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• Bank of Canada meets; may opt for bigger 50-bps cut
• October flash PMIs to set the mood amid some growth concerns
• A relatively quiet week otherwise, with mostly second-tier releases

BoC to likely cut by half a point

Expectations that the Bank of Canada will cut rates by 50 basis points at its October meeting firmed up after the latest CPI data. Nevertheless, markets are not fully convinced of an outsized move, hence, there is a little bit of uncertainty heading into Wednesday’s decision by Canada’s central bank.

On the face of it, the Canadian economy is not in great shape. Growth has been sluggish at best since late 2022 and the jobless rate has jumped from a post-pandemic low of 4.8% to around 6.5%. More importantly, the Bank of Canada has seen great progress in getting inflation down, which fell to a 3½-year low of 1.6% in September.

Governor Tiff Macklem even signalled at the last meeting that policymakers are “prepared to take a bigger step”. Furthermore, the BoC’s own survey indicates businesses remain quite pessimistic amid weak demand.

Yet, there are signs that the worst may be over as GDP growth has been stronger this year and employment is rising again after two months of declines. Some investors were also disappointed that the underlying measures of inflation were flat in September. All this could be seen as limiting the scope for further 50-bps reductions in the overnight rate even if policymakers back one at their October gathering.

For the Canadian dollar, any hawkish surprises could provide a much-needed boost as it’s depreciated by about 2.6% against the US dollar from its September peak. But a 50-bps cut is the most likely outcome even though it’s only 75% priced in. The loonie could therefore come under pressure if the expectations are confirmed.

But investors will also be on the lookout for any hints about future cuts. If Macklem keeps the door open to further 50-bps reductions, this would put the loonie at risk of a deeper bearish trend. However, if he sounds somewhat more upbeat about the outlook, investors might price out some rate cuts in the months ahead, potentially lifting the loonie.

Will Eurozone PMIs worsen the euro’s woes?

Last month’s PMI reports for the Eurozone were so bad that it prompted an about-turn by the European Central Bank on the likelihood of a back-to-back cut in October, having signalled the opposite at the September meeting. The ECB has now cut rates three times, totalling 75 bps, and more easing is on the way, as the risks to inflation and growth are tilted to the downside. If the flash PMI numbers for October are equally disappointing, investors are sure to reinforce their bets of additional rate cuts over the coming months.

High interest rates have taken their toll on the Eurozone economy but as businesses start to feel the relief of lower borrowing costs, the block’s largest economies – France and Germany – are grappling with other issues. German manufacturers are struggling to stay competitive on the global stage, while weak demand in China is adding to their pain. In France, the political turmoil has created uncertainty for businesses.

On the bright side, German exports to China may get a boost from Beijing’s recently announced measures to support growth, while the political deadlock in France appears to have ended for now.

This may bode well for the outlook, but the present situation in Europe remains very worrying for policymakers. So unless Thursday’s PMIs offer a glimmer of hope that business confidence is returning, the euro is likely to remain on the backfoot. Traders will also be keeping an eye on Friday’s Ifo Business Climate out of Germany.

Pound may find some support in UK PMIs

UK economic indicators have been somewhat mixed lately, but the picture is much clearer for inflation. Headline CPI fell below the Bank of England’s 2% target in September and there was a significant drop in services CPI too. Even if growth picks up momentum again, the BoE will almost certainly continue cutting rates.

However, the strength of the economy will still determine the pace of easing, and this is key for sterling as the Bank of England may not have to cut rates as many times as other major central banks if growth holds up, bolstering GBP crosses in the medium term.

Both the services and manufacturing PMIs ticked slightly lower in September but remained above 50. An improvement in October could help the pound recoup some of its recent losses on Thursday. But any rebound will struggle to go far with expectations high that the BoE will cut rates on November 7. The pound will also be paying close attention to Governor Bailey’s remarks as he is scheduled to make several appearances over the coming week.

