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At an event today, BoE MPC member Catherine Mann highlighted the ongoing challenges with services inflation, stating that it still has "a long way to go" before it reaches the target-consistent level. Despite cooling to the lowest point in over two years, Mann emphasized that services inflation needs to fall to around 3% to align with BoE’s 2% inflation target.

She cautioned that structural persistence in wage-price dynamics could delay rate cuts, noting, "If you have structural persistence in the relationship between wages and price formation, it’s premature to start cutting until you purge those behaviors."

Additionally, Mann warned that interest rates are likely to settle higher than pre-pandemic levels due to persistent inflationary pressures driven by supply shocks and labor market frictions. She added that there is likely to be "a lot more inflation" moving forward.

Markets

EUR/USD tested 1.0778 for a second straight session as disappointing French PMI surveys kicked off European dealings. The French composite PMI got stuck deeper in recession territory (47.3 from 48.6) while consensus expected a minor improvement compared to last month (48.9). With the French business surveys however, the worse (European) news was immediately digested. German PMI’s showed an unexpected improvement (composite 48.4 from 47.5 vs 47.6) and both countries accounted for the second consecutive (minor) drop in business activity on an EMU level (composite 49.7 from 49.6). The rest of the eurozone saw output increase at the fastest level in four months. Output was scaled back in response to a weakening demand environment, with new orders down for the fifth consecutive month. Companies responded to lower workloads by reducing employment to the largest degree in almost four years (centred on manufacturing, near stagnation in services), while business confidence dropped to an 11-month low. There was again a divergence between manufacturing (45.9 from 45) and services (51.2 from 51.4). Input costs increased again, but the pace of inflation eased further and was the lowest in just under four years. Output prices rose at a modest pace that was the slowest since February 2021, as a rise in services charges just outweighed a fall in manufacturing selling prices. Higher services costs nevertheless remain a worry for the ECB. While PMI’s obviously were a grim reading, at least they didn’t deteriorate further or drop below consensus estimates. While we still get the November surveys, the October release justifies another 25 bps rate cut by the ECB in December instead of an acceleration to 50 bps. EUR/USD “rebounded” towards 1.08 with front end European yields coming off the intraday lows. At the time of writing, German yields remain 4 to 5 bps lower across the curve though. US eco data included an unexpected decline in weekly jobless claims (227k from 242k vs stabilization expected) and slightly better US PMI’s. Manufacturing remains mired in recession (47.8 from 47.3) while services are strong (55.3 from 55.2). Details showed robust output and sales growth while selling prices rose at the slowest rate since May 2020. Businesses nevertheless remain cautious about hiring, leading to a third month of modest payroll reductions. PMI’s didn’t trigger a directional market move.

News & Views

Czech National Bank policymaker Jan Prochazka broke the relative silence surrounding the central bank lately. Prochazka said that weaker growth abroad and a slow domestic demand recovery would allow the CNB to keep cutting the policy rate (4.25%) but warned for potential inflation hotspots. Money markets currently expect about two more 25 bps cuts at each of the remaining meetings this year. The November 7 one will showcase updated forecasts as well as potential changes as to how they are made and communicated based on external reviews that are underway. Prochazka said he expected a growth downgrade for 2025, saying the current above-potential 2.8% is too high. A “bad mood” weighs on consumer spending and the external environment (Germany) may worsen in coming months. While inflation is currently within the CNB’s tolerance range (2% +/- 1 ppt), the headline figure may break above 3% again in December. The Czech policymaker was also worried about rising services prices at a pace of around 5%. In its meeting-by-meeting approach the CNB keeps a close eye at the evolution of the CZK as well. The Czech currency trades in a tight sideways trading range around the 2-year lows of EUR/CZK 25-25.5.

