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Europe’s Fundamental Forecast

Europe’s Fundamental Forecast Asia’s oil boost from China’s stimulus, the ECB’s impact on the Euro, and the USD’s strength against currencies

Key points

  • China’s stimulus and strong industrial production boosted crude oil prices in Asia.
  • ECB President Lagarde’s press conference may impact the Euro, while the Dollar Index (DXY) faces data releases.
  • Strong demand for the US dollar affected various currencies, with USD/CAD potentially influenced by higher crude prices.

Europe’s Fundamental Forecast-Key Events and Implications for Euro and US Sessions

Asia Session Summary

In the Asia session, crude oil prices experienced a boost due to China’s latest economic stimulus measures. The People’s Bank of China announced a reduction of the reserve requirement ratio for banks by 25 basis points, marking the second such reduction this year. This move aims to increase lending to the private sector by decreasing the amount of cash that banks must hold in reserve. It is part of an effort to strengthen the world’s second-largest economy.

Additionally, China’s industrial production exceeded expectations, with a year-on-year growth rate of 4.5% in August, a significant acceleration from the previous month’s 3.7%. This robust growth in industrial production, driven by increased manufacturing activity and mining output, contributed to the elevated crude oil prices. WTI oil, in particular, surged above the $90 threshold for the first time in ten months.

Implications for Europe & US Sessions

Europe Session

Following the recent monetary policy press conference for the Eurozone, ECB President Christine Lagarde is scheduled to hold another press conference during the Eurogroup meeting in Spain. The Euro faced downward pressure, tumbling over 100 pips overnight, and is expected to remain under pressure.

US Session

In the context of the Dollar Index (DXY), the Empire State Manufacturing Index showed a decline in business activity, while input and selling prices increased in August in the state of New York. The forecast for September indicates a continued decline in manufacturing activity, albeit at a slower rate. The preliminary findings of the Consumer Sentiment survey by the University of Michigan will also be released today. Although sentiment has improved over the past two months, consumers remain cautious about the future of the US economy. If the preliminary survey indicates higher inflation expectations and increased cost pressures in the Empire State index, it could lead to greater demand for the US dollar.

Central Bank Actions

Regarding central bank actions, the Federal Reserve has set the federal funds rate target range at 5.25% to 5.50%. The Committee remains committed to achieving a 2.0% inflation target. It is ready to adjust monetary policy as necessary based on various factors, including labor market conditions, inflation pressures, expectations, and global financial developments. The next meeting is scheduled for September 19-20, 2023.

Currency and Commodity Outlook

Gold (XAU) Outlook

Gold’s performance is sensitive to market sentiment and the US dollar. The Empire State Manufacturing Index suggests a potential manufacturing slowdown. If the Consumer Sentiment survey indicates higher inflation expectations and cost pressures, it could boost the US dollar and lower gold prices.

Australian Dollar (AUD) Expectations

The Australian Dollar (AUD) initially faced downward pressure due to the ECB’s policy statement but later rebounded. With no major events scheduled, analysts expect the AUD to align with the Australian dollar.

New Zealand Dollar (NZD) Forecast

The New Zealand Dollar (NZD) experienced a dip and rebound. Without significant events on the horizon, it’s likely to follow the Australian dollar.

Japanese Yen (JPY) Outlook

While the DXY remains strong, USD/JPY trades relatively subdued at around 147.50. The Bank of Japan’s measures, like yield curve control and inflation expectations, could influence the JPY.

Euro (EUR) Expectations

The Euro (EUR) is expected to remain under pressure after ECB President Christine Lagarde’s press conference led to a significant decline. The ECB’s rate hike and growth projections may also impact the Euro.

Swiss Franc (CHF) Outlook

USD/CHF surged to 0.8970 due to increased US dollar demand. The Swiss National Bank’s tightened monetary policy, raising the SNB policy rate, might continue to influence the CHF.

British Pound (GBP) Expectations

The British Pound (GBP) faced downward pressure amid increased demand for the US dollar. The Bank of England’s rate hike and inflation expectations could affect the GBP.

Canadian Dollar (CAD) Outlook

Despite rising US dollar demand, USD/CAD remained stable. Higher crude oil prices may influence the Canadian dollar, pressuring USD/CAD.

Oil Forecast

China’s stimulus measures, including a reduction in the reserve requirement ratio, boosted crude oil prices. Strong Chinese industrial production lifted WTI oil above $90 per barrel for the first time in ten months. Ongoing developments in China’s economy may continue to affect oil prices.

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