive cuts by the Bank of England (BoE) could significantly weaken the Pound, potentially causing the Pound to Dollar exchange rate to drop to 1.23 and the Pound to Euro exchange rate to dip to 1.15, assuming the EUR/USD remains steady.

Howard suggests that the BoE is likely to reduce rates on either June 20 or August 01, but not on both dates. If a cut occurs in June, it will likely be by a slim margin of 5-4, with Andrew Bailey, Ben Broadbent, and Sarah Breeden expected to join Dave Ramsden and Swati Dhingra in voting for it.

Broadbent previously indicated that the Bank would cut interest rates this summer if the Bank’s forecasts merely met expectations. If this happens, a subsequent cut in August is not out of the question, especially considering the dovish comments from BoE Chief Economist Huw Pill and hawk Megan Greene last week.

August will also mark Clare Lombardelli’s first Monetary Policy Committee rate vote as she joins the MPC, succeeding the outgoing Broadbent. Michael Saunders, Senior Economic Advisor to Oxford Economics and a former member of the Bank’s Monetary Policy Committee, notes that unlike the U.S., UK inflation has been below the central bank’s expectations in recent quarters and is likely to return to target soon.

Saunders expects the BoE to start cutting rates in either June or August, with June being slightly more likely, depending on upcoming pay and price data. However, some analysts warn of the risk of services inflation delivering an upside surprise, which could deter a number of MPC members from voting for a rate cut next month.

A strong services inflation print could thwart the chances of back-to-back rate cuts, making August the preferred start date and strengthening Pound exchange rates. James Smith, Developed Markets Economist at ING Bank, suggests that if services inflation comes in higher than expected, it could favor another ‘on hold’ decision next month.

Services inflation, a resilient aspect of the inflation basket, could undermine a sustained fall in the headline rate to 2.0%. Therefore, the Bank won’t see a 2.1% reading in headline CPI as an automatic trigger to lower interest rates. However, a sharp deceleration in services inflation could increase the chances of a June start and a consecutive August cut, which would weigh on the Pound.

The Bank of England (BoE) is closely monitoring inflation and wage growth, which could influence its decision on interest rates. Here are the key points:

Interest Rate Cut Possibility: Deputy Governor Ben Broadbent stated that the BoE might cut interest rates in the coming months. The decision hinges on how quickly the knock-on effects of 2022’s inflation surge ease.

Inflation Pressure: Strong wage growth has been a major driver of inflation. However, survey evidence suggests that this pressure may dissipate only gradually.

Optimism Amid Slow Price Rises: Broadbent remains optimistic because prices are rising more slowly than wages. This trend helps households recover from the impact of inflation.

Forecast and Policy: The BoE’s latest forecasts indicate that policy may need to become less restrictive. If this trend continues, a rate cut could be possible over the summer.

Monetary Policy Committee (MPC): The MPC recently voted 7-2 to maintain the interest rate at a 16-year high of 5.25%. Views within the MPC vary on the evidence needed for rate cuts.

Operational Independence: Broadbent emphasizes the importance of retaining the BoE’s operational independence, especially in the face of potential shocks to Britain’s economy.

Political Criticism: Some politicians have criticized the BoE due to soaring inflation and bond sale losses, particularly as an election approaches.

Broadbent’s tenure as deputy governor ends in June, with Clare Lombardelli set to replace him

According to fundamental news facts and data available, the UK inflation data due this week could be a deciding factor for a June rate cut from the Bank of England, with markets currently predicting a 58% likelihood of this event. The overall inflation, which was previously at 3.2%, is expected to drop close to the Bank’s 2% target, largely due to a 12% decrease in household electricity/gas bills seen in April.

This trend is likely to continue in July when Ofgem, the UK’s energy regulator, updates the household price cap. As a result, electricity/gas costs are projected to reduce headline inflation by about one percentage point or more during Q2 and Q3.

However, utilities are not the only factor. Food price inflation is also rapidly slowing down, and it is expected to be almost zero by summer. This is reflected in the producer price inflation, which measures what supermarkets are effectively paying, and has been flat or slightly negative for several months.

Further disinflation is also expected in ‘core goods’, which includes items unrelated to energy. Both household goods and vehicles are now in deflation, a result of improved supply chains, higher inventory levels, and lower consumer demand last year. As a result, headline inflation is expected to fall below the Bank of England’s 2% target in May’s data due in June and remain there for most, if not all, of this year.

If these predictions are correct, it could lead to several rate cuts this year, with at least three expected, slightly more than what markets are pricing. However, there is still some uncertainty over services inflation in the short term, which the BoE is particularly interested in due to recent volatility in wage figures.

