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France's economic woes intensified in October, with PMI data showing further contraction across key sectors. 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.

Tariq Kamal Chaudhry, Economist at Hamburg Commercial Bank, emphasized the gravity of the situation, stating, "France remains trapped in economic decline as Q4 begins." HCOB's Nowcast predicts only marginal growth moving forward, placing significant pressure on the French government to implement measures aimed at stabilizing the economy and addressing fiscal imbalances.

The industrial sector remains "mired in a deep crisis," with no signs of recovery in sight. Meanwhile, the services sector is also struggling under "tough conditions," further dampening the overall economic outlook.

Full France PMI release here.

EUR/USD has tumbled to 1.0789, marking a near three-month low as market sentiment heavily favours the US dollar. The dollar's strength is driven by expectations of a gradual and limited interest rate cut by the US Federal Reserve and solid prospects for Donald Trump's re-election, which appears increasingly likely.

Concurrently, the Euro is under pressure due to a significant rate cut by the European Central Bank. This cut has set a clear downward trend for the EUR exchange rate, offering little room for recovery. This week, Fed officials advocated caution in monetary easing, suggesting that while a 50-basis-point cut by year-end is plausible, more aggressive cuts are unlikely.

The combination of Fed caution, rising US government bond yields, and the anticipated political stability under a potential second Trump term are contributing factors to the strengthening US dollar.

Today, the focus will be on key economic indicators, including Markit's October business activity in services and industry. Additionally, data on new home sales and the weekly unemployment benefits report will be closely monitored, especially considering their importance to the Fed's assessment of the employment landscape.

Technical analysis of EUR/USD

The EUR/USD pair has completed a downward wave to 1.0760 and is now rebounding towards 1.0880. After reaching this level, a pullback to 1.0820 is anticipated. The market may form a consolidation range at these lows, with a potential breakout upwards towards 1.0900 and possibly extending to 1.0990. The MACD indicator, currently below zero but pointing upwards, supports the possibility of a corrective rally.

On the hourly chart, EUR/USD is developing a second growth impulse towards 1.0824. Once this level is achieved, a corrective phase will be initiated, targeting 1.0790. The Stochastic oscillator, with its signal line moving towards 80 from above 50, supports this short-term bullish correction within the broader bearish context.

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."

Markets

German Bunds significantly outperformed US Treasuries yesterday, especially at the front end of the curve. The German 2-yr yield lost 7.2 bps compared with a 4.7 bps increase for the US 2-yr yield. EUR/USD as a result tested 1.0778 support a first time (close: 1.0782). ECB governors kept all options open for the December policy meeting in comments on the sidelines of the IMF’s World Economic Outlook in Washington. In brief: downside growth risks could accelerate an already faster-than-expected disinflation process and eventually result in an undershoot of the 2% inflation target. ECB Lagarde underlined that the direction of travel is clear and that the pace will be determined on the basis of backward- and forward-looking elements using the three criteria (inflation outlook, dynamics of underlying inflation and the strength of monetary transmission) and applying judgment. EMU money markets currently attach a near 50% probability to the ECB scaling rate cuts up to 50 bps in December. October PMI surveys are the first piece of the data puzzle today. Over the past months, we’ve seen a divergence between very weak EMU sentiment data and more modest (but often ignored and labelled outdated) hard data. Next week’s Q3 EMU GDP numbers can therefore deliver a (much) better outcome than the 0.0% GDP growth as suggested by the PMI-based model. Consensus doesn’t expect much improvement in today’s (October) PMI’s compared to upwardly revised (but also ignored) September figures. They could be the straw to brake EUR/USD’s back. EUR/GBP yesterday bounced off 0.83-support in the run-up to BoE Bailey’s speech in Washington. He stressed that disinflation is happening faster than expected though services inflation remains higher than is consistent with target. This suggests that he’ll still push for a 25 bps rate cut at the November BoE meeting. UK & US PMI’s and US weekly jobless claims are up for release as well today, offering an interesting and likely volatile mix in an era of extremely data-dependence. Genuine dollar strength and rising US rates propelled USD/JPY from 140 mid-September to 153 yesterday, prompting a first verbal intervention by Japanese Finance Minister Kato against one-sided rapid moves in FX markets.

News & Views

The Bank of Canada upped the pace in its easing cycle yesterday and lowered the policy rate by 50 bps to 3.75%. This came after inflation eased sharply from 2.7% to 1.6%. Aside from declining oil prices, the BoC sees notoriously sticky shelter costs have begun to ease. Excess supply elsewhere in the economy has reduced inflation in the prices of many other goods and services, it said, adding that its preferred measures of core inflation are now below 2.5%. With inflation now back around the 2% mid-point target and a lacklustre economy, the central bank put governor Macklem’s words in September – when he offered the possibility of easing faster - to practice. Canadian GDP is expected to strengthen gradually over 2024-2025-2026 (1.2%-2.1%-2.3%) amid lower rates supporting consumption, residential & business investment. Exports should benefit from robust demand from the US. Inflation saw some small downward revisions in the first two years of the policy horizon to be at 2.5%-2.2%-2.0%. The BoC commits to further cuts if the economy evolves as expected but the timing and pace is guided by incoming data. With yesterday’s move largely priced in the Canadian dollar only lost limited ground to USD/CAD 1.3836. The Loonie had been dropping significantly in the run-up since end-September amid the growing divergence between the US and Canada.

