• Japan’s Q1 GDP falls faster than expected
• Data raises questions about when the BOJ will lift interest rates.
• Yen's weakness complicates picture for BoJ
• Japan's real wages fell for a 24th consecutive month

 

Japan's economy fell faster than expected in the first quarter. Preliminary gross domestic product data from the Cabinet Office on Thursday showed Japan's economy shrank -2% annualized in January to March from the prior quarter, faster than the 1.5% drop seen in a Reuters poll of economists.

 

In the first quarter of this year, private consumption, which is the largest component of GDP, dropped by an annualized -2.7% from the previous three-month period. Corporate investment fell -3.2%. Exports fell 18.7%, while imports also fell -12.8%, resulting in a decline in net exports. Private residential investment dropped -9.8% from the previous quarter.

 

Downwardly revised data showed GDP barely grew in the fourth quarter of 2023, due to downgrades to capital expenditure estimates.

 

 

Japan’s GDP Growth. Source: Japan’s Cabinet Office

 

 

Data raises questions about when the BoJ will lift interest rates

The BoJ raised interest rates for the first time since 2007 in March, and persistently high inflation may pave the way for another move. There are signs of a division among ruling Liberal Democratic Party members over whether the central bank should hike again or keep rates low to smooth financing. The BoJ is paying close attention to whether demand-driven inflation, backed by strong wage growth, is taking root in Japan.

 

Yen's weakness complicates picture for BoJ

A weaker yen has created a two-speed economy in Japan, with the export and tourism sectors broadly benefiting from a more competitive exchange rate. However, households and small businesses are squeezed by inflated costs of imported goods.

 

The yen's weakness complicates the question of whether the BoJ should maintain its monetary stimulus or continue to unwind it.

 

Japan's real wages fall for 24th consecutive month

When real wage growth remains negative, it's hard to expect strong private consumption. The weakening of domestic demand coincides with inflation outpacing wage growth.

 

This comes despite the annual wage negotiations in the spring between labor unions and management yielding the best outcome in three decades after major companies weighed the impact of the recent bout of cost-push inflation and agreed to hike pay.

Real wage growth, seen as crucial for Japan to completely emerge from its long fight against deflation, has lagged behind price hikes, eroding households' purchasing power as prices for everyday goods have continued rising due to high raw material costs and a weak yen.

 

 

 

The content published above has been prepared by CFI for informational purposes only and should not be considered as investment advice.  Any view expressed does not constitute a personal recommendation or solicitation to buy or sell.  The information provided does not have regard to the specific investment objectives, financial situation, and needs of any specific person who may receive it, and is not held out as independent investment research and may have been acted upon by persons connected with CFI.  Market data is derived from independent sources believed to be reliable, however, CFI makes no guarantee of its accuracy or completeness, and accepts no responsibility for any consequence of its use by recipients.

 

US inflation data is set for release today at 4.30 PM Dubai time, with markets awaiting how the real reading turns out compared to expectations and the previous data. Forecasts indicate that inflation is expected to slow to 3.4% on an annual basis.

 

CPI data is considered one of the most important data points that affects the Federal Reserve’s decisions. From the Fed’s point of view, inflation is still far from its 2% target, suggesting that tight monetary policy will continue while inflation remains high.

 

On the other hand, the market outlook reflects optimism in that today’s reading may prompt the Fed to start lowering interest rates during its upcoming meetings, given that recent data has already indicated the start of a slowdown in the US economy. 

 

Consumer confidence fell to its lowest levels since November last year, while unemployment claims rose to the highest level since August last year. Markets also witnessed a decline in US labor market data.

Expected scenarios

 

If today's reading is higher than 3.5%, this may prompt the Fed to postpone lowering interest rates, given that inflation remains significantly higher than the central bank’s target. Analysts expect this outcome to positively impact the US dollar and spark potential declines in stocks and oil.

 

However, if inflation declines below 3.4%, this may prompt the Federal Reserve to start reducing interest rates, given that inflation is moving towards the central bank’s target.

 

 

US Inflation Data April 2023-24

Figure 1: US inflation data over the past year. Source: US Department of Labor

 

Today’s inflation data will likely come with strong volatility in the financial markets. Traders should consider that the initial market reaction, regardless of the nature of the actual reading, may be sharp and volatile before the markets become stable. It should also be noted that traders all have different ideas and beliefs in the way they interpret the information issued, and therefore prices may not move 100% according to that information.