Another light US calendar week

Over in the US, the flash PMIs will be vital too. Investors will be dissecting the details of the S&P Global survey to get a fresh update on employment conditions and price pressures across the services and manufacturing sectors.

The Fed is widely expected to trim rates again this year but following the recent run of upbeat data, not only has a 50-bps cut been priced out, but also a 25-bps reduction in both November and December is not seen as a done deal by some investors. If the PMIs extend the streak of upside surprises, the US dollar may climb to fresh highs against its peers as investors further scale back rate cut bets.

However, with no big releases due until the last week of October, any reaction is likely to be modest, with traders probably more preoccupied with corporate earnings. Other data will include existing home sales on Wednesday, new home sales on Thursday and durable goods orders on Friday.

Is more Chinese stimulus in the pipeline?

Elsewhere, CPI numbers for the Tokyo region out on Friday will be the only highlight in Japan, and in Australia, traders will be watching Thursday’s PMI figures. The Australian dollar could benefit from positive PMIs, having been lifted by the solid employment readings for September.

China will also remain in the spotlight as the PBOC will set its loan prime rates on Monday, and there could be further announcements on fresh stimulus policies targeted at the property market and consumers. Any surprises on this front could keep the positive risk sentiment going should markets struggle for direction.

ECB's widely anticipated 25bp rate cut did not end up rocking the markets, as Lagarde delivered little concrete guidance on what the central banks' next steps will be. Markets saw her remarks slightly on the dovish side, as she noted inflation risks 'may' be slightly tilted to the downside. Over the past weeks, continuing weakness in PMIs, downside surprise in September HICP and declines in markets' inflation expectations have all supported the case for faster easing and current market pricing implies even a modest 20% probability of a larger 50bp cut in December. Pace of cuts in 2025 remains uncertain as well, but we stick to our call for quarterly 25bp reductions, which would set the deposit rate at 2.00% by the end of next year. Read more from our full ECB Review, 17 October.

Prediction markets have continued to signal rising probability of Donald Trump clinching victory in the upcoming US elections. At the time of writing, Polymarket sees odds of Trump's win at nearly 61%. Republican 'clean sweep' is seen as the most likely total outcome with 43% probability, followed by a Harris win with a divided Congress at 24%. That said, the latest swing state polls signal the race remains closer than prediction market odds suggest, according to RealClearPolitics. Trump is in the lead in all the seven most important swing states, but in 5/7 states, he leads by less than 1 percentage point, which falls well within typical margins of error (usually 2-4%).

Either way, we think a Republican sweep could provide near-term support for US equities and the broad USD, and especially the latter remained on a strong footing this week. US September retail sales came out on the strong side of expectations, with control group sales (which strip away the most volatile categories) growing +0.7% m/m SA. Unusually positive seasonal adjustment might have distorted the monthly growth figure higher - in non-seasonally adjusted y/y terms growth cooled down to 2.7% (from 3.9%). But even so, it seems US consumer spending remains on a healthy footing. We discussed possible near-term distortions to US data releases in RtM USD - Not too hot, not too cold, 15 October.

Chinese Q3 GDP growth was slightly stronger than expected at 4.6% y/y (from 4.7%), but make no mistake, latest data continues to underpin the story of weakening momentum in consumer spending. CPI data from last weekend showed price pressures still hovering near deflation, latest export and credit growth figures were weaker than expected and housing market shows no real signs of recovery with very weak sales volumes and declining prices. All-in-all, we think the latest round of data underscores the need for much stronger stimulus going forward, Finance Ministry's press conference last Saturday still lacked clear details on what to expect on the fiscal stimulus front.

Next week will be calm before the storm of US elections, nonfarm payrolls and FOMC meeting all within the first week of November. Main data focus will be on October flash PMIs on Thursday, which will likely signal continuing contraction in manufacturing activity and modest growth in services on both sides of the Atlantic. Chinese Loan Prime Rates will likely be cut by 20bp on Monday following a 30bp cut to the 1-year Medium Term Lending facility rate earlier. FOMC participants will also have their final chances to provide guidance next week ahead of blackout starting on Saturday 26 October.