UK Chancellor Reeves confirmed in the Financial Times a report that appeared in the Guardian yesterday that cited a senior government source saying she would target a different metric of “debt”. Replacing the current one (public sector net debt excluding the BoE) by the one known as Public Sector Financial Liabilities (PSNFL) would give Reeves additional headroom of >£50bn by the end of the decade under the Treasury’s March forecasts and still have debt falling over five years’ time. Sources said that Reeves would not rush to use all of the extra borrowing though. Nevertheless, today’s clear underperformance of UK gilts compared to German and US peers does reveal some nervousness going into next week’s Budget presentation. UK yields rise 3-4 bps across the curve.

In October, US PMI data showed modest improvement across sectors. Manufacturing PMI rose slightly from 47.3 to 47.8, while Services PMI edged up from 55.2 to 55.3, leading to an increase in Composite PMI from 54.0 to 54.3. These numbers point to a continued expansion of business activity in the US.

Chris Williamson, Chief Business Economist at S&P Global Market Intelligence, noted that October saw business activity grow at an "encouragingly solid pace," with PMI data indicating GDP growth at an annualized rate of about 2.5%.

He added that businesses are increasingly optimistic about the year ahead, particularly in the manufacturing sector. Confidence is improving as companies expect a more stable post-election environment, which could help reverse the current slowdown in production and sales.

Full US PMI release here.

• GBP/USD saw a bounce despite weak UK PMI data, attributed to US Dollar weakness.
• The Bank of England may consider interest rate cuts due to slowing inflation, potentially weakening the Pound Sterling.
• GBP/USD technical analysis shows potential for a bullish bounce, but a break below the trendline could lead to a larger correction.

Cable has enjoyed a decent bounce this morning off a key confluence level. Despite weak PMI data, some US Dollar weakness has helped GBP arrest its slide. Preliminary October Composite PMI in the UK edged lower to 51.7 from 52.6 in October. This begs the question, can Pound Sterling extend its recovery?

October data pointed to a moderate increase in UK private sector output, but the rate of expansion slowed for the second month running to its lowest since November 2023. Survey respondents widely commented on the impact of delayed decision-making among clients and heightened economic uncertainty in October.  Employment was a particularly weak spot, with overall staffing numbers decreasing for the first time in 2024 to date.

Commenting on the flash PMI data, Chris Williamson, Chief Business Economist at S&P Global Market Intelligence said: “Business activity growth has slumped to its lowest for nearly a year in October as gloomy government rhetoric and uncertainty ahead of the Budget has dampened business confidence and spending. Companies await clarity on government policy, with conflicts in the Middle East and Ukraine, as well as the US elections, adding to the nervousness about the economic outlook.

Encouraging for the Bank of England (BoE) is the fact that further cooling of input cost inflation to the lowest for four years opens the door for the Central Bank to take a more aggressive stance towards lowering interest rates, should the current slowdown become more entrenched.

This obviously means that the Pound Sterling may face further weakness as rate cut bets intensify. However, given that the DXY is at extremely overbought levels and GBP/USD is at extremely oversold levels, there is still a chance that Cable may rise back above the 1.3000 and potentially higher as well. A lot of this would hing on how the US Dollar performs over the coming days and weeks.

There are a host of big events over the coming days which could impact markets and relate directly to the GBP and US Dollar. Chief of those being the US election which draws closer with market participants likely to hedge their bets ahead of the big day. This could mean volatility and some whipsaw price action.

On the other end of the pond we have the UK budget on October 30, which is the first from the UK Labour Government. Big tax increases seem likely because of the rising demands on government funds. More investment is on the way, but will it mean even more borrowing? That’s the big question for markets, and Reeves will need to handle it carefully. There are a host of questions which could spark volatility heading into the event as well.

GBP/USD Technical Analysis

GBP/USD had a brief bounce at the back end of last week that failed to break through the 1.3100 handle before pushing lower. This saw cable break below the 100-day MA and finally test the long-term ascending trendline that has been in play since the April 22 lows.

The test of the ascending trendline just below the 100–day MA and key support level do look promising for a bullish bounce. However, the first hurdle would be a daily candle close back above the 100-day MA and then of course the psychological 1.3000 handle.