 

 

The content published above has been prepared by CFI for informational purposes only and should not be considered as investment advice.  Any view expressed does not constitute a personal recommendation or solicitation to buy or sell.  The information provided does not have regard to the specific investment objectives, financial situation, and needs of any specific person who may receive it, and is not held out as independent investment research and may have been acted upon by persons connected with CFI.  Market data is derived from independent sources believed to be reliable, however, CFI makes no guarantee of its accuracy or completeness, and accepts no responsibility for any consequence of its use by recipients.

 

The UK economy has gradually improved since the year started, indicating a shift away from the technical recession downturn.

 

Gross Domestic Product (GDP) m/m Data

The UK witnessed a recession by the end of 2023, where the country’s GDP came in negatively for two consecutive quarters, indicating a period of economic decline.

 

The economy experienced a significant downturn of -0.5% in September 2023, followed by -0.3% in December 2023, marking a recession (Figure 1).  Despite these challenges, there have been signs of recovery, with the rate of decline showing a gradual decrease over time.

 

The most recent Gross Domestic Product (GDP) m/m data, released on May 10, 2024 (Figure 1), indicates consistent positive growth since March 13, 2024, signaling an expansion in economic activity and marking the end of the recession.

 

Figure 1: Gross Domestic Product (GDP) m/m % in the UK, Forex Factory

 

Claimant Count Change Data

The Claimant Count Change, released by the Office for National Statistics, measures the number of individuals claiming unemployment-related benefits. The most recent figure, released on May 14, 2024, resulted in 8.9K, a notable shift from the previous adjusted reading of -2.4 K (Figure 2). Additionally, it represents the lowest count of unemployment claimants in the UK since September 12, 2023, signaling a significant improvement in the labor market.

 

Figure 2: Claimant Count Change in the UK, Trading Economics

 

Overall Analysis

Towards the end of 2023, despite facing a recession, the UK was facing high inflation rates. This has caused the Bank of England (BOE) to increase the interest rate as a measure to combat inflation. Following a series of 14 rate hikes, the BOE has decided to maintain its interest rate at 5.25% for six consecutive sessions.

 

In parallel, inflation has shown a gradual decline, edging closer to the healthy 2% level, while also displaying signs of economic activity improvement. These developments highlight the comeback of the UK economy and its journey towards advancement.

 

 

 

The content published above has been prepared by CFI for informational purposes only and should not be considered as investment advice.  Any view expressed does not constitute a personal recommendation or solicitation to buy or sell.  The information provided does not have regard to the specific investment objectives, financial situation, and needs of any specific person who may receive it, and is not held out as independent investment research and may have been acted upon by persons connected with CFI.  Market data is derived from independent sources believed to be reliable, however, CFI makes no guarantee of its accuracy or completeness, and accepts no responsibility for any consequence of its use by recipients.

Market Outlook: May 13 – 17

• Fed members hinted at potential delays in rate cuts
• Unemployment Claims and Consumer Confidence fell short of expectations
• U.S. Key figures Releases likely to influence the monetary policy outlook

Highlights of Last Week’s Key Events in the U.S.

Last Week, Fed members such as Logan and Bowman mentioned that it is premature to consider rate cuts and indicated that they don’t foresee any warranted this year, hinting at potential delays.

Furthermore, both Unemployment Claims and Consumer Confidence data in the U.S. disappointed expectations. Unemployment claims registered at 231K, missing the 212K forecast and marking the highest level since November 2023. Prelim UoM Consumer Confidence actual data recorded 67.4, falling short of the expected 76.3, marking the lowest level since June 16, 2023.

However, Fed Chair Powel mentioned at the FOMC Press Conference that they will base their interest rate decisions on major U.S. data outcomes.

Crucial U.S. Data to Track This Week

The U.S. takes the spotlight for this week as it is set to release key figures, that could influence the outlook for the Federal Reserve monetary policy.

