Global Market Analysis By zForex

Commercial Content Analysts
103

Dollar Index Hovers Near Five-Month Peak Amid Mixed Economic Signals and Central Bank Speculations

The dollar index saw minimal change on Wednesday closely approaching its five-month peak of 105.1 reached the previous day. This movement came as traders evaluated strong US economic indicators and reconsidered their expectations for Federal Reserve interest rate reductions. February’s job openings slightly surpassed projections, reaching 8.756 million against an anticipated 8.75 million. Additionally, factory orders experienced a more significant rebound than expected, in line with the ISM manufacturing report, which indicated the first growth in factory activity in 18 months.

On Tuesday, San Francisco Fed President Mary Daly and Cleveland Fed President Loretta Mester suggested the Federal Reserve might cut interest rates three times this year. Market participants are keenly awaiting comments from Chair Powell, alongside the release of the ADP employment report and the ISM Services PMI.

In Europe, European Central Bank (ECB) official Robert Holzmann expressed openness to a rate cut in June, contingent on further supportive data. Meanwhile, ECB policymaker Yannis Stournaras hinted at the possibility of reducing rates by up to 100 basis points throughout the year, although consensus on this within the ECB remains elusive. The preliminary Eurozone Harmonized Index of Consumer Prices (HICP) for March is anticipated.

In the UK, Bank of England (BoE) Governor Andrew Bailey noted recent signs of decreasing inflation, suggesting the economy is nearing a point where interest rate reductions could commence. However, BoE official Jonathan Haskel cautioned that such cuts should still be considered distant despite the positive trend in inflation rates. Chancellor of the Exchequer Jeremy Hunt remarked that nearing the inflation target could pave the way for the BoE to contemplate rate cuts.

The Bank of Japan (BoJ) maintains a cautious approach towards further policy tightening, which has not significantly bolstered market optimism. Japanese Finance Minister Shunichi Suzuki’s comments on preventing excessive exchange-rate volatility have given some support to the Japanese Yen.

Gold prices climbed to 2288 on Wednesday, continuing their ascent amid rising demand for safe-haven assets due to geopolitical uncertainties. This increase occurred despite higher US yields and diminishing expectations for a Fed rate cut in June.

Oil prices remained at five-month highs in anticipation of an OPEC+ meeting amidst concerns over global supply disruptions caused by escalating tensions in the Middle East and renewed attacks on energy facilities in Ukraine and Russia.

104

Global Economic Signals Prompt Speculation on Imminent Interest Rate Cuts

On Thursday, the dollar dipped to a one-week low, influenced by recent economic data that fueled expectations for imminent interest rate reductions in the US. This downturn was initiated by an unexpected deceleration in US service sector growth on Wednesday. Despite this, the dollar has remained the top-performing currency among the G10 for the year, as expectations for rate cuts have significantly decreased in recent months.

Federal Reserve officials, including Chair Jerome Powell, emphasized on Wednesday the necessity for ongoing debate and further data analysis before any decision to cut interest rates, an action financial markets anticipate might happen in June.

In the Eurozone, the inflation rate for March fell more than expected, leading to speculation about the European Central Bank (ECB) potentially lowering interest rates in June. The Eurozone Harmonized Index of Consumer Prices (HICP) reported a year over year increase of 2.4% for March, below the forecasted 2.6%. Remarks by ECB officials, including Pablo Hernandez and Robert Holzmann, suggested that rate cuts could commence in June due to a consistent inflation slowdown across the bloc.

In the UK, futures traders are betting on a 25 basis point rate cut by the Bank of England (BoE) in June, with the probability currently at 66%. BoE Governor Andrew Bailey noted recent positive trends toward cooling inflation, suggesting that the UK economy is approaching a juncture where interest rate reductions could be contemplated. The UK’s Manufacturing PMI for March showed unexpected growth after a 20 month contraction, driven by strong domestic demand and leading to a surge in business optimism among manufacturers.

The Japanese Yen (JPY) is trading slightly above a multi-decade low against the dollar, with the Bank of Japan’s (BoJ) continued dovish stance and a positive market sentiment pressuring the yen. However, speculation about potential market intervention by Japanese authorities to support the yen has tempered bearish bets against it.

Gold prices remained near an all-time high of $2,300 an ounce on Thursday as investors processed remarks from Federal Reserve officials. Chair Jerome Powell stated on Wednesday that the Fed requires further evidence of inflation sustainably moving towards the 2% target before considering interest rate cuts.

Crude oil futures are trading at their highest levels since October due to supply concerns, geopolitical risks, and OPEC+ output cuts. OPEC+ announced on Wednesday that it would maintain its current oil output policy, focusing on compliance and requiring members who exceeded their supply quotas in the first quarter to present compensation plans.

