Forex Fundamental News Facts for 28th May, 2024

Forex Fundamental News Facts for 28th May, 2024

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[Quick Facts]
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1. Price gains at UK retailers fell to an over two-year low in May.
2. Villeroy says ECB shouldn’t rule out the second rate cut in July.
3. ECB’s Lane doesn’t expect two consecutive rate cuts.
4. Israel will expand the scope of its operations in northern Gaza.
5. U.S. summer driving season kicks off to boost oil prices, with OPEC+ meeting and demand prospects in focus.
6. As Questions Grow for Germany, Investors Warm to France.
7. Jump in Japan’s Business Service Prices Supports BOJ Hike Case.
8. Australian Retail Sales and US Consumer Confidence Collide.

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[News Details]
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Price gains at UK retailers fell to an over two-year low in May:

The BRC shop price index, as reported by the British Retail Consortium (BRC), decelerated to a year-on-year rate of 0.6% in May, marking the lowest point since 2021’s end. This indicates a positive shift in the economic landscape. Other sectors also experienced a dip in inflation, with food price inflation dropping to 3.2% in May from April’s 3.4%. Non-food prices, on the other hand, showed deflation for the second month in a row, registering -0.8% in May compared to April’s -0.6%.

The improving economic situation will likely be well-received by Prime Minister Rishi Sunak as the British general election looms on July 4. However, current opinion polls predict a loss for Sunak’s Conservative Party to the Labor Party, ending their 14-year reign. Market speculators initially believed that the easing inflation would lead the Bank of England to reduce interest rates in June, but these expectations were tempered following stronger-than-anticipated CPI data.

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Villeroy says ECB shouldn’t rule out the second rate cut in July:

ECB’s Villeroy Advocates for Flexibility in Rate Cuts: Villeroy de Galhau, a member of the European Central Bank (ECB) Governing Council and Governor of the Bank of France, argued against limiting rate cuts to once a quarter based on new economic projections. He advocated for a data-driven, meeting-by-meeting approach, suggesting that the ECB should retain the option for back-to-back rate cuts in June and July.

ECB Expected to Initiate First Rate Cut Next Month: The ECB is anticipated to commence its first rate cut next month, but it is expected to maintain its benchmark rate within a restrictive range throughout 2024, rather than continuing to cut rates post-June.

Uncertainty Surrounds ECB’s Policy Moves Post-June: While the June rate cut has been widely communicated by ECB members and fully priced into financial markets, subsequent ECB policy moves remain uncertain. Market traders anticipate a pause in July, followed by another rate cut in September, with rates then being held steady.

European finance ministers called G7 nations on Friday to stay united on the view that China is undermining market based economies with their trade practices. As we have said for some time. The harder China pushes on the export string to resolve their economic problems the bigger the pushback will be leading to tariffs and more reshoring of manufacturing pushing up goods inflation over time.

The war in Ukraine and the wider conflict with Russia will push EU countries to go beyond the fiscal constraints to ramp up military spending without sacrificing general welfare spending. This will be inflationary as it increases the investment rate in Europe and drives up demand for workers and raw materials.

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ECB’s Lane doesn’t expect two consecutive rate cuts:

ECB’s Lane Anticipates No Consecutive Rate Cuts: Philip Lane, the ECB’s chief economist, warned that maintaining overly restrictive interest rates could lead to inflation falling below the target in the medium term, necessitating a faster pace of rate cuts that could potentially drop to below-neutral levels.

Philip Lane, the chief economist of the European Central Bank (ECB), hinted at a potential interest rate cut from its historic highs in the upcoming meeting on June 6th. This move is anticipated despite concerns about the U.S. Federal Reserve’s reaction. The ECB’s decision is driven by the recent drop in eurozone inflation to near the bank’s 2% target, down from over 10% in 2022.

Several central banks, including those of Switzerland, Sweden, Czech Republic, and Hungary, have already lowered their interest rates this year due to falling inflation. However, the Fed and the Bank of England are not expected to follow suit until summer, while the Bank of Japan is likely to continue raising rates.

Lane attributes the faster decline in eurozone inflation compared to the U.S. to the region’s greater impact from the energy shock caused by Russia’s invasion of Ukraine in 2022. He believes that the ECB’s monetary policy has been successful in ensuring a timely decrease in inflation.

This potential move by the ECB seems to be happening sooner than the U.S. Federal Reserve’s actions, indicating a divergence in monetary policy decisions between the two entities. This sentiment is supported by Bank of America economists, who suggest that the ECB is likely to cut rates in June, while the U.S. braces for a longer period of high rates.