The Producer Price Index (PPI) data is scheduled for release on Tuesday, May 14, 2024, at 4:30 PM GMT+4 (Dubai Time), followed by the Consumer Price Index (CPI) on Wednesday, May 15, 2024, at 4:30 PM, GMT+4 (Dubai Time).

The PPI m/m, which measures the price levels from the perspective of producers, is projected to rise from 0.2% to 0.3%. If this scenario occurs or if the released figure surpasses 0.3%, it would signal inflationary pressures, potentially resulting in higher costs for consumers and likely strengthen the value of the U.S. Dollar.

The CPI y/y, which measures the price levels purchased by consumers, is anticipated to drop from 3.5% to 3.4%, signaling easing inflationary pressures. Inflation has been gradually decreasing closer to around the 2% healthy level, however, if the CPI resulted as 3.5% indicating stickiness or higher, then this will most probably delay rate cuts and increase the value of the U.S. Dollar.

Fed Chair Powel is due to speak on Tuesday, May 14, 2024, at 6:00 PM, GMT+4 (Dubai Time). The speech will mostly provide insights regarding steps taken toward the monetary policy. For real-time updates, stay tuned on our telegram channels. 

Moreover, on Wednesday, May 15, 2024, the Census Bureau is scheduled to release the Retail Sales m/m data at 4:30 PM, GMT+4 (Dubai Time). The market forecasts a significant drop from 0.7% to 0.4%, indicating a decline in consumer spending, which may potentially cause the U.S. Dollar value to drop.

The key topic under inspection is whether the Fed will initiate its first rate cut this year or keep it steady at 5.50%. By analyzing crucial U.S. economic indicators such as the PPI, CPI, and Retail Sales, witnessing a decline in all three may provide significant insights into the potential timing of a rate cut by the Fed.

 

The content published above has been prepared by CFI for informational purposes only and should not be considered as investment advice.  Any view expressed does not constitute a personal recommendation or solicitation to buy or sell.  The information provided does not have regard to the specific investment objectives, financial situation, and needs of any specific person who may receive it, and is not held out as independent investment research and may have been acted upon by persons connected with CFI.  Market data is derived from independent sources believed to be reliable, however, CFI makes no guarantee of its accuracy or completeness, and accepts no responsibility for any consequence of its use by recipients.

 

 

The Bank of England announces its latest interest rate decision on May 9th. While the central bank is not expected to alter interest rates, investors will be focusing on two key questions that they hope the accompanying report and press conference will answer:

 

• When will interest rates start to fall in 2024?

• Where does the Bank see inflation going this year?

 

March saw a notable dovish shift from the BoE, hinting at a potential future cut. This marked the first time in the current cycle that no members of the Monetary Policy Committee voted for a hike. In March, Bailey said it was reasonable for investors to bet on rate cuts this year.

 

The critical question is when the central bank will start cutting rates. Market pricing suggests August, and the OECD report predicts the third quarter will be the most likely period, with rates expected at 3.75% by the end of 2025.

 

The UK now has to get up to speed with the changed expectations for interest rates, which can be summed up as higher for longer. Until recently, the Federal Reserve was expected to take the lead and cut interest rates this spring, with other central banks to follow. However, the Fed is now signaling that rate cuts are not on the horizon, and it ruled out a rate hike at its meeting on May 1st. The European Central Bank could be the first to cut rates at its June meeting as inflation continues to fall in the eurozone.

 

 

UK inflation over the past 60 years: Source: Morning Star

 

 

The UK inflation picture is better than that of the US, but not by much. It is still witnessing some of the "stickiness" in inflation that has troubled Fed policymakers. However, UK inflation at 3.2% is still below that of the US, where the latest CPI reading was 3.5%. As the OECD pointed out this week, the UK economy is weaker than the US, so monetary easing could be less problematic and help stimulate parts of the economy. Investors have been building up bets against the pound as conviction grows that the Bank of England will start cutting interest rates by the summer, ahead of its US counterpart.

Speculation amongst currency traders regarding a fall in the sterling has reached a 16-month high, data from the US Commodity Futures Trading Commission shows. Meanwhile, according to State Street, one of the world's largest custodian banks, asset managers have turned significantly bearish on the pound since March last year.