The risk to this week’s services CPI figure is thought to be to the upside. Several price categories see annual price resets in April, often explicitly linked to prior rates of headline inflation. Last year, services inflation was significantly higher than expected, causing the biggest single daily move in UK swap rates for the whole of 2023.

The Bank of England expects services inflation to dip from 6.0% to 5.5% in April’s data due this week. Policymakers have indicated that the data only needs to come in roughly in line with forecasts to justify a near-term cut. If the data aligns with expectations, a June rate cut would quickly become the base case. However, a larger upside surprise to services inflation this week could shift the first rate cut towards August.

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Could RBNZ Support Kiwi’s Recent Strength?:

The Reserve Bank of New Zealand (RBNZ) is set to announce its interest rate decision on Wednesday, with the market largely anticipating no change in the cash rate. The RBNZ has maintained a hawkish stance in recent times, emphasizing the need to keep the official cash rate (OCR) at a restrictive level to bring inflation back to the 1-3% target range.

However, data since the April 10 meeting has shown a downturn. Business sentiment has fallen, consumer confidence has worsened, and the unemployment rate hit a 3-year high of 4.3% in Q1 2024. Despite this, inflation remains high. The Q1 CPI print was below expectations but still above 4%, and both the quarterly labour costs and producer prices indices confirm persistent inflation. However, the RBNZ may see some relief as the 2-year inflation rate is predicted to drop to 2.33%, close to the RBNZ’s inflation target midpoint.

The RBNZ’s stance at this meeting could also hinge on its quarterly projections. The previous Monetary Policy Statement in February forecasted annual inflation to drop to 2% in Q4 2025, leading to a 60bps decrease in the OCR, with the first rate cut expected in Q2 2025. A significant revision in the 2025-2026 inflation figures and a softening of the key statement about the need to keep the OCR at restrictive levels could lend credibility to the market’s expectations, which currently price in 40bps of easing in 2024 with the first rate cut set for the October 9, 2024 meeting.

Overall, the RBNZ is expected to be content with the progression of the domestic economy and its current monetary policy stance. Given the recent data, it seems unlikely that Wednesday’s Monetary Policy Report will confirm the markets’ expectations for significant easing in 2024, despite potential downward revisions in the quarterly projections.

With the market still processing the recent mixed US data releases, which could lead to a Fed rate cut during the summer, the kiwi has been strengthening against the US dollar. If the RBNZ decides to moderate its current stance, the kiwi could weaken against the dollar, possibly leading to higher volatility and a retest of the lower boundary of the 0.6060-0.6092 range. Conversely, if the RBNZ maintains its current balanced stance, the market reaction might be more subdued. The next resistance appears to be at the 0.6198 level.

In recent years, New Zealand’s economic landscape has shifted significantly. Here are the key points:

Rockstar Economy to Tough Times: A decade ago, New Zealand was hailed as a “rockstar economy,” benefiting from dairy and meat exports and a surge in tourism. However, the current situation is different, with households bearing the brunt of post-Covid economic adjustments.

Inflation Battle: The focus has been on battling inflation, but policymakers must also address supply-side issues. To combat inflation, New Zealand’s central bank raised interest rates by 525 basis points, leading to a recession.

Supply-Side Challenges: The supply side of the economy struggled to meet increased demand after lockdowns. New Zealand’s response to this challenge has been lackluster compared to other countries, resulting in slow inflation reduction.

Risk of Persistent Inflation: Despite rate hikes, inflation remains stubbornly high. The Reserve Bank faces a tough dilemma: balancing inflation control with economic growth.

Productivity and Flexibility: Improving productivity and supply-side flexibility are critical. Policy settings and government measures should focus on lifting productivity to address New Zealand’s economic challenges

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RBA Keeps Door Open to Another Interest Rate Hike:

The Reserve Bank of Australia (RBA) recently shared the minutes from its May monetary policy meeting. Key takeaways include:

Labour Market: The labour market has relaxed slightly, but not as much as anticipated. Unemployment rates are just slightly higher than the lows of late 2022. Despite a decrease in average hours worked and job vacancies, the participation rate and employment-to-population ratio remain near record highs.

Inflation: Inflation has continued to ease in the March quarter, but at a slower pace than before. Recent inflation data were stronger than expected in February. Service price inflation, especially for less discretionary services, has peaked but remains high.

Australian Dollar: The Australian dollar has seen a slight appreciation since the last meeting, supported by the depreciation of the yen and the renminbi on a trade-weighted basis.