In the U.S., there is ongoing debate about when the Federal Reserve will start reducing rates. Recent strong economic and labor data have led Goldman Sachs to push its forecast for the Fed’s rate cut back to September from July. However, recent comments from the Federal Reserve and minutes from their policy meeting indicate that rate cuts in the U.S. are not imminent. As a result, it is anticipated that the rate cut cycles of the ECB and the Federal Reserve will significantly differ.

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Israel will expand the scope of its operations in northern Gaza:

The Israel Defense Forces (IDF) announced on May 27 that it had extended its military operations in the Gaza Strip, hitting numerous military targets. The IDF expanded its ground operations in the Jabalia area in northern Gaza, resulting in the death of several armed individuals and the discovery and destruction of a bomb-making workshop, numerous tunnel shafts, and a significant cache of weapons.

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U.S. summer driving season kicks off to boost oil prices:

Oil prices saw a slight increase following last week’s drop, with the market’s focus on the upcoming OPEC+ meeting and U.S. demand as the summer driving season commences. The start of the U.S. summer driving season, marked by Memorial Day, will offer insights into demand trends. Early signs indicate a strong market performance, with the American Automobile Association predicting the highest number of people flying over the weekend in nearly two decades. This record flight activity and robust gasoline demand are expected to somewhat bolster oil prices.

In the recent holiday trade, commodities experienced a quick recovery from a price drop, with crude and copper showing promising signs after a notable bounce. The absence of fresh fundamental news due to public holidays in the U.S. and U.K. has led traders to rely heavily on price action and market sentiment for direction.

Copper’s price action has been positive on COMEX, bouncing back from a support level of $4.746, a trend that has been consistent since early April. Despite the low volumes, which usually call for caution, the rebound aligns with the broader trend observed this year. Given the price action, buying dips is currently favored over selling rallies. Potential trade targets include $5.02 or the record high of $5.20 set last week.

As for WTI crude oil, buying below $76.80 has proven to be a solid trade, with the price rebounding strongly. The latest bounce has taken WTI through a downtrend resistance dating back to the highs struck in April, indicating a shift towards a more positive outlook.

In the near term, any indication of gasoline demand in the U.S. over the Memorial Day long weekend could influence both upstream and downstream prices. Key inflation data to be released in the U.S. on Friday will likely set the tone for the U.S. dollar and U.S. interest rate outlook into early June. Attention will then shift to the virtual OPEC+ meeting on June 2, where it’s expected that the cartel will extend existing supply curbs.

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As Questions Grow for Germany, Investors Warm to France:

Hager Group’s Expansion Plans Favor France Over Germany: For over six decades, the German electrical components manufacturer Hager has maintained sites on both sides of the Rhine. However, recent developments have seen the family-owned company favoring the French side for its expansion plans. Daniel Hager, the group chairman, attributes this shift to reductions in French business tax rates, proactive local officials assisting with site identification for business expansion, and newfound flexibility in France’s historically rigid labor laws.

Impact of Macron’s Pro-Business Reforms: President Emmanuel Macron’s seven-year tenure has seen a series of pro-business reforms that have helped balance economic relations between the two largest economies in the euro zone. The high taxes and 35-hour work week that once deterred foreign investors from France are now things of the past. France is currently witnessing record levels of foreign direct investment. “The business climate has become significantly more positive and welcoming to companies since President Macron took office,” said Hager.

Investment in France’s Border Region of Alsace: While the Hager group continues to invest in Germany, it is investing 120 million euros ($130 million) in France’s border region of Alsace. This group is a typical example of the small to midsize “Mittelstand” of often family-owned firms that account for 55% of German jobs.

France’s Increasing Attraction for Foreign Tech Investors: In contrast to Germany’s struggling growth due to its over-reliance on exports to China and cheap Russian gas, France’s long-term commitment to nuclear energy is becoming increasingly attractive to foreign tech investors like Microsoft, which plans to build power-hungry data centers there.

France: Europe’s Top Destination for Foreign Direct Investment: With Germany struggling to gain momentum and Britain held back by the long fallout from Brexit, France has been Europe’s top destination for foreign direct investment since 2019, according to an annual survey by consultants EY.

Macron’s Tax Reforms: Macron has reduced companies’ annual tax bill by a combined 25 billion euros by cutting the corporate income tax rate to 25% while reducing or outright scrapping other business taxes. The average corporate tax rate in Germany is just below 30%, according to the federal economic development agency Germany Trade & Invest.

Challenges Remain Despite Economic Growth: Despite the pro-business push resulting in French economic growth more than double that of Germany since Macron was first elected in 2017, the economy still faces numerous challenges from flagging productivity to an oversized budget deficit. Foreign investors believe that Macron still needs to do more, especially to cut red-tape on businesses, which a new bill by his Finance Minister Bruno Le Maire aims to address.