This would then set the stage for a retest of the resistance area resting just below the 1.3100 range (denoted by the red block on the chart). Acceptance above this level could open up a deeper retracement toward the 1.3250-60 range.

Alternatively, a break of the trendline would be significant and could open up a longer term correction toward the 1.2750 handle for cable. Such a move would hinge on the idea of a continued rally for the US Dollar and DXY in particular. The 200-day MA currently rests around the 1.2800 and could prove key as well.

Later today we have speeches from both Catherine Mann and Andrew Bailey of the Bank of England (BoE) which could stoke some short-term volatility. Any comments around rate cuts etc, may also have a more material impact. This would obviously hinge on what the comments are and where policymakers see rates heading in the months to come.

GBP/USD Daily Chart, October 24, 2024

Source:TradingView.com

Support

• 1.2940
• 1.2800
• 1.2750

Resistance

• 1.3000
• 1.3100
• 1.3250

Daily Pivots: (S1) 151.45; (P) 152.32; (R1) 153.64; More...

Further rally is in favor in USD/JPY with 151.18 minor support intact, despite loss of momentum as seen in 4H MACD. Decisive break of 61.8% retracement of 161.94 to 139.57 at 153.39 will extend the rally from 139.57 to retest 161.94 high. On the downside, below 151.18 minor support indicate short term topping, and turn bias back to the downside for deeper pullback.

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 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) 0.8645; (P) 0.8666; (R1) 0.8684; More…

Despite loss of momentum as seen in 4H MACD, further rise is still in favor in USD/CHF with 0.8629 minor support intact. Firm break of 38.2% retracement of 0.9223 to 0.8374 at 0.8698 will argue that fall from 0.9223 has completed at 0.8374, after defending 0.8332 low. Further rally should then be seen to 61.8% retracement at 0.8899 next. On the downside, below 0.8629 minor support will indicate short term topping, and turn bias back to the downside for pullback.

In the bigger picture, price actions from 0.8332 (2023 low) are currently seen as a medium term corrective pattern, with fall from 0.9223 as the second leg. Strong support could be seen from 0.8332 to bring rebound. Yet, overall outlook will continue to stay bearish as long as 0.9243 resistance holds. Firm break of 0.8332, however, will resume larger down trend from 1.0146 (2022 high).

Daily Pivots: (S1) 1.2887; (P) 1.2941; (R1) 1.2974; More...

Further decline is expected in GBP/USD as long as 1.3070 resistance holds, despite loss of momentum as seen in 4H MACD. Fall from 1.3433 should target 61.8% retracement of 1.2298 to 1.3433 at 1.2732. However, firm break of 1.3070 resistance will indicate short term bottoming, and turn bias back to the upside for stronger rebound.

In the bigger picture, considering mildly bearish divergence condition in D MACD, a medium term top is likely in place at 1.3433 already. Price actions from there are seen as correction to whole up trend from 1.0351 (2022 low). Deeper decline would be seen to 38.2% retracement of 1.0351 to 1.3433 at 1.2256, which is close to 1.2298 structural support. Strong support should be seen there to bring rebound.

Daily Pivots: (S1) 1.0760; (P) 1.0783; (R1) 1.0806; More...

Further decline is expected in EUR/USD despite loss of downside momentum as seen in 4H MACD. Firm break of 61.8% retracement of 1.0447 to 1.1213 at 1.0740 will extend the fall from 1.1213 to 1.0601 support next. Nevertheless, break of 1.0871 will indicate short term bottoming, and turn bias back to the upside for stronger rebound.

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.

The forex markets are relatively calm today, as major currency pairs and crosses gyrate within familiar ranges, digesting recent moves, and awaiting fresh data. Euro is having a slight recovery, supported by mixed PMI data that reflected an improving outlook in Germany, offset by a more concerning deterioration in France. Inflationary pressures continue to linger, which suggests ECB might lean towards a 25bps rate cut in December rather than a 50bps reduction. However, it's important to note that Euro's recovery remains weak, with plenty of data still expected ahead of the next meeting weeks away.