Projections: The labour market is expected to continue to ease, but at a slower pace than previously projected. Unemployment is expected to reach a level consistent with the Board’s full employment mandate by mid-2025. Inflation is projected to hit the target range of 2-3% in the second half of 2025 and the midpoint in 2026. However, these projections are contingent on the labour market conditions.

Monetary Policy: Despite notable updates on the economy’s state since the last meeting, these updates were not significant enough to warrant a change in the monetary policy stance. The Board’s highest priority remains returning inflation to target, a process that is expected to be uneven due to the considerable uncertainty about the outlook for both inflation and the labour market.

In conclusion, the economy, labour market, and inflation have slowed less than expected. The RBA remains committed to returning inflation to target and will continue to closely monitor global economic developments, domestic demand trends, and the outlook for inflation and the labour market.

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Iran’s President Raisi Dead-What Does the Leadership Void Mean for the Country and the World?:

The sudden death of Iranian President Ebrahim Raisi in a helicopter crash has significant implications for Iran’s political landscape. Here are the key points:

Context: Iran faces deep economic decline, popular discontent, and ongoing conflicts in the region. The helicopter carrying President Raisi crashed while returning from Azerbaijan, resulting in his death and that of Iran’s foreign minister.

Continuity and Uncertainty: Analysts expect some continuity, but Raisi’s death could provide an opening for Iran’s powerful Revolutionary Guard to gain more control over the country’s political direction. The situation is volatile due to regional tensions and the aging Supreme Leader Khamenei’s succession.

Raisi’s Background: Elected in 2021, Raisi was a hard-line right-winger and a potential successor to Ayatollah Khamenei. His harsh stance against the West and crackdown on protests contributed to his controversial legacy.

Succession Process: Raisi’s death triggers a pre established succession process. Vice President Mohammad Mokhber assumes the interim presidency, and an election will be held within the next 50 days. However, elections in Iran are considered unfree, with the Guardian Council controlling the ballot.

Iran’s Foreign Relations: Despite Raisi’s death, Iran’s foreign and domestic policies are unlikely to change significantly. Relations with the U.S. and Israel remain complex, and Iran continues to face severe sanctions.

Challenges and Public Dissatisfaction: Iran’s government has rock-bottom credibility, with low election turnout and widespread dissatisfaction. A new hardliner president will inherit challenges such as regional crises, a sanctioned economy, and the looming succession crisis after Ayatollah Khamenei’s eventual passing

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🔥News releases on THIS WEEK :

21/05 Tue 7:30am AUD Monetary Policy Meeting Minutes

21/05 Tue 2:00pm EUR ECB President Lagarde Speaks

21/05 Tue 2:00pm USD Treasury Sec Yellen Speaks

21/05 Tue 6:30pm CAD CPI m/m

21/05 Tue 7:00pm USD FOMC Member Waller Speaks

21/05 Tue Tentative NZD GDT Price Index

21/05 Tue 11:00pm GBP BOE Gov Bailey Speaks

22/05 Wed 8:00am NZD Official Cash Rate & RBNZ monetary Policy

22/05 Wed 12:00pm GBP CPI y/y

22/05 Wed Tentative GBP Monetary Policy Report Hearings

22/05 Wed 8:00pm USD Existing Home Sales

22/05 Wed 8:30pm USD Crude Oil Inventories

23/05 Thu 12:00am USD FOMC Meeting Minutes

23/05 Thu 2:10am NZD RBNZ Gov Orr Speaks

23/05 Thu 1:15pm EUR French Flash Manufacturing & services PMI

23/05 Thu 1:30pm EUR German Flash Manufacturing & Services PMI

23/05 Thu 2:00pm EUR Flash Manufacturing & Services PMI

23/05 Thu 2:30pm GBP Flash Manufacturing & Services PMI

23/05 Thu Day 1 All G7 Meetings

23/05 Thu 6:30pm USD Unemployment Claims

23/05 Thu 7:45pm USD Flash Manufacturing & Services PMI

23/05 Thu 8:00pm USD New Home Sales

23/05 Thu 8:30pm USD Natural Gas Storage

24/05 Fri 12:00pm GBP Retail Sales m/m

24/05 Fri 1:45pm CHF SNB Chairman Jordan Speaks

24/05 Fri Day 2 All G7 Meetings

24/05 Fri 6:30pm CAD Core Retail Sales m/m

24/05 Fri 6:30pm USD Core Durable Goods Orders m/m

24/05 Fri 7:35pm USD FOMC Member Waller Speaks

24/05 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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