 

 

The content published above has been prepared by CFI for informational purposes only and should not be considered as investment advice.  Any view expressed does not constitute a personal recommendation or solicitation to buy or sell.  The information provided does not have regard to the specific investment objectives, financial situation, and needs of any specific person who may receive it, and is not held out as independent investment research and may have been acted upon by persons connected with CFI.  Market data is derived from independent sources believed to be reliable, however, CFI makes no guarantee of its accuracy or completeness, and accepts no responsibility for any consequence of its use by recipients.  

Gold is moving in a horizontal price channel following two weeks of decline of more than 3.5%. Gold prices dropped from $2390 to current levels around $2300, now showing signs of stabilizing since the start of May between the resistance zone around $2330 and support at $2280.

 

Positive moves in the dollar index, supported by a slowdown in U.S. jobs, are considered the most important factors currently affecting gold prices, especially after the precious metal rose to record levels around $2430 in April 2024.

 

The markets are currently awaiting US inflation data that will be released next week in order to anticipate the Fed’s future monetary policy moves. A reading higher than 3.7% indicates the return of inflationary pressures, something which may encourage the Fed to raise the pace of interest rates.

 

Meanwhile, a reading below 3% may lead the Fed towards its first interest rate cut. Judging between inflation expectations on the one hand and gold’s horizontal price movements on the other, we will continue to monitor how gold prices move in the near-future.

 

Figure 1: XAUUSD, MT5

 

 

 

The content published above has been prepared by CFI for informational purposes only and should not be considered as investment advice.  Any view expressed does not constitute a personal recommendation or solicitation to buy or sell.  The information provided does not have regard to the specific investment objectives, financial situation, and needs of any specific person who may receive it, and is not held out as independent investment research and may have been acted upon by persons connected with CFI.  Market data is derived from independent sources believed to be reliable, however, CFI makes no guarantee of its accuracy or completeness, and accepts no responsibility for any consequence of its use by recipients.   

Liquidity is a crucial trading concept that every trader should understand to make informed decisions. In simple terms, liquidity refers to the ease with which an asset can be bought or sold in the market without causing a significant impact on its price. A highly liquid market means many buyers and sellers are actively trading the asset, making it easier to enter and exit positions without experiencing slippage.

 

Identifying a liquidity zone is essential for traders as it allows them to anticipate potential price movements and adjust their strategies accordingly. A liquidity zone can be defined as a specific price range where a significant amount of trading activity is concentrated, along with pending orders and stop-loss targets. Traders often use volume indicators and order book data to identify these zones, as they provide valuable insights into market dynamics and the behavior of market participants.

 

When trading in a liquidity zone, it is important to pay attention to key price levels and market indicators that can signal potential changes in market sentiment. By observing how price reacts to specific levels and monitoring trading volumes, traders can better understand market dynamics and make more informed trading decisions.

 

Let's take a look at some new concepts around the subject of liquidity, including liquidity sweeps and liquidity runs. First, we have a liquidity sweep, as shown below in Figure 1. This usually breaks the resistance line targeting liquidity and stop losses, which is then followed by a trend reversal candlestick occurring in a liquidity sweep.

 

Figure 1: Liquidity sweep

 

Second, we see the example of a liquidity run, as shown in Figure 2. A liquidity run occurs with the break of a resistance line with price remaining around this zone for an extended period. This indicates that a potential move higher could occur. In this example, the opposite also applies when the traded instrument is in a downtrend.

 

Figure 2: Liquidity run

 

Let's now look at how to define liquidity sweeps and liquidity runs. As shown in Figure 3 below, there are two ways to identify liquidity sweeps and runs.

 

1) Offering fair value

2) Seeking liquidity

 

If the market breaks resistance and instantly drops below, this confirms a liquidity sweep. The same idea applies to the downside. On the other hand, if the market breaks a solid support or resistance zone and remains there for an extended amount of time, the market may just be looking to gain momentum and direction.

 

Figure 3: Identifying liquidity runs & sweeps

 

In conclusion, understanding liquidity and identifying a liquidity zone is essential for traders to boost their performance. By paying attention to market dynamics, order flow, and volume indicators, traders can gain a competitive edge in the markets and improve their overall trading performance. Trading within a liquidity zone can help traders navigate volatile market conditions with confidence and precision.