Hager’s View on France’s Industrial Sector: Hager stated that even though foreign investment is back in a big way in France, its industrial sector still has a long way to go to catch up with Germany. “Economically there’s no reason to be shouting from the rooftops,” he said.

Bruno Le Maire, in an interview with Bloomberg Television, expressed concern over China’s economic model of producing increasingly cheaper industrial devices. He believes this poses a threat to not only the EU and the US, but also the global economy, and calls for this issue to be addressed.

This sentiment is echoed by the Group of Seven (G-7), whose finance chiefs, in a meeting in Stresa, Italy, agreed to respond to harmful practices and consider measures to ensure a level playing field. This agreement marks a shift from their usual neutral language on trade.

Following this, President Joe Biden announced the re-imposition of tariffs on hundreds of goods imported from China. The EU is also expected to take defensive measures against China’s auto exports, following an investigation into electric-vehicle subsidies.

Le Maire, at the G-7 meeting, emphasized the need for member countries to strengthen information exchange and establish a shared assessment of China’s industrial practices. He assured that the EU has the necessary tools to reestablish a level playing field.

On the topic of AI cooperation, Le Maire expressed his intention to preserve France’s leadership in Europe in the field of Artificial Intelligence. This has attracted foreign capital, with Microsoft Corp. announcing a €4 billion investment in French cloud and AI infrastructure. Le Maire welcomes cooperation with foreign investors and does not intend to block them from taking over French tech companies.

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Jump in Japan’s Business Service Prices Supports BOJ Hike Case:

The Bank of Japan (BOJ) reported a 2.8% year-on-year increase in the services producer price index, a metric that measures the cost of various goods and services provided by businesses to other firms and government entities. This is the fastest growth rate since September 1991, surpassing the 2.3% economists’ forecast.

The BOJ has emphasized service prices as a crucial indicator of inflation spread across the broader economy. The robust price growth supports the view that inflation can be sustained. This data might prompt the BOJ to consider advancing its next interest rate hike timing, with about 41% of BOJ observers predicting October for the next rate hike.

While global central banks have previously taken assertive steps to increase interest rates and control inflation, the BOJ has adopted a more cautious approach. However, this caution has put pressure on Japan’s currency due to the gap with US interest rates, keeping inflation above its 2% target for over two years.

Inflation is the top policy task that the public wants Prime Minister Fumio Kishida to address, as per a May poll by the Nikkei newspaper. BOJ Governor Kazuo Ueda and Deputy Governor Shinichi Uchida stated that there is room for a gradual increase in interest rates now that the country has moved away from a 0% inflation norm.

The report highlighted that machinery repairs and maintenance, leasing of infotech equipment, and road freight transportation were among the major contributors to the year-on-year surge. Service prices are expected to continue their upward trend, partly due to wage increases that Japanese workers have received this year.

The yen’s ongoing weakness will likely contribute to further price increases. Ueda stated that companies are now more likely to pass on rising costs to customers through price increases. The yen reached 160 per dollar for the first time in 34 years last month, signaling a potential shift in the central bank governor’s stance on the foreign exchange market.

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Australian Retail Sales and US Consumer Confidence Collide:

The Reserve Bank of Australia (RBA) and the AUD/USD are set to be impacted by the upcoming Australian retail sales figures. Predictions indicate a 0.3% rise in April’s retail sales, following a 0.4% drop in March. The RBA has expressed concerns about household spending, attributing its sluggishness to the current high inflation and interest rate climate. If retail sales exceed expectations, it could reignite speculation about an RBA rate increase.

While retail sales data is important, the monthly Consumer Price Index (CPI) Indicator, expected to drop from 3.5% to 3.4% in April, will likely have a more significant effect on the Australian dollar. The RBA has cautioned that a sudden surge in inflation could trigger a policy response, despite the current interest rate environment impacting some households.

In the US, consumer confidence is a key focus, with predictions of a decrease from 97.0 to 95.9 in May. A steeper-than-expected decline could fuel investor anticipation of a Federal Reserve rate cut in September. Diminishing consumer confidence could potentially suppress consumer spending and demand-driven inflation, allowing the Federal Reserve to adopt a less aggressive approach to achieving the 2% inflation target.

Other data, including Dallas Fed Manufacturing and housing sector figures, will likely be overshadowed by consumer confidence numbers. Investors are advised to pay attention to speeches by Federal Open Market Committee (FOMC) members Neel Kashkari, Lisa Cook, and Loretta Mester, and to consider reactions to the US Services PMI and CB Consumer Confidence Index.

In the short term, trends in the AUD/USD could be influenced by Australian retail sales and inflation data, as well as US inflation figures. Higher-than-expected US inflation could shift monetary policy divergence in favor of the US dollar. Despite uncertainties in private consumption and the Chinese economy, the US economy remains strong.