105

Global Economic Update: Inflation Data Spurs Rate Cut Speculations Amid Mixed Market Reactions

In March, the US Producer Price Index (PPI) rose by a modest 0.2% month-over-month, falling short of the anticipated 0.3% increase. This resulted in a 2.1% year-over-year increase, marking the largest gain since April 2023. Furthermore, the Core PPI, which excludes food and energy, climbed 2.4% year-over-year, surpassing market forecasts. These figures, reported by the Bureau of Labor Statistics on Thursday, fueled optimism for potential rate cuts by the Federal Reserve (Fed) within the year.

Despite this, the financial markets have tempered their expectations, now pricing in only two rate cuts, likely starting in September. This cautious stance was reinforced by the Federal Open Market Committee (FOMC) minutes, which highlighted ongoing uncertainties about persistent high inflation and a lack of confidence in inflation stabilizing sustainably at 2%.

On the same day, the European Central Bank (ECB) maintained its key interest rates at 4.0% for the fifth consecutive meeting, while subtly indicating the possibility of a rate cut, potentially preceding the Fed’s adjustments. Market speculation has led to expectations of a 25 basis point reduction by the ECB as early as June, placing downward pressure on the Euro.

In the UK, recent data from the Office for National Statistics revealed a slight 0.1% month-over-month growth in Gross Domestic Product (GDP) for February, aligning with estimates but showing a deceleration from the previous 0.3% expansion. Additionally, February’s Industrial Production exceeded expectations with a 1.1% increase, rebounding from a 0.3% decline in January. The UK Goods Trade Balance also improved, registering a deficit of GBP -14.212 billion against a forecasted GBP -14.5 billion. Despite these positive indicators, the Pound Sterling remained subdued as markets anticipate an imminent rate cut by the Bank of England (BoE), potentially ahead of the Fed.

The Japanese Yen weakened to a new multi-decade low against the US dollar, influenced by the Bank of Japan’s (BoJ) dovish stance and lack of clear future policy direction. This contrasts with the Fed’s expected delay in rate cuts due to persistent inflation, suggesting a continued disparity in interest rates between the US and Japan, which undermines the Yen’s appeal as a safe-haven currency.

In commodities, gold prices soared past the $2,400 mark, setting a record for the 17th time, driven by ongoing geopolitical tensions and the anticipation of US rate cuts. Meanwhile, crude oil prices experienced an uptick amid escalating tensions in the Middle East, though they were on track for a weekly loss, reflecting broader economic concerns.

106

Global Financial Update: Dollar Strengthens, ECB and BoE Rate Cut Speculations, and Geopolitical Tensions Impact Markets

On Tuesday, the US dollar index continued its upward trajectory, following a surge on Monday triggered by a strong US retail sales report. In March, retail sales, which reflect consumer spending, increased by 0.7% from February, surpassing expectations. This strong consumer activity contradicts earlier predictions of a spending pullback, prompting further speculation about the timing of potential Federal Reserve interest rate cuts. This speculation has been fueled by strong employment gains in March and rising consumer inflation.

In contrast, the European Central Bank (ECB) views market expectations for a rate decrease starting in June as reasonable, following a steady decline in the annual core Consumer Price Index (CPI), which excludes volatile food and energy prices, to 2.9% in March. This marks the eighth consecutive month of declines, suggesting that inflation is on a sustainable path towards the ECB’s 2% target. Last week, the ECB maintained its Main Refinancing Operations Rate at 4.5%. ECB President Christine Lagarde indicated that if upcoming assessments provide more confidence that inflation is returning to the target, rate cuts would be justified.

In the UK, the Pound Sterling is under pressure due to disappointing labor market data for the quarter ending in February, which reflected a deteriorating economic outlook. The UK’s Office for National Statistics (ONS) reported that the unemployment rate increased unexpectedly to 4.2% from the anticipated 4.0% and previous 3.9%. Additionally, layoffs in February rose to 156,000 up from 89,000 in January. Market attention is now turning to the upcoming release of the UK Consumer Price Index (CPI) for March, which could significantly influence expectations for future Bank of England (BoE) rate adjustments, currently projected to begin in August.

The Japanese Yen weakened further on Tuesday, hitting a new 34-year low against the US dollar. This follows the Bank of Japan’s (BoJ) decision to maintain a dovish stance, refraining from providing clear guidance on future policy directions or the pace of policy normalization after the cessation of negative interest rates in March. A recent report suggests a shift in the BoJ’s focus from inflation targeting to a more discretionary approach, which will consider various economic indicators to guide future rate decisions, contributing to the yen’s depreciation.

Gold prices hovered near record highs on Tuesday, strengthened by a prediction from a major Wall Street bank that the precious metal could reach $3,000 per ounce within the next six to 18 months.