 

 

 

The content published above has been prepared by CFI for informational purposes only and should not be considered as investment advice. Any view expressed does not constitute a personal recommendation or solicitation to buy or sell. The information provided does not have regard to the specific investment objectives, financial situation, and needs of any specific person who may receive it, and is not held out as independent investment research and may have been acted upon by persons connected with CFI. Market data is derived from independent sources believed to be reliable, however, CFl makes no guarantee of its accuracy or completeness, and accepts no responsibility for any consequence of its use by recipients.

• The U.S. Dollar Index witnesses 1% decline
• RBA expected to maintain rates for longer
• BOE likelihood of rate cuts rises
• Release of key inflation indicators in China: CPI and PPI

 

Last Week's Major Events

 

Last week, the U.S. Dollar witnessed a decline of approximately 1%. The move came as a result of multiple factors explained below.

 

On Wednesday, May 1, the Federal Reserve decided to maintain interest rates at 5.50%. This was followed by the FOMC Press Conference, during which Fed Chair Jerome Powell mentioned the central bank's cautious stance on interest rate cuts.

 

Powell emphasized the importance of gaining greater confidence that inflation is moving sustainably towards the 2% mark before considering any adjustments to monetary policy. Moreover, the pivotal role of key U.S. economic metrics in shaping the Fed’s future interest rate path was highlighted.

 

On Friday, markets saw the release of major U.S. labor data, including the Non-farm Employment Change (NFP) and the Unemployment Rate. The NFP figure fell short of expectations, with a result of 175K jobs added, marking the lowest figure since December 8, 2023, against a forecast of 238K. This drop signaled weakness in employment growth.

 

At the same time, the unemployment rate figure surpassed expectations hitting 3.9% compared to the projected 3.8%, indicating a higher-than-anticipated proportion of unemployed individuals.

 

The combined impact of these developments on market sentiment weighed heavily on the U.S. Dollar, contributing to its recent decline.

 

Upcoming Major Events

 

Reserve Bank of Australia Cash Rate

The Reserve Bank of Australia (RBA) is scheduled to release its Cash Rate on Tuesday, May 7, 2024, at 8:30 AM (Dubai Time). The market anticipates the rate to remain unchanged at 4.35%. If the reading aligns with forecasts, this will mark the fifth consecutive period of maintaining the rate at this level, representing its highest point. The RBA is expected to hold its key interest rate at this level to manage inflationary pressures, which are driven by a rise in employment conditions.

 

 

Bank of England Official Bank Rate

The Bank of England (BOE) is scheduled to release its Official Bank rate on Thursday, May 9, 2024, at 3:00 PM (Dubai Time). The market anticipates the rate to remain at 5.25%, a level maintained since November 2, 2023. Governor Andrew Bailey emphasized that price pressures are heading in a favorable direction. Notably, the Consumer Price Index (CPI) declined from 3.4% in March to 3.2% in April, with expectations of further declines. This raises expectations of rate cuts in the coming months, with September emerging as a probable starting point.

China Inflation

On Saturday, May 25, markets are expecting the release of major inflation figures in China, such as the Consumer Price Index (CPI) and the Producer Price Index (PPI) at 5:30 AM (Dubai Time). China’s CPI is projected to hold steady at 0.1%, indicating a concerning difference from the desired 2% target level. While PPI is expected to rise from -2.8% to -2.3%, signaling a positive trend. This increase suggests that producers are currently facing higher costs, potentially predicting future price hikes for consumers. Such a scenario could translate into a rise in the next CPI reading.

 

 

 

The content published above has been prepared by CFI for informational purposes only and should not be considered as investment advice.  Any view expressed does not constitute a personal recommendation or solicitation to buy or sell.  The information provided does not have regard to the specific investment objectives, financial situation, and needs of any specific person who may receive it, and is not held out as independent investment research and may have been acted upon by persons connected with CFI.  Market data is derived from independent sources believed to be reliable, however, CFI makes no guarantee of its accuracy or completeness, and accepts no responsibility for any consequence of its use by recipients.

 

At 16:30 Dubai time, U.S. labor market data is set for release. These figures are considered one of the most important data points that affects the Fed’s decisions future monetary policy decisions. The Fed indicated in its previous meeting that it will closely monitor labor market data, which in turn, will direct the course of monetary policy.