Japanese Yen is also recovering modestly following verbal intervention by Japanese officials after the currency briefly dipped through the 153 mark against Dollar. While the intervention has paused further selling pressure, Yen lacks strong momentum needed for a more sustained rebound. The currency’s next move will continue to depend heavily on yield differentials between Japan and the US/Europe, as well as the outcome of Japan’s snap election on October 27. With these two significant factors still unresolved, traders may still push Yen lower ahead of the election, keeping the currency vulnerable.

Overall in the currency markets, Dollar is staying as the strongest performer for the week so far, followed by Canadian, and then Swiss Franc. Yen is still the weakest, followed by Aussie and then Kiwi. Euro and Sterling are positioning in the middle with the Pound having a slight upper hand.

Technically, EUR/GBP's consolidation pattern from 0.8924 temporary low might have completed after rejected by 55 4H EMA twice. Focus is back on 0.8294. Firm break there will resume larger down trend down trend. But strong support should emerge around 0.8201 key long term support to bring sustainable rebound. So the next time could be an opportunity to buy the cross.

In Europe, at the time of writing, FTSE is up 0.46%. DAX is up 0.64%. CAC is up 0.50%. UK 10-year yield is up 0.0420 at 4.249. Germany 10-year yield is down -0.047 at 2.264. Earlier in Asia, Nikkei rose 0.10%. Hong Kong HSI fell -1.30%. China Shanghai SSE fell -0.68%. Singapore Strait Times rose 0.12%. Japan 10-year JGB yield fell -0.0209 to 0.958.

US initial jobless claims falls to 227k vs exp 245k

US initial jobless claims fell -15k to 227k in the week ending October 19, well below expectation of 245k. Four-week moving average of initial claims rose 2k to 238.5k.

Continuing claims rose 28k to 1897k in the week ending October 12. Four-week moving average of continuing claims rose 18k to 1861k.

UK PMI composite hits 11-month low as business confidence wavers

UK business activity weakened in October, with both the manufacturing and services sectors showing signs of slowing momentum. PMI Manufacturing index dropped from 51.5 to 50.3, marking a 6-month low, while PMI Services index fell from 52.4 to 51.8, an 11-month low. Consequently, Composite PMI also declined to an 11-month low, slipping from 52.6 to 51.7.

Chris Williamson, Chief Business Economist at S&P Global Market Intelligence, attributed this slump to "gloomy government rhetoric" and rising uncertainty ahead of the Budget. He added that external risks, such as conflicts in the Middle East, the ongoing war in Ukraine, and the upcoming US elections, have further dampened economic confidence.

The early PMI data suggests that the UK economy grew at a meagre 0.1% quarterly rate in October. However, Williamson noted that further cooling of input cost inflation, now at its lowest level in four years, could allow BoE to take a "more aggressive stance" toward rate cuts if the economic slowdown persists.

Eurozone PMIs: Persistent price pressures lean ECB toward 25bps Dec cut, not 50bps

Eurozone's economic activity showed mixed signals in October, with PMI Manufacturing rising slightly from 45.0 to 45.9, while PMI Services fell marginally from 51.4 to 51.2. As a result, Composite PMI ticked up slightly to 49.7 from 49.6, but remained below the 50-point mark, indicating ongoing economic contraction.

Cyrus de la Rubia, Chief Economist at Hamburg Commercial Bank, described the Eurozone as "stuck in a bit of a rut," noting that the economy contracted for the second consecutive month. While the manufacturing sector continues to slump, its negative impact is being balanced out by minor gains in services. De la Rubia added, "For now, it is not clear whether we will see a further deterioration or an improvement in the near future."

According to de la Rubia, for ECB, the data present an "unwelcome surprise," particularly in the services sector. Inflationary pressures appear to be lingering, driven by wage growth, which has been pushing up costs and selling prices for service providers.

This persistent inflation suggests that the ECB may lean towards a 25bps rate cut in December, as opposed to the larger 50bps cut some had speculated.