Oil prices climbed on Tuesday, supported by faster-than-expected economic growth in China and heightened geopolitical tensions in the Middle East following a missile and drone attack by Iran on Israel over the weekend.

107

Key Market Themes: Fed’s Hawkish Stance, Tech Earnings, Middle East Tensions

The Fed appears to make hawkish statements for a while longer regarding its decision to cut interest rates, which it has a deferred approach to.

While the balance sheets of major technology companies in the USA will be in the focus of investors this week, the growth data to be announced on Thursday and personal consumption expenditures to be announced on Friday will be followed as important data of the week.

With the effect of the decreasing tension in the Middle East, the barrel price of Brent oil decreased to 86 dollars and continues to be traded at 87 dollars, close to this price.

As for the ounce of gold, the sharpest withdrawal of the last period was close to 100 dollars in the last two days, while 2300 dollars of gold was tested.

ECB/Villeroy stated that the tensions in the Middle East had no effect on the interest rate cut, and this continues to keep expectations for a rate cut in June stable.

In the UK, the BoE stated that they would not be in a hurry to reduce interest rates and gave the message that steps would be taken according to the data to be announced. High interest rates have left home buyers facing the most difficult conditions of the last 70 years.

Following the rise in the USA led by Nasdaq, Asian indices followed a positive course led by the Hang Seng index.

108

Alphabet and Microsoft Showcase Robust Q1 2024 Earnings, Driven by AI and Cloud Computing Success

Strong Financial Performances: Both Alphabet and Microsoft exceeded market expectations in Q1 2024, with significant revenue and profit increases largely fueled by advancements in AI and cloud computing.

Strategic Investments Pay Off: Continuous heavy investments in AI and cloud infrastructure are yielding substantial returns, positioning both companies for sustained growth in the evolving tech landscape.

Alphabet and Microsoft, two titans of the tech industry, released their first-quarter earnings on April 25, 2024, showcasing strong performances that exceeded market expectations, particularly in the realms of AI and cloud computing.

Microsoft’s Earnings Highlights:

  • Revenue Surge: Microsoft reported a significant 17% increase in revenue to $61.86 billion, with a net income jump of 20% to $21.9 billion. The growth was driven by its intelligent cloud segment, which saw a 23% increase to $35.1 billion, thanks to Azure’s impressive 31% year-over-year growth.

  • Investment in AI and Cloud: The company’s future outlook includes double-digit revenue growth and continued heavy investment in AI and cloud infrastructure, with capital expenditures estimated between $45 billion and $50 billion for the current fiscal year.

Alphabet’s Earnings Highlights:

  • Revenue and Profit Growth: Alphabet reported a 15% increase in revenue to $80.54 billion, with a notable quadrupling of profit in its cloud business. Operating income stood at $25.5 billion, with net income reaching $23.66 billion.

  • Segment Performance: YouTube and Google Cloud were standout segments, with YouTube ad revenue climbing to $8.09 billion and Cloud revenue hitting $9.57 billion. Google Cloud’s operating income reached $900 million, reflecting a strong operating margin of 9%.

Both companies have demonstrated that their investments in AI and cloud services are yielding substantial returns. Microsoft’s Azure and Alphabet’s Google Cloud are benefiting from the increased adoption of AI services by corporate customers, indicating a normalization of cloud infrastructure demand.

Alphabet’s after-market stock rally, which lifted its market cap past $2 trillion, underscores investor confidence in its growth trajectory. Meanwhile, Microsoft’s gaming and hardware revenues faced challenges, with Xbox hardware revenue declining, although Xbox content and services revenue, including Xbox Game Pass, saw a 62% increase.

The earnings reports from both Alphabet and Microsoft send a clear message to investors that their strategic focus on AI and cloud computing is not only paying off but also positioning them for sustained growth in the rapidly evolving tech landscape.

In conclusion, Alphabet and Microsoft’s Q1 2024 earnings results reflect their successful navigation of the tech sector’s current dynamics, with AI and cloud computing at the forefront of their growth strategies. As they continue to invest and innovate in these areas, the market can expect these tech giants to maintain their leadership positions and drive future industry trends.

109

Gold Prices Jump on Rate Cut Hopes, Dollar Stumbles After Dovish Fed

Gold prices surged to over $2,310 per ounce on Monday, bouncing back from nearly a month-low last week. Traders are observing remarks from various Federal Reserve officials this week to estimate potential rate cuts, especially after disappointing US labor data for April. The data showed a slower job growth rate than expected, strengthening the likelihood of rate cuts later in the year. According to CME’s FedWatch Tool, there’s a 67% chance of a rate cut in September. Lower interest rates make holding gold more attractive since it doesn’t yield interest. However, in India, demand for physical gold remained subdued last week despite price drops, as buyers are waiting for bigger price declines. Meanwhile, Chinese premiums dropped for the second consecutive week due to weak holiday demand.