Full report in PDF.

• Gold prices surged past $2700/oz fueled by expectations of global rate cuts and escalating geopolitical tensions in the Middle East.
• The London Bullion Market Association’s bullish prediction of $2941/oz gold price in 12 months.
• Technically, gold is overbought, but the threat of an Israeli strike on Iran could limit downside risks.

Gold prices advanced further overnight gaining acceptance above the $2700/oz as global rate cut bets intensified. The killing of Hamas Political Bureau leader and of the masterminds behind the October 7 attacks Yahya Sinwar had raised expectations of an escalation in the Middle East conflict, but the precious metal was already well on its way to fresh highs.

Currently, a mix of factors is fueling the gold rally. Despite the strengthening US dollar, gold prices continue to climb. Economic data from the UK and the ECB’s interest rate meeting have boosted expectations for rate cuts worldwide, enhancing gold’s attractiveness. Lower global interest rates reduce the opportunity cost of holding this non-yielding precious metal and could keep the rally moving forward.

A bullish take from the London Bullion Market Association who conducted a poll recently further adds credence to the idea that Gold prices may not be done just yet. The poll was to predict the price of Gold in 12 months time with the association seeing prices at $2941/oz.

The US election is nearing as well and uncertainty continues around the next US President. This could be another reason the appeal of safe haven continues to grow.

Technical Analysis Gold (XAU/USD)

From a technical analysis standpoint, Gold has been difficult to analyze with the lack of price action.

Gold bears may have been hoping for some headwinds from US data but that has not materialized as housing data disappointed. This has led to some USD weakness, which in theory should aid Gold prices. .

The concern for bulls lies in the fact that the RSI is now in overbought territory on the four-hour, daily and weekly charts. That coupled with the potential for profit taking before the end of the day leaves me slightly concerned. However, the threat of a retaliatory strike by Israel on Iran has strengthened as Israeli officials commented today a strike is imminent. This is something that could limit downside ahead of the weekend and into next week as well.

Immediate support rests at 2700 before the 2685 and 2673 handles come into focus.

Conversely, looking at the upside and immediate resistance rests at today’s high print around 2717 before 2725 and 2750 come into focus.

GOLD (XAU/USD) Four-Hour (H4) Chart, October 18, 2024

Source: TradingView (click to enlarge)

Support

• 2700
• 2685
• 2673

Resistance

• 2717
• 2725
• 2750

GBP/JPY has been in a strong bullish phase, but five-wave bullish cycle within wave (5) up from 2022 swing lows can be completed after recent strong reversal down back below channel support lines. In fact, drop from the high is impulsive on a smaller time frame, so it’s wave A that stabilized near 178 support area as expected. As such, current rise is corrective, ideally B wave that can be still in progress as a bigger correction before a continuation lower for wave C. Ideal resistance is at that channel line, from the outside, around 196 – 200 area.

GBP/JPY is looking for a higher resistance within wave C of (B) in the 4-hour chart, as it can be now breaking out of subwave »iv« triangle into subwave »v« of C, so keep an eye on next strong 196 – 200 resistance zone, from where bears for a higher degree wave (C) may show up.

Market picture

The crypto market has gained around 8% over the past seven days, stabilising near $2.30 trillion over this week and reaching a capitalisation of $2.32 trillion at the time of writing on Friday. The sentiment index is firmly in greed territory at 73. This is the highest level of optimism since late July and contrasts sharply with fear (32) a week earlier.

Bitcoin has gained over 12% in the last week, making two attempts to break through the $68 thousand level. In our view, the bulls in bitcoin already showed their strength on Monday, as they took the price above the 200-day MA in one fell swoop, breaking through the previous highs and the upper boundary of the multi-month descending channel. The next growth target looks to be the $71-73K area, where strong resistance and historical highs from March are concentrated.

