potential growth

In our conversation with an FXPRO analyst about the current market situation, several key topics were discussed. Regarding the recent FOMC decision, it appears that markets are underestimating the Fed's hawkish rhetoric. Despite leaving the Fed Funds rate unchanged, the FOMC's published forecasts suggest two more rate hikes this year and an extended period without policy easing. However, investor confidence in Powell's economic assessment is at a record low. This disparity between market expectations and the Fed's projected scenario is evident in the bond market pricing, with the most likely FOMC scenario priced at a mere 8.4%.   Interestingly, this misplaced investor confidence in a less hawkish Fed is driving equity gains, reminiscent of a similar scenario in January when regional banking issues dashed market optimism. The market's detachment from reality is leading to a disregard for the Fed's rate guidance and the tightening measures already implemented.   FXMAG.COM: Could you please comment on the FOMC decision? FXPRO analyst: Markets continue to underestimate the Fed's hawkish rhetoric. After leaving the Fed Funds rate unchanged, the FOMC has published forecasts suggesting two more 25 basis point hikes this year and an extended period without policy easing. However, investors' confidence in Powell's economic assessment is at a record low (36% vs. 74% for Greenspan in 2001). The most likely FOMC scenario - two more rate hikes before the end of the year - is priced by the bond market at only 8.4%, according to the FedWatch tool. Indeed, this investor confidence that the Fed will be less hawkish than it promises is fueling equity gains. We saw something similar in January when regional banking problems dashed market optimism. Markets have become too detached from reality, ignoring both the Fed's direct rate guidance (which is within its power) and the economic logic and the policy tightening that has already occurred.     FXMAG.COM: Could you please comment on the ECB decision?  FXPRO analyst: Despite six months of economic contraction, the ECB is quite open about its intentions to fight inflation. We expect another 25-point hike on Thursday, and the tone supports at least a couple more. This is a more hawkish stance than that of the Fed. Moreover, we do not rule out hawkish surprises from the ECB today and in the coming weeks. It should not be forgotten that continental Europe is historically less inflation-tolerant than the US and the UK. This could be fuel for a stronger euro in the coming months.     FXMAG.COM: Could you give your point of view about how the gold prices would behave in the next weeks? Is there a chance that there will be new ATH? FXPRO analyst: Gold retreated to $1930, a level not seen since March when the US regional banking crisis triggered a rally in precious metals and major cryptocurrencies. A pullback on the shoulders of rising equities has forced gold to give back more than half the amplitude of the March-May rally. Despite the retreat, gold still has the potential to grow from current levels to $2100 by the end of the year. A central argument against this bullish scenario would be a break below $1920 in the coming days, a significant reversal area.  

USD/JPY The Bank of Japan unexpectedly purchased 300 billion yen worth of government bonds yesterday in order to maintain low yield on long-term debt securities. This led to yen weakening by 0.86%.     On the daily chart, the price approached a strong resistance formed by three lines: the target level at 142.82, the MACD line, and the embedded line of the price channel. A slight rebound may occur from this area, after which there will be a new and successful attempt to break through it. If the price consolidates above 142.82, the next target would be 144.73, with further potential growth towards 145.90. The Marlin oscillator being in the positive territory indicates a tendency for further price increases.     A strong upward movement can be seen in the four-hour chart. There may be a rebound towards the support at 141.96 (July 21 high), followed by a resumption of the upward trend. The Marlin oscillator, continuing to rise, will likely withstand corrective declines without moving into the negative zone when the price falls.

The outlook is for further weakness in economic activity China now looks set to endure a period of sub-trend growth while it restructures this debt and alleviates some of the debt-service cost strains that are apparently weighing on some local government financing vehicles. Much of this off-balance sheet debt will need to be brought back on the balance sheet. Clarity over the scale of the existing problem will help determine the central government’s response, as at this stage, we suspect that even they don’t know. But lower interest rates for official debt and longer payment schedules seem very likely to dominate proceedings. Bucketloads of new debt, however, will not. We think that China's longer-term potential growth rate is around the 5% mark. But in the near term, even this may present a challenge for policymakers to achieve. We have downgraded our GDP forecast for 2023 to 4.5% as the previous main engine of growth – consumer spending – is faltering. Estimating how long this balance sheet adjustment will weigh on the economy is pure guesswork at this stage, but a wet-finger estimate of two years seems a reasonable starting point. We are not looking for 5% growth to be achieved again until 2025.   Chinese inflation is just unwinding earlier food price spikes   Inflation is low, but will recover Such weakness is likely to keep inflation very subdued in the meantime. Much of the recent decline in overall inflation is due to falls in food price inflation, which spiked up to more than 10% in July last year on the back of swine fever-affected pork prices. This is yet another reason for dismissing deflation claims. Indeed, if you create a conventional CPI index from China’s year-on-year inflation series, then it looks like the price level rose by about 0.3% month-on-month in each of the last two months. So temporary base effects are doing most of the damage to inflation currently, and by November these will have passed. In the meantime, though, further negative year-on-year CPI inflation figures are likely to keep the 'deflation' argument alive for a while longer.