On Monday, the dollar index stabilized above 105.00 as investors evaluated the Federal Reserve’s monetary policy stance and awaited upcoming central bank statements. Last week, the index declined approximately 1% after the Fed kept interest rates unchanged, and Chair Powell reiterated the central bank’s inclination towards easing despite inflation concerns. Additionally, April’s job data revealed a lower-than-expected increase of 175,000 jobs, further supporting market expectations of rate cuts, with a November cut fully anticipated. The dollar also faced pressure from the yen’s strong rally last week, amid suspicions that the Bank of Japan intervened heavily to bolster its currency, spending over 9 trillion yen in the process.

The Japanese yen weakened towards 154.00 per dollar, retracting some of its gains from last week due to a public holiday, though concerns about government intervention persist. Last week, the currency surged by up to 5.2% on suspicions of intervention, with Bank of Japan data indicating significant spending to support it. Analysts suggest this intervention only offers temporary respite as underlying market conditions remain unfavorable for the yen. The yen has faced downward pressure this year as the Bank of Japan maintains ultra-low interest rates despite higher rates abroad, prompting investors to borrow yen for investment in higher-yielding currencies. However, expectations of two rate cuts by the US Federal Reserve this year may ease pressure on the yen.

In April 2024, the Caixin China General Composite PMI rose slightly to 52.8 from 52.7 in March, marking the highest level since May 2023. This indicates the sixth straight month of growth in private sector activity, driven by strong performance in both manufacturing and services. New orders increased notably, but employment levels declined for the third consecutive month. Input and output prices remained low, mainly due to subdued manufacturing factory gate prices. Overall, sentiment remained steady. Dr. Wang Zhe of Caixin Insight Group emphasized the importance of effective policy implementation to sustain economic recovery and improve market confidence.

110

US Unemployment Surges, Dollar Stabilizes, Gold Rises Amid Rate Cut Speculation

In the US, the number of individuals claiming unemployment benefits surged by 22,000 to reach 231,000 for the week ending May 4th, marking the highest level since August 2023 and significantly exceeding market expectations of 210,000. This notable increase halted a streak of four consecutive downside surprises, indicating a sudden and pronounced weakness in the labor market. This development strengthens the case for the Federal Reserve to consider gradual monetary policy easing.

On Friday, the dollar index stabilized around 105.3 as investors await further comments from the Federal Reserve to gain insight into future interest rate movements. Scheduled speeches from Fed Governor Michelle Bowman, Chicago’s Austan Goolsbee, Minneapolis’ Neel Kashkari, and Dallas’ Lorie Logan are anticipated later in the day. The dollar index faced pressure on Thursday following a surprising surge in weekly jobless claims to their highest levels in eight months, signaling a slowdown in the labor market and reinforcing expectations for Fed rate cuts this year. The probability of a rate decrease in September rose from 65% to 69% following the release of the claims data. Additionally, two Bank of England policymakers hinted at supporting a rate cut, with the first reduction expected during the summer, while the European Central Bank is anticipated to reduce borrowing costs in June.

On Friday, gold prices surged above $2,350 per ounce, supported by traders’ anticipation of an interest rate cut by the Federal Reserve following recent economic indicators. Thursday’s data showed a larger-than-expected rise in US jobless claims, signaling a gradual cooling of the labor market. Investors foresee the Fed commencing an easing cycle in September. Lower interest rates typically favor gold, which lacks yield. However, traders will closely watch next week’s CPI and PPI releases for further clues on the Fed’s monetary policy stance, especially considering some Fed officials’ reservations about easing. Additionally, strong investment in the over-the-counter market, ongoing central bank purchases, and rising Asian demand contributed to gold’s uptick. Furthermore, stalled ceasefire discussions in the Middle East and escalating tensions in Ukraine added to its risk premium. Gold is poised to climb by 2.2% over the week.

On May 9th, the Bank of England decided to maintain the key bank rate at 5.25%, aligning with market expectations and keeping it at its highest level since 2008. However, there was a notable shift in sentiment, with two committee members advocating for a reduction of 0.25 percentage points, compared to just one member in the previous meeting. Despite this, officials revised their inflation forecast while raising the growth outlook. According to BoE projections, the Bank Rate is anticipated to decline from 5.25% to 3.75% by the end of the forecast period. The UK economy is forecasted to expand by 0.4% in Q1 2024 and by 0.2% in Q2. However, demand is expected to lag behind potential supply growth, resulting in an economic slack margin. CPI inflation is projected to approach the 2% target in the near term, with potential risks stemming from geopolitical factors. The Monetary Policy Committee underscores the importance of a tight monetary policy to achieve sustainable inflation return to the 2% target. They emphasize their commitment to adjusting policy as necessary based on economic data.