News Background

CryptoQuant notes that bitcoin inventories on centralised crypto exchanges have fallen to multi-year lows. More than 51,000 BTC were withdrawn from major trading platforms last month.

QCP Capital recorded purchases of March call options on Bitcoin with an exercise price of $120K. The purchases were accompanied by a rise in quotes above $68K, which analysts saw as a sign of the return of bullish long-term buyers.

According to a16z crypto estimates, there are about 617 million cryptocurrency owners and 30-60 million monthly active users, excluding bots and temporary addresses. However, only 5-10% of users can be considered active, highlighting the huge opportunity to attract passive cryptocurrency holders.

The Block estimates that the total revenue of users staking Ethereum has fallen by around 30% from its peak in March due to a drop in the network activity.

Ethereum co-founder Vitalik Buterin sees the network’s most pressing problem as the lack of a unified ecosystem. According to him, the space built around the protocol is now more like 34 different blockchains.

Markets

This morning the ‘official’ ONS UK September retail sales for the second consecutive month beat expectations by quite a substantial margin. Headline sales rose by 0.3% M/M and 3.9% Y/Y after a monthly rise of 1% in August and against expectations for a 0.4% monthly decline. Combined with a solid labour market report on Tuesday and softer than expect September inflation data published on Wednesday, this week’s data are important input for the upcoming BoE policy meeting on November 07. UK interest rate markets showed quite an asymmetric reaction function. No outspoken move on labour market data and/or retail sales but a substantial decline in (ST) UK interest rates after Wednesday’s CPI. Markets ‘feel’ that current still restrictive BoE policy allows a selective data reading from BoE governor Bailey and some other (likely even a majority) of his MPC colleagues. Markets still fully discount a next 25 bps rate cut at the November meeting and also hardly reduced chances for follow-up action in December. The combination of solid retail data, supported by positive real wages, at the same time supported by the BoE gradually reducing policy restriction for now proves reasonably good news for sterling. This is a fortiori the case for its performance against a vulnerable euro. EUR/GBP this morning briefly touched a new YTD low near 0.83. For now no sustained break occurred, but the downside in the pair still looks highly vulnerable. In case of a break the April/March 2022 lows at 0.825 and 0.8203 are next high profile reference on the technical charts.

Except for slightly weaker than expected US housing/starts and permits, there were no market relevant data in the US and EMU today. Markets mainly reassessed the impact of yesterday’s accelerated ECB easing. Reuters mentions sources close to the deliberations that inflation was seen easing to the target sooner than thought. This also caused some participants to open the debate whether the ECB should have dropped the pledge to keep policy tight. Also today, the ECB’s Survey of professional forecasters pointed to a slightly faster deceleration in 2025 inflation (1.9% from 2%). Nothing really spectacular, but it serves the current market bias. The German curve bull steepens with yields declining 4.5 bps (2-y) to 2 bps (30-y). Markets see slightly less that a 50% chance on a 50 bps ECB step in December. US Treasuries underperform with yields declining only 2-3 bps. Equities mostly trade in positive territory (Eurostoxx 50 + 0.62%). The S&P 500 opens in green with the all-time top still only a whisker away. After the tumbling early this week, oil is going nowhere ($74/b). Maybe a bit surprising given recent US data and ‘policy divergence’ between the Fed and the likes of ECB, but the dollar is falling prey to modest profit taking. DXY drops from the 103.8 area to currently 103.52. USD/JPY eased slightly to 149.9. Despite a growing interest-rate disadvantage, even EUR/USD rebounded from the 1.0825 area to currently 1.086. We don’t draw any firm conclusions on the USD correction yet. With markets focused on growth (or the lack of it) for next week we keep a close eye that the (US and EMU) PMI’s.

News & Views

People familiar with the matter indicate that Bank of Japan officials see little need to rush into raising rates later this month, according to news agency Bloomberg. They only see a small risk of prices outpacing the central bank’s quarterly projections (July), reducing the need to act quickly. US elections and the upcoming FOMC meeting are sources of uncertainty. At the October 31 policy meeting, the BoJ will probably discuss whether they can revise their July assessment that risks for prices are on the upside for this fiscal year and next. The base scenario remains one of higher interest rates down the road. The Japanese yen sticks to recent lows above USD/JPY 150.

