The data published this week contributed to the increasing confidence in the economy's capacity to endure the Federal Reserve's endeavors to mitigate inflation. Contrary to expectations, economic activity concluded the year more robustly, whereas inflation persisted downward.
The Bank of Japan's indication of a possible increase in interest rates for April and the Bank of Canada's dovish position suggested a rate cut could occur earlier than expected. The European Central Bank will implement an initial rate cut in April, although a subsequent action in June is possible.
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Forex Technical Outlook for 29 January 2024 to 02 February 2024
Let’s see the list of events to look at this week:
- CB Consumer Confidence on Tuesday
- JOLTS Job Openings on Tuesday
- AUD CPI y/y on Wednesday
- ADP Non-Farm Employment Change on Wednesday
- Federal Funds Rate and FOMC Statement on Wednesday
- BOE Bank Rate & Monetary Policy Report on Thursday
- ISM Manufacturing PMI on Thursday
- US Non-Farm Employment Change on Friday
Let’s see the market outlook from the weekly forecast:
In line with annual expectations, the Personal Consumption Expenditures (PCE), rose 2.6% in the twelve months concluding in December. In contrast, the core PCE, excluding food and energy, declined from 3.2% to 2.9%, below expectations. The EUR/USD reacted with a peak to the 1.0885 level and subsequently retreated lower. The numbers were interpreted by investors as further support for the notion that the Federal Reserve could commence cutting interest rates in the summer.
Based on data from the CME FedWatch Tool, the likelihood of the Federal Reserve implementing a 0.25% rate cut is 51.4%, while the likelihood of a 0.50% cut is 37.8%. In contrast, yields on US Treasury bonds reversed course and increased, which stifled the EUR/USD's ascent.
In contrast, economic data originating from Europe presented a varied outlook. Amid economic uncertainty, German consumer confidence for February declined from 25.4 in January to -29.7, while Spain's unemployment rate reached its lowest level since 2007. According to INE, the unemployment rate in Spain fell from 11.84% to 11.76% in the final quarter of 2023.
Anticipated is the monetary policy decision of the Federal Reserve, which is slated to take place on January 30-31.
According to the weekly forecast of EUR/USD, a bullish continuation is potent, where a daily candle above the 20 DMA and 1.0932 static level could resume the broader trend.
On the bearish side, the current continuation could extend toward the 100-day SMA but a break below the 1.0725 level could lower the price in the coming days.
After the weaker PCE Price Index data, the Pound Sterling (GBP) experienced a strong recovery. However, the annual reading declined to 2.9%, lower than the expected 3% and the previous estimate of 3.2%.
The forthcoming interest rate announcements from the Federal Reserve (Fed) and the Bank of England (BoE) will command investors' attention the following week. The prevailing anticipation is that both central banks will persist with their existing monetary policies. Nevertheless, market participants will diligently observe signs suggesting a change in interest rate trajectory.
As per the current expectation, BoE policymakers might abstain from deliberating on potential rate cuts. Conversely, U.S. policymakers might offer indications concerning prospective reductions in interest rates. The likelihood of a rate cut in March will likely increase in anticipation of weaker core PCE data preceding the Fed's interest rate decision.
As per the weekly GBP/USD forecast, a bullish pennant breakout could activate the upward continuation, aiming for the 1.3000 level. However, the range extension is possible from the flat 20-day EMA before forming the bullish breakout.
On the bearish side, a daily close below the 1.2500 psychological level could lower the price towards the 1.2200 area.
The US Dollar Index (DXY) declined from 103.38, failing to surpass its monthly high of 103.82. In the interim, 10-year US Treasury securities yields have decreased to around 4.11%.
Market sentiment is positive despite investors contemplating the possibility that the Federal Reserve (Fed) might postpone interest rate cuts until May. Given the robust 3.3% expansion of the U.S. economy in the fourth quarter of 2023, growth prospects for 2024 appear favorable. The favorable economic environment allows Fed policymakers to refrain from hastening the initiation of a rate-cutting cycle.
With regard to the Australian Dollar, the forthcoming quarter's Consumer Price Index (CPI) data could be a crucial event to look at. Price pressures could ease to 4.3% from 5.4%, providing policymakers at the Reserve Bank of Australia (RBA) some respite.
AUD/USD consolidated after a strong bearish impulse, which indicates a possible downside continuation. In that case, a daily candle below the 0.6551 level could offer a short opportunity, targeting the 0.6453 level.
On the bullish side, a massive buying pressure above the 0.6650 level with consolidation is needed before forming a stable trend.