Australian Dollar Strengthens Against US Dollar: The Australian Dollar (AUD) has been gaining strength against the US Dollar (USD) for three consecutive sessions, despite a slight increase in Australia’s Retail Sales (MoM) by 0.1% in April, which was less than the anticipated market growth of 0.2%.

Factors Reinforcing AUD’s Strength: The AUD’s robustness is further bolstered by an enhanced risk appetite. The recent minutes from the Reserve Bank of Australia (RBA) meeting indicate that the board finds it difficult to forecast future cash rate changes, given the increased probability of inflation staying above the 2-3% target for a prolonged period.

US Dollar Loses Ground: The US Dollar (USD) continues its downward trend, influenced by the fall in US Treasury yields. The US Dollar Index (DXY), which gauges the USD’s value against six other major currencies, is trading around 104.50. The yields on 2-year and 10-year US Treasury bonds stand at 4.94% and 4.46%, respectively.

Decreased Probability of Federal Reserve Rate Cut: The CME FedWatch Tool indicates a reduced likelihood, down to 44.9% from 49.6% a week earlier, of the Federal Reserve implementing a 25 basis-point rate cut in September. Several US Federal Reserve (Fed) officials, including Fed Governor Michelle Bowman, Cleveland Fed President Loretta Mester, and Minneapolis Fed President Neel Kashkari, are slated to speak on Tuesday.

China’s Measures to Support Property Sector: China’s Shanghai has introduced measures to bolster the property sector, such as reducing down payment requirements and lowering minimum mortgage rates. China also launched a US$47 billion state-backed fund to fortify its semiconductor industry. These economic changes in China could significantly influence the Australian market due to the close trade relationship between the two countries.

US Economic Indicators: The University of Michigan’s 5-year Consumer Inflation Expectations for May eased slightly to 3.0%, below the predicted 3.1%. Despite the upward revision of the Consumer Sentiment Index to 69.1 from a preliminary reading of 67.4, it still marked a six-month low. The US Census Bureau released Durable Goods Orders, showing a solid recovery in April with a 0.7% month-over-month increase, contrary to the forecasted 0.8% decline. However, March’s figure was revised down to 0.8% from the initial estimate of 2.6%.

Australian Economic Indicators: On Thursday, the Australian Consumer Inflation Expectation for future inflation over the next 12 months fell to 4.1% in May from 4.6% in April, marking the lowest level since October 2021. The S&P Global US Composite PMI surged to 54.4 in May, marking the highest level since April 2022. The Service PMI rose to 54.8, indicating the biggest output growth in a year, while the Manufacturing PMI increased to 50.9.

Technical Analysis of AUD/USD: The Australian Dollar is trading around 0.6660 on Tuesday. The daily chart analysis suggests a bullish bias for the AUD/USD pair, as it is positioned within a rising wedge. The 14-day Relative Strength Index (RSI) is slightly above the 50 level, further confirming this bullish bias. The AUD/USD pair could potentially reach a four-month high of 0.6714, followed by the upper limit of the ascending triangle around 0.6730. On the downside, the 21-day Exponential Moving Average (EMA) at 0.6618 serves as key support, followed by the psychological level of 0.6600. A further decline could exert downward pressure on the AUD/USD pair, potentially driving it toward the throwback support region at 0.6470.

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🔥News releases on THIS WEEK :

28/05 Tue 7:30am AUD Retail Sales m/m

28/05 Tue 7:00pm USD S&P/CS Composite-20 HPI y/y

28/05 Tue 8:00pm USD CB Consumer Confidence

29/05 Wed 7:30am AUD CPI y/y

29/05 Wed All Day EUR German Prelim CPI m/m

29/05 Wed 8:00pm USD Richmond Manufacturing Index

29/05 Wed 11:45pm USD FOMC Member Williams Speaks

30/05 Thu 12:00am USD Beige Book

30/05 Thu 4:50am AUD RBA Assist Gov Hunter Speaks

30/05 Thu 5:00am USD FOMC Member Bostic Speaks

30/05 Thu 6:00am CHF SNB Chairman Jordan Speaks

30/05 Thu 7:30am AUD Building Approvals m/m

30/05 Thu 6:30pm CAD Current Account

30/05 Thu 6:30pm USD Prelim GDP q/q

30/05 Thu 6:30pm USD Unemployment Claims

30/05 Thu 8:00pm USD Pending Home Sales m/m

30/05 Thu 10:05pm USD FOMC Member Williams Speaks

31/05 Fri 7:30am CNY Manufacturing & Non-Manufacturing PMI

31/05 Fri 8:00am NZD Annual Budget Release

31/05 Fri 6:30pm CAD GDP m/m

31/05 Fri 6:30pm USD Core PCE Price Index m/m 

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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