Germany PMI Manufacturing index rose to 42.6 from 40.6, while PMI Services climbed to 51.4 from 50.6. This led to a rise in Composite PMI to 48.4 from 47.5.

France PMI Manufacturing edged down slightly from 44.6 to 44.5. More notably, Services PMI dropped to 48.3 from 49.6, hitting a 7-month low, while Composite PMI fell from 48.6 to 47.3, its lowest point in nine months.

ECB's Holzmann: 50bps cut in Dec unlikely, but can't be ruled out

Austrian ECB Governing Council member Robert Holzmann, one of the more hawkish voices, signaled that a 25bps cut is "probable" at the December meeting. While a larger, half-point cut isn't "impossible", it's unlikely.

Holzmann emphasized caution, saying, “I’m still concerned that inflation might prove stronger than expected,” reflecting his hesitation in moving too quickly toward easing.

Despite acknowledging some downside risks, he remarked, "I don’t see enough of them to conclude that they dominate," adding that the view of risks being tilted to the downside is still a minority on the ECB Governing Council.

Separately, Slovenia's ECB Governing Council member Bostjan Vasle echoed the sentiment, expressing support for "going to neutral in measured steps.”

Vasle noted that while data has shown improvement, inflation "has not yet been defeated," and discussions about undershooting the inflation target are premature. He further commented, "Once we get closer to neutral, it may be appropriate to align our language accordingly."

Japan’s private sector falls into contraction as PMI services plunges to 20-month low

Japan's private sector slipped into contraction territory at the beginning of Q4, with PMI Manufacturing index declining from 49.7 to 49.0 in October. The services sector saw a much sharper fall, with PMI Services tumbling from 53.1 to 49.3, its worst reading since February 2022. As a result, PMI Composite also dropped from 52.0 to 49.4, the weakest figure since November 2022.

According to Usama Bhatti, economist at S&P Global Market Intelligence, Japan’s economic slowdown has become more pronounced, with firms attributing the downturn to a "muted economy and subdued new order inflows."

Business confidence for the coming year also took a hit, softening to the lowest level since August 2020. Bhatti noted that the "stubbornness of high prices" and ongoing economic weakness are weighing on overall sentiment.

Australian's PMI manufacturing hits 53-month low, inflation pressures easing

Australia’s manufacturing sector continues to struggle, with PMI Manufacturing index slipping slightly from 46.7 to 46.6 in October, marking its lowest point in 53 months. According to Judo Bank’s Matthew De Pasquale, key indicators such as output and new orders have dropped to levels that signal the sector is "on the verge of recession."

However, services sector, which accounts for over 80% of the country's economic output, showed modest improvement. PMI Services ticked up from 50.5 to 50.6, and new business activity rose to its highest level since May, suggesting some resilience. De Pasquale noted that while business growth remains "soft," the outlook for the services sector is improving with new business activity at the highest level since May

Inflation also appears to be moderating. Input cost pressures fell to their lowest levels since the onset of pandemic-induced inflation in 2021. Final prices, particularly in services, are also trending downward. De Pasquale added that inflation "remains on track" to return to RBA's target range of 2% to 3%.

EUR/USD Mid-Day Outlook

Daily Pivots: (S1) 1.0760; (P) 1.0783; (R1) 1.0806; More...

Further decline is expected in EUR/USD despite loss of downside momentum as seen in 4H MACD. Firm break of 61.8% retracement of 1.0447 to 1.1213 at 1.0740 will extend the fall from 1.1213 to 1.0601 support next. Nevertheless, break of 1.0871 will indicate short term bottoming, and turn bias back to the upside for stronger rebound.

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.

US initial jobless claims fell -15k to 227k in the week ending October 19, well below expectation of 245k. Four-week moving average of initial claims rose 2k to 238.5k.

Continuing claims rose 28k to 1897k in the week ending October 12. Four-week moving average of continuing claims rose 18k to 1861k.

Full US jobless claims release here.