The European Commission has cleared payment of some €800 million of post-pandemic recovery funds it withheld from Slovakia over concerns with the rule of law in the country. The EC formally unblocked the funds already back in July after the Fico government reinstated sentencing for fraud with EU resources. But it stopped short from transferring until after parliament had approved changes to its criminal code which reduced sentences for crimes ranging from petty theft to fraud. The Fico’s government in the meantime reassured Brussels that the amendments do not eliminate the prosecution of crimes related to EU Funds. The EC responded that some of its concerns have been alleviated though adding that talks are ongoing to “clarify the pending issues”.

The first three sessions of the week haven’t been appetizing as the US political uncertainties, the ongoing geopolitical jitters in the Middle East, and the mounting expectation that Federal Reserve (Fed) would slow down the pace of monetary easing pushed investors to the sidelines.

Gold ran from record to record despite the rising US yields which, in return, rise not only because of the weakening dovishness regarding the Fed rate cut bets, but also because of a general lack of appetite before the upcoming US presidential election. The world is worried that a potential Trump win would further hammer international trade and fan global inflationary pressures. The IMF lowered its global growth forecast for next year to 3.2% due to accelerating risks from wars to protectionism. It however left its 2024 projection unchanged, and expects inflation to slow to 4.3% in 2025 from 5.8% this year.

Over at the Fed, Mary Daly said that she hasn’t seen any information that would suggest that they shouldn’t continue cutting rates but other members including Neel Kashkari say that the rate cuts should continue at a moderate speed. Activity on Fed funds futures assess around 92% chance for a 25bp cut in the November meeting, but there is a mounting speculation that the Fed could make a pause to its nascent loosening policy in December.

As such, the US dollar continues to recover against most majors. The greenback is offered this morning in Asia, but the dollar index rallied more than 4% since the September dip. The EURUSD sold off to 1.0761 yesterday as the rate cut bets in the Eurozone remain strong on the back of inflation that seems under control and weak economic and corporate data. Many European Central Bank (ECB) members sound increasingly dovish. Olli Rehn for example said that the zone’s ‘dire economy’ may bolster disinflationary pressures, Bank of France’s Francois Villeroy called for more agility with future rate cuts to avoid acting too slowly and Mario Centeno said that the ECB should consider ramping up monetary easing if the data backs such move. The growing divergence between the Fed and the ECB outlooks should continue to support a deeper selloff in the EURUSD. Price rallies should meet resistance near 1.0870, which shelters the minor 23.6% Fibonacci retracement on September-October selloff and the pair should remain in the bearish trend below 1.0935 – the major 38.2% Fibonacci retracement on that selloff.

Elsewhere, the USDJPY cleared the 150 resistance, pulled out the 200-DMA and is trading past the 152 this morning as the continuation of the rally that started with dovish remarks from the new PM who suggested that the country doesn’t need another rate hike this year. The yen could however need another FX intervention to stop it from falling too fast too low.

In Britain, Cable slipped below the 100-DMA and remains under a selling pressure as the Bank of England (BoE) Governor Bailey says that inflation in Britain is weakening faster than they anticipated, and in Canada, the Loonie hit the lowest levels against the US dollar since the beginning of August after the Bank of Canada (BoC) delivered a 50bp cut yesterday, as expected.

There will certainly be a correction and a consolidation to the US dollar rally, but unlikely before the US election.

In equities, the European stocks remain under pressure. The rising dovish voices at the ECB are favourable but the earnings season is not going well for the European companies. ASML announced weak results, Deutsche Bank warned against rising bad debt due to morose economic environment and announced that it will set aside more money than expected to deal with soaring loans while the European car and luxury good makers are under the pressure of weakening demand at home and in China. Hermes is due to report earnings today and could reveal the slowest quarter in 3 years – a weakness that doesn’t concern business across the Atlantic Ocean.

On the contrary, the US big banks announced a strong quarter, TSM blew past expectations last week hinting that the US chipmakers have likely had a good quarter, Netflix did better than expected and Tesla – which has been struggling lately – came up with better-than-expected results yesterday, after the bell. The company reported a 8% revenue growth and a 17% jump in net income, said that their costs per vehicle were pulled down to the lowest levels (around $35’100), the operating margin got a boost from 7.6% to 10.8% since last year and Cybertruck reached profitability for the first time. Tesla shares jumped 12% in the afterhours trading. The latter could give a boost to the S&P500 and Nasdaq 100 after a few days of hesitation and retreat.

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

EUR/USD's fall from 1.1213 is in progress and intraday bias stays on the downside for 61.8% retracement of 1.0447 to 1.1213 at 1.0740. Firm break there will target 1.0601 support next. On the upside, break of 1.0871 resistance is needed to indicate short term bottoming. Otherwise, outlook will stay bearish in case of recovery.