The Tokyo Core CPI experienced a significant decline, from 2.1% in December to 1.6% annually in January. Since May 2022, this is the first time the indicator has fallen below the 2% target set by the Bank of Japan. On the contrary, the Core index, excluding fuel and raw food costs, declined from 3.5% in December to 3.1% annually in January.
The Bank of Japan believes that rising service prices progressively replace cost pressures as the principal driver of inflation. This transition is noteworthy because it signifies a potentially more enduring inflation trajectory. Japan also disclosed December corporate service inflation figures, which remained unchanged at 2.4%, the highest level in nine years.
BoJ Governor Ueda commented on progress towards achieving the 2% sustainable inflation objective during this week's policy meeting. As evidence of sustainable inflation, the BoJ is intent on higher wages, anticipating an increase in the national wage negotiations in March.
In the US, the preliminary GDP estimate for the fourth quarter surpassed initial projections. Annual GDP growth slowed to 3.3% from 4.9% in the third quarter but still exceeded the consensus estimate of 2.0%. The CME's FedWatch tool indicates that the likelihood of a rate cut in March has declined to 48%.
The USD/JPY price consolidates at the 100-day SMA level, while the short-term 20 EMA has an upward slope below it. Based on this outlook, an upward continuation with a daily close above the 148.82 level could increase the price toward the 150.00 area.
Due to the dearth of high-tier data releases and the improved risk sentiment, gold slightly increased to begin the week. Global equity indexes surged in response to a Bloomberg report indicating that China was considering implementing a $27 billion rescue program for the equity market.
Gold could not extend its Monday gains into Tuesday, whereas the yield on 10-year US Treasury bonds remained stable above 4%. The S&P Global Composite PMI increased from 50.9 in December to 52.3, with the Services PMI reaching 52.9 and the Manufacturing PMI becoming the first to surpass 50 since April. As a result, the yield on 10-year US Treasury bonds increased marginally, leading to a weekly low of XAU/USD below $2,020.
Gold, meanwhile, was able to mitigate its losses despite escalating geopolitical tensions, as two US-owned commercial ships were reportedly targeted by Houthi militants backed by Iran late Wednesday near the Gulf of Aden.
The Bureau of Economic Analysis (BEA) released data on Thursday indicating that the United States' real Gross Domestic Product (GDP) grew by 3.3% annually in the fourth quarter. Although the USD was initially strengthened, XAU/USD was able to stabilize as US yields declined.
Additional US data for December indicated an increase in weekly initial jobless claims to 214,000 and no change in orders for durable goods. Moreover, in comparison to the third quarter, the Personal Consumption Expenditures (PCE) Price Index increased by 2% every quarter, mirroring the rise of the GDP Price Index from 3.3% to 1.5% in Q4.
As per the XAU/USD weekly forecast, a bearish range extension is potent, targeting the 1972.80 support level. However, any immediate bullish pressure above the 20-day EMA could offer a short-term bullish opportunity, targeting the 2088.94 resistance level.
Almost two weeks after the Spot ETF was approved by the Securities and Exchange Commission, the cost of Bitcoin has remained range-bound near the psychologically significant $40,000 threshold. A discernible pattern has surfaced among retail traders, specifically individuals possessing less than 1 BTC, as indicated by the decline in Bitcoin wallets since October 2023.
Since early October 2023, the number of Bitcoin wallets containing a maximum of 1 BTC has decreased significantly, according to data from Santiment. During the previous four days, in response to a Bitcoin price decline that peaked at $38,555, an estimated 487,000 BTC wallets containing a maximum of 1 BTC were emptied. The observed decrease indicates a reduction in the involvement of retail traders in the Bitcoin market as a consequence of the current BTC price correction.
The capitulation among retail traders is likely driven by the sentiment among BTC traders in the wake of the ETF approval, according to sentiment analysts at Santiment. Furthermore, as of January 26th, the Bitcoin halving event, which will reduce the mining reward by half, is approaching in less than three months. Specifically, the event is scheduled for 2 months and 28 days. Throughout history, Bitcoin prices have dropped in the days preceding halving transactions, followed by a rally that frequently propels the cryptocurrency to all-time highs within a specified period.
Experts anticipate that the Bitcoin halving event will be the subsequent major price driver for Bitcoin, following the recent approvals of ETFs. Although the ETF approval event was met with a "sell the news" reaction.
The BTC/USD price rebounded above the 40,000.00 level and formed a stable daily candle. However, the current price is struggling to overcome the 20-day EMA level.
Considering the long-term outlook, investors might expect the upward pressure to extend at the 48,000.00 level. On the other hand, a downside continuation with a valid daily candle below the 100-day support could extend the downside continuation before forming another long opportunity.