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CFD Markets News and Forecasts — 31-03-2024
The European Central Bank (ECB) Governing Council member Yannis Stournaras said on Sunday that a total of four interest rate cuts is possible in 2024, with a total rate reduction of 100 basis points (bps) by year-end.
Key quotes
“If inflation develops in line with our March forecast and if this trend continues until the end of the year, I believe that this year we will have reductions in key interest rates from the ECB,”
“Personally I think the reduction of interest rates by four times this year, by 25 basis points each time, is possible”
“This is not yet a unified view. Some colleagues are more cautious and believe that interest rate cuts should be more moderate.”
“The differences of opinion within the governing council of the ECB are much smaller than the image in the media”
Market reaction
EUR/USD came under modest bearish pressure following these comments and was last seen trading at 1.0788, where it was down 0.03% on a daily.
ECB FAQs
The European Central Bank (ECB) in Frankfurt, Germany, is the reserve bank for the Eurozone. The ECB sets interest rates and manages monetary policy for the region. The ECB primary mandate is to maintain price stability, which means keeping inflation at around 2%. Its primary tool for achieving this is by raising or lowering interest rates. Relatively high interest rates will usually result in a stronger Euro and vice versa. The ECB Governing Council makes monetary policy decisions at meetings held eight times a year. Decisions are made by heads of the Eurozone national banks and six permanent members, including the President of the ECB, Christine Lagarde.
In extreme situations, the European Central Bank can enact a policy tool called Quantitative Easing. QE is the process by which the ECB prints Euros and uses them to buy assets – usually government or corporate bonds – from banks and other financial institutions. QE usually results in a weaker Euro. QE is a last resort when simply lowering interest rates is unlikely to achieve the objective of price stability. The ECB used it during the Great Financial Crisis in 2009-11, in 2015 when inflation remained stubbornly low, as well as during the covid pandemic.
Quantitative tightening (QT) is the reverse of QE. It is undertaken after QE when an economic recovery is underway and inflation starts rising. Whilst in QE the European Central Bank (ECB) purchases government and corporate bonds from financial institutions to provide them with liquidity, in QT the ECB stops buying more bonds, and stops reinvesting the principal maturing on the bonds it already holds. It is usually positive (or bullish) for the Euro.
China’s official Manufacturing Purchasing Managers' Index (PMI) improved to 50.8 in March from the previous reading of 49.1, the latest data published by the country’s National Bureau of Statistics (NBS) showed on Sunday. Markets expected a 49.9 readout in the reported month.
Meanwhile, the NBS Non-Manufacturing PMI climbed to 53.0 in March versus 51.4 in February.
Market reaction
At the time of writing, the AUD/USD pair is trading around 0.6527, up 0.18% on the day.
Australian Dollar FAQs
One of the most significant factors for the Australian Dollar (AUD) is the level of interest rates set by the Reserve Bank of Australia (RBA). Because Australia is a resource-rich country another key driver is the price of its biggest export, Iron Ore. The health of the Chinese economy, its largest trading partner, is a factor, as well as inflation in Australia, its growth rate and Trade Balance. Market sentiment – whether investors are taking on more risky assets (risk-on) or seeking safe-havens (risk-off) – is also a factor, with risk-on positive for AUD.
The Reserve Bank of Australia (RBA) influences the Australian Dollar (AUD) by setting the level of interest rates that Australian banks can lend to each other. This influences the level of interest rates in the economy as a whole. The main goal of the RBA is to maintain a stable inflation rate of 2-3% by adjusting interest rates up or down. Relatively high interest rates compared to other major central banks support the AUD, and the opposite for relatively low. The RBA can also use quantitative easing and tightening to influence credit conditions, with the former AUD-negative and the latter AUD-positive.
China is Australia’s largest trading partner so the health of the Chinese economy is a major influence on the value of the Australian Dollar (AUD). When the Chinese economy is doing well it purchases more raw materials, goods and services from Australia, lifting demand for the AUD, and pushing up its value. The opposite is the case when the Chinese economy is not growing as fast as expected. Positive or negative surprises in Chinese growth data, therefore, often have a direct impact on the Australian Dollar and its pairs.
Iron Ore is Australia’s largest export, accounting for $118 billion a year according to data from 2021, with China as its primary destination. The price of Iron Ore, therefore, can be a driver of the Australian Dollar. Generally, if the price of Iron Ore rises, AUD also goes up, as aggregate demand for the currency increases. The opposite is the case if the price of Iron Ore falls. Higher Iron Ore prices also tend to result in a greater likelihood of a positive Trade Balance for Australia, which is also positive of the AUD.
The Trade Balance, which is the difference between what a country earns from its exports versus what it pays for its imports, is another factor that can influence the value of the Australian Dollar. If Australia produces highly sought after exports, then its currency will gain in value purely from the surplus demand created from foreign buyers seeking to purchase its exports versus what it spends to purchase imports. Therefore, a positive net Trade Balance strengthens the AUD, with the opposite effect if the Trade Balance is negative.
- AUD/USD holds positive ground near 0.6525, adding 0.16% on the day.
- The US PCE was up 2.5% YoY in February, in line with the market consensus.
- The Chinese NBS Manufacturing PMI improved to 50.8 in March against 49.1 prior.
The AUD/USD kicks off the new week on a positive note around 0.6525. It's a holiday in Australia for Easter Monday, and the market is likely to be mute. Investors will keep an eye on the US ISM Manufacturing Purchasing Managers Index (PMI) for fresh impetus, which is expected to improve to 48.4 in March from 47.8 in February.
US inflation, as measured by the Personal Consumption Expenditures Price Index (PCE) rose in line with expectations in February, climbing 2.5% YoY in February. The monthly was slightly below the market consensus, rising 0.4% MoM in the same month. Furthermore, the Core PCE, which excludes volatile food and energy prices, rose 2.8% annually and 0.3% monthly, aligning with the estimation. The data suggested a continued trend of inflation, potentially keeping the Federal Reserve (Fed) on hold before it can start lowering interest rates this year. The higher-for-longer US rate narrative is likely to provide some support to the US Dollar (USD) in the near term.
The Fed Chairman Jerome Powell said on Friday that the recent US inflation data was "along the lines of what we would like to see," and it kept the Fed's baseline for interest rate cuts this year intact. Fed officials continued to pencil in three rate cuts this year. Investors expect the first rate cuts will come at the June meeting.
On the Aussie front, the encouraging Chinese PMI data might cap the downside of the China-proxy Australian Dollar (AUD). The China's National Bureau of Statistics (NBS) reported on Sunday that the monthly NBS Manufacturing PMI improved to 50.8 in March from 49.1 in the previous month. Meanwhile, the NBS Non-Manufacturing PMI rose to 53.0 in March from 51.4 in February.
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