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) 151.45; (P) 152.32; (R1) 153.64; More...

Intraday bias in USD/JPY stays on the upside at this point. 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 will turn intraday bias neutral first. But further rally will now remain in favor as long as 55 D EMA (now at 148.02) holds, in case of retreat.

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) 1.2887; (P) 1.2941; (R1) 1.2974; More...

GBP/USD's fall from 1.3433 continues today and intraday bias stays on the downside. Deeper decline would be seen to 61.8% retracement of 1.2298 to 1.3433 at 1.2732. On the upside, above 1.3070 minor resistance will turn intraday bias neutral and bring consolidations first, before staging another decline.

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

Further rally is in favor in USD/CHF with 0.8629 minor support intact, despite loss of momentum as seen in 4H MACD. 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 turn intraday bias neutral again.

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).

In focus today

In the euro area, focus turns to the October flash PMIs. We expect the manufacturing sector to remain in contractionary territory, while still edging up to 45.4 from 45.0, due to the way in which the PMI index is constructed. We expect the service PMI to remain in growth territory but decline to 51.1 from 51.4 in September. The service PMI is likely supported by a rise in French service PMI following the unwind of the effect of the Olympic Games in August and September. Outside France however, we expect a slight slowdown in service PMIs reinforced by seasonality.

In the US, we also receive flash PMIs, which will likely signal continuing contraction in manufacturing activity and modest growth in services.

In the UK, flash PMIs for October are due for release as well and expected to remain close to unchanged north of the 50-mark.

In Japan, we receive Tokyo CPI Ex-Fresh Food which is expected to decline by 0.3% from 2.0% to 1.7%.

Economic and market news

What happened overnight

In Japan, Japanese Finance Minister Katsunobu Kato warned against currency speculation, as moves in the currency market drive down the yen's value with USD/JPY reaching 153. This comes hours after the BoJ Govenor Kazuo Ueda indicated a careful approach to raising interest rates, emphasizing the need to avoid moving too slowly. He warned that moving too slowly could create a build-up of speculative positions, potentially triggering a slide in the yen, pushing up import costs.

What happened yesterday

In Canada, the Bank of Canada cut its policy rate by 50bp to 3.75% in a move highlighting the new phase of Canadian monetary policy; namely one in which policy rates are brought back quickly to neutral levels amid inflation recently falling within the target interval. In the monetary policy report Bank of Canada stated that its neutral rate assumption remains 2.75% and that the current evaluation on the balance of risk has become balanced. To us this suggests that the base case from here should be another 100bp worth of rate cuts for the upcoming Canadian monetary policy announcements - likely in 50bp increments.

In the US, 10-year Treasury yields climbed to three-month highs as worries of a less dovish Federal Reserve spread. Equity markets dropped as higher yields pressured rate-sensitive mega caps, such as Nvidia (NVDA.O) and Apple (AAPL.O) declining by 3.57% and 3.05% respectively. Furthermore, McDonald's (MCD.N) plummeted by 4.88% after an E.coli infection linked to the fast-food chain killed one and sickened many.

In the EU, euro zone consumer confidence increased by 0.4 points to -12.5 from -12,9 in September. Consumer sentiment also rose in the European Union as a whole, reaching its long-term average after gaining 0.5 points to -11.2. In Denmark consumer confidence declined by 2.1 points to -8.9 from -6.8, reaching the lowest level this year as fears of recession overshadows worries about inflation. We anticipate a gradual rise in consumer confidence as purchasing power is restored and interest rates decline.

ECB President Christine Lagarde cooled market speculation advocating for a cautious and data-driven process. This comes in the wake of a recent push from several ECB policy makers voicing their concerns about undershooting the 2% inflation target and being open to speeding up rate cuts.

Equities: Global equities were lower for the third consecutive day yesterday. Much of what we observed could be reiterated from our previous commentary, as this is not a macro-driven sell-off characterised by a spike in volatility. However, a significant shift occurred yesterday with cyclicals being sold off, most notably with US tech underperforming. While specific company-related news may explain some of these movements, we interpret these events within a broader context. Over the past three months, for instance, US tech and tech sectors in general have been underperforming. With a bit of selective analysis, one can observe a considerable underperformance. This trend is not due to an unfavourable macro environment for tech; rather, it stems from the cessation of extreme earnings outperformance and highly elevated valuations. In the US, the performance yesterday was as follows: Dow -1.0%, S&P 500 -0.9%, Nasdaq -1.6%, and Russell 2000 -0.8%.

This morning, most Asian markets were cloaked in red, while European futures showed a mixed picture. US futures were influenced by late-hour earnings released yesterday, which drives growth-related futures higher.

FI: The front end of the euro curve led the bullish steepening of the curve as expectations for a jumbo cut from the ECB rose on the back of General Committee comments. The comments did not exclude the possibility of ECB cutting rates by more than 25bp at one point.

FX: USD rose further yesterday, where JPY was the big loser among G10 currencies. EUR/USD slipped below 1.08 and USD/JPY rose to 153. It was also a tough day for Scandies with EUR/NOK climbing above 11.80 and EUR/SEK above 11.40.