Premature & Risky": Governor Das on interest rate cuts in India. The Indian central bank kept its policy rate unchanged at 6.5% earlier this month, but turned more neutral in its forward guidance. Inflation has moderated after two years of unchanged interest rates. However recent inflation data has shattered the December rate cut narrative (25% probability). The economists now project end of first quarter for the first cut. Mr Das mentioned that he would like to see inflation comfortably settle around 4% and also reiterated that the central bank wasn't behind the curve and called for extra caution. The RBI remains more bullish on Indian growth, sticking with forecasts of 7.2% for the current fiscal year, while the government’s projection stands at 6.5%-7%..

Daily Pivots: (S1) 0.8304; (P) 0.8339; (R1) 0.8359; More...

EUR/GBP's down trend resume by breaking through 0.8309. Intraday bias is now on the downside for 0.8201 key support next. Strong support could be seen from there to break rebound. But for now, break of 0.8433 resistance is needed to indicate short term bottoming. Otherwise, outlook will stay bearish in case of recovery.

In the bigger picture, down trend from 0.9267 (2022 high) is in progress. Next target is 0.8201 (2022 low), but strong support should be seen there to bring rebound. However, outlook will remain bearish as long as 0.8624 resistance holds even in case of strong rebound.

Daily Pivots: (S1) 149.54; (P) 149.93; (R1) 150.62; More...

Intraday bias in USD/JPY remains on the upside for the moment. Rise from 139.57 is in progress for 61.8% retracement of 161.94 to 139.57 at 153.39 next. On the downside, below 148.84 minor support will turn intraday bias neutral first. But further rally will remain in favor as long as 146.48 resistance turned support holds.

In the bigger picture, price actions from 161.94 are seen as a corrective pattern to rise from 102.58 (2021 low). The range of medium term consolidation should now be set between 38.2% retracement of 102.58 to 161.94 at 139.26 and 161.94. Nevertheless, sustained break of 139.26 would open up deeper medium term decline to 61.8% retracement at 125.25.

Daily Pivots: (S1) 1.0803; (P) 1.0839; (R1) 1.0866; More....

Intraday bias in EUR/USD is turned neutral with current recovery. Some consolidations would be seen above 1.0810 temporary low first. But outlook will stay bearish as long as 1.0954 resistance holds. Below 1.0810 will resume the fall from 1.1213 to 61.8% retracement of 1.0447 to 1.1213 at 1.0740. Firm break there will target 1.0601 support next.

In the bigger picture, price actions from 1.1274 (2023 high) are seen as a consolidation pattern to up trend from 0.9534 (2022 low), with fall from 1.1213 as the third leg. Downside should be contained by 50% retracement of 0.9534 (2022 low) to 1.1274 at 1.0404, to bring up trend resumption at a later stage.

Daily Pivots: (S1) 1.2982; (P) 1.3003; (R1) 1.3031; More...

Intraday bias in GBP/USD remains neutral for the moment. On the downside, sustained trading below 1.3000 cluster support (38.2% retracement of 1.2298 to 1.3433 at 1.2999) will argue that whole rise from 1.2298 has completed and bring deeper fall to 61.8% retracement at 1.2732. Nevertheless, strong bounce from current level, followed by break of 1.3102 minor resistance, will turn bias back to the upside for stronger rebound towards 1.3433.

In the bigger picture, as long as 1.3000 support holds, the up trend from 1.0351 (2022 low) is still in progress. Next target is 61.8% projection of 1.0351 to 1.3141 from 1.2298 at 1.4022. However, considering mild bearish divergence condition in D MACD, decisive break of 1.3000 will argue that a medium term top is already in place, and bring deeper fall back to 1.2664 support next.