 

With inflation still above the Fed’s target, will today’s jobs data support the central bank’s decision to keep interest rates higher for a longer?

 

Expectations suggest that the U.S. economy added 238,000 jobs in March compared to the previous month’s 303,000. If expectations are correct, this would indicate that the labor market has started taking the negative effects of the Fed’s policy, potentially pushing the central bank to start lowering interest rates. However, if the reading turns out lower than expected and lower than the previous reading, this may prompt the Fed to keep rates high for longer than previously expected.

 

Expected scenarios and their potential market impact:

 

• Higher than expected and previous reading: This scenario may support the Fed’s current decisions not to lower interest rates. Analysts expect this to have a positive impact on the U.S. dollar while negatively impacting on gold and stocks.
• Lower than expected and previous reading: This may justify the Fed reducing interest rates in its upcoming meetings or ruling out any further hikes. Therefore, analysts expect this to negatively affect the US dollar and positively impact gold and stock prices.
• Between the previous and expected: This reading would be the most confusing for markets, making it difficult to predict specific price movement.

 

Note that the initial market reaction, regardless of the nature of the actual reading, may be sharp and volatile before the market begins to return to stability. Therefore, traders should remember that people have different ideas and convictions in the way they interpret the information issued, and therefore prices cannot move 100% according to this information.

 

 

 

The content published above has been prepared by CFI for informational purposes only and should not be considered as investment advice. Any view expressed does not constitute a personal recommendation or solicitation to buy or sell. The information provided does not have regard to the specific investment objectives, financial situation, and needs of any specific person who may receive it, and is not held out as independent investment research and may have been acted upon by persons connected with CFI. Market data is derived from independent sources believed to be reliable, however, CFl makes no guarantee of its accuracy or completeness, and accepts no responsibility for any consequence of its use by recipients.

Investors await the Federal Reserve’s meeting, which is set to begin Tuesday and conclude with an interest rate decision and press conference on Wednesday.

 

The Fed is expected to leave interest rates unchanged, but the accompanying statement and Fed Chair Jerome Powell's post-meeting press conference may shed additional light on the future outlook for rates.

 

The Fed is also expected to send the following message to markets - continue squeezing inflation with high-interest rates until prices remain under control. 

 

Recent economic data has tamped expectations of a near-term rate cut, with the central bank now likely to leave rates unchanged until September at least.

 

The latest macro data showed inflation in the U.S. remains sticky. The U.S. consumer price index (CPI) rose 0.4% month-on-month (MoM) and 3.5% year-on-year (YoY), above Wall Street expectations of 0.3% MoM and 3.4% YoY, according to data released by the Labor Department's Bureau of Labor Statistics on Wednesday.

 

GDP numbers showed the economy slowed significantly during the first quarter, making the situation more complex for the Federal Reserve. Growing at the slowest pace in two years, the U.S. GDP increased at 1.6% annually between January and March.

 

While markets are widely expecting interest rates to remain unchanged, traders will closely watch for policy guidance from the central bank. At the top of investors’ minds are questions about how many rate cuts will take place this year and when they might begin.

 

Earlier this year, Fed officials projected they would cut interest rates as inflation cooled. Financial markets had expected those cuts to begin in June. However, after three consecutive months of above-expected inflation reports, traders are now pricing in September as the earliest month for the first cut, according to the CME Group’s FedWatch tool.

 

Still, with the economy booming and unemployment low, there is little pressure on the Fed to cut rates to stimulate the economy and prevent a recession, and much pressure to keep them high in order to quell inflation. 

 

The U.S. non-farm payrolls data will also be closely watched next Friday for clarity on the Fed's rate-cut projections.

 

 

The content published above has been prepared by CFI for informational purposes only and should not be considered as investment advice.  Any view expressed does not constitute a personal recommendation or solicitation to buy or sell.  The information provided does not have regard to the specific investment objectives, financial situation, and needs of any specific person who may receive it, and is not held out as independent investment research and may have been acted upon by persons connected with CFI.  Market data is derived from independent sources believed to be reliable, however, CFI makes no guarantee of its accuracy or completeness, and accepts no responsibility for any consequence of its use by recipients.