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Daily Pivots: (S1) 0.8388; (P) 0.8406; (R1) 0.8419; More...

EUR/GBP's break of 0.8399 support confirms resumption of the decline from 0.8624. Intraday bias stays on the downside for 0.8382 low. Firm break there will resume larger down trend. Next near term target will be 61.8% projection of 0.8624 to 0.8399 from 0.8463 at 0.8324. For now, outlook will remain bearish as long as 0.8463 resistance holds, in case of recovery.

In the bigger picture, as long as 0.8624 resistance holds, down trend from 0.9267 is expected to continue. Firm break of 0.8382 will target 0.8201 (2022 low). However, decisive break of 0.8624 will indicate that such down trend has completed, and turn outlook bullish for 0.8764 resistance next.

Daily Pivots: (S1) 1.6313; (P) 1.6383; (R1) 1.6448; More...

Intraday bias in EUR/AUD remains on the downside for the moment. Firm break of 1.6256 support will resume whole fall from 1.7180 to 61.8% projection of 1.7180 to 1.6256 from 1.6629 at 1.6058. On the upside, above 1.6474 minor resistance will turn intraday bias neutral first. But risk will be on the downside as long as 1.6629 resistance holds, in case of recovery.

In the bigger picture, outlook is mixed up by the deeper than expected fall from 1.7180. Yet as long as 1.5996 support holds, up trend from 1.4281 (2022 low) is still in favor to resume at a later stage. Firm break of 1.7180 will pave the way to 61.8% projection of 1.4281 to 1.7062 from 1.5996 at 1.7715.

Daily Pivots: (S1) 158.00; (P) 158.99; (R1) 160.19; More....

Intraday bias in EUR/JPY remains mildly on the upside for the moment. Rise from 155.14 is seen as the third leg of the corrective pattern from 154.40. Further rally would be seen to 163.89, and possibly further to 61.8% retracement of 175.41 to 154.40 at 167.38. On the downside, however, break of 157.11 will turn bias back to the downside for 155.14 instead.

In the bigger picture, price actions from 175.41 are seen as correction to rally from 114.42 (2020 low). The range of consolidation should have been set between 38.2% retracement of 114.42 to 175.41 at 152.11 and 175.41 high. However, decisive break of 152.11 would argue that deeper correction is underway.

Daily Pivots: (S1) 187.82; (P) 189.11; (R1) 190.77; More...

Intraday bias in GBP/JPY remains on the upside for the moment. Rise from 183.70 is seen as the third leg of the corrective pattern from 180.00. Further rally would be seen to 193.45 and possibly further to 61.8% retracement of 208.09 to 180.00 at 197.35. Nevertheless, break of 186.68 minor support will turn bias back to the downside for 183.70 instead.

In the bigger picture, price actions from 208.09 are seen as a correction to whole rally from 123.94 (2020 low). The range of consolidation should be set between 38.2% retracement of 123.94 to 208.09 at 175.94 and 208.09. However, decisive break of 175.94 will argue that deeper correction is underway.

Global markets continues to a wave of risk-on sentiment today, with Japan's Nikkei leading the charge in Asia. The index maintained its gains after BoJ decided to keep interest rates unchanged, a move that was widely anticipated.

This positive momentum stems from the strong performance of US equities overnight, as DOW and S&P 500 closed at record highs, in somewhat delayed reaction to Fed's jumbo 50bps rate cut earlier in the week.

Meanwhile, China's decision to hold its benchmark lending rates steady—though a disappointment for some expecting a cut—has had little effect on the overall bullish sentiment.

In the currency markets, Yen is currently the worst performer this week, followed by Dollar and Loonie. On the other hand, Aussie is the top gainer, followed closely by Kiwi and Sterling. Euro and Swiss Franc are positioning in the middle.

Technically, it's important to highlight that key Dollar pairs like EUR/USD and USD/CHF are still trading within established near term ranges, suggesting that the recent market moves are more about risk appetite pushing up commodity currencies rather than a broad Dollar selloff in reaction to Fed's actions.

To confirm sustained bearish shift in Dollar, EUR/USD would need to decisively break above the 1.1200 resistance, ideally accompanied by extended record run in Gold through 2600 mark.

In Asia, at the time of writing, Nikkei is up 2.10%. Hong Kong HSI is up 1.11%. China Shanghai SSE is down -0.19%. Singapore Strait Times is down -0.38%. Japan 10-year JGB yield is up 0.0035 at 0.857. Overnight, DOW rose 1.26%. S&P 500 rose 1.70%. NASDAQ rose 2.51%. 10-year yield rose 0.055 to 3.740.

BoJ stands pat at 0.25%, sees gradual inflation rise and economic growth

BoJ left its uncollateralized overnight call rate unchanged at around 0.25% during today's meeting, as widely anticipated and decided by unanimously.

In the accompanying statement, BoJ maintained a positive outlook for the Japanese economy, projecting continued growth at a rate above its potential. The central bank expects "overseas economies will continue to grow moderately," further supporting Japan's economic expansion. Domestically, the "virtuous cycle from income to spending" will gradually intensify, aided by accommodating financial conditions.

On the inflation front, core CPI is forecast to rise through fiscal 2025. BoJ also noted that underlying inflation will "increase gradually" as output gap narrows and medium- to long-term inflation expectations firm up.

However, the central bank also outlined several risks to its outlook, including global economic developments, commodity prices, and the pace at which firms adjust wage and price setting.

Japan's CPI core rises to 2.8% in Aug, core-core up to 2.0%

Japan's core CPI, excluding fresh food, rose to 2.8% yoy in August, matching expectations and marking the fourth consecutive month of acceleration. This increase is up from 2.7% yoy in July and continues the upward trend from 2.2% yoy in April, keeping inflation above BoJ's 2% target since April 2022.

Core-core CPI, which strips out both fresh food and energy, also rose from 1.9% yoy to 2.0% yoy, highlighting broader inflationary pressures in Japan. Headline CPI, which includes all categories, increased from 2.8% yoy to 3.0% yoy.

Energy prices surged 12.0% yoy, while food prices increased by 2.9% yoy, and household durable goods saw a significant rise of 7.7% yoy. These numbers indicate persistent inflationary pressures across a wide range of goods and services.

UK Gfk consumer confidence plummets to -20 ahead of expected painful budget

UK GfK Consumer Confidence dropped sharply in September, falling from -13 to -20, marking the biggest decline since April 2022. The seven-point drop reflects growing concerns about the economic outlook and personal finances, with households bracing for a difficult budget next month.

Key forward-looking indicators worsened significantly. Expectations for the general economy over the next 12 months dropped by -12 points to -27, while personal finance expectations fell by -9 points to -3. The major purchase index, which gauges consumers' willingness to buy big-ticket items, also dropped -10 points to -23.

GfK noted, "Despite stable inflation and the prospect of further rate cuts, this is not encouraging news for the UK's new government." Neil Bellamy, Consumer Insights Director at GfK, linked the drop to concerns over Prime Minister Keir Starmer's warnings of a "painful" budget. Bellamy said, "Consumers are nervously awaiting the Budget decisions on Oct. 30 after the withdrawal of winter fuel payments and warnings of further difficult measures."

Looking ahead

Germany PPI and UK retail sales will be released in European session. Canada retial sales IPPI and RMPI will be released later in the day.

GBP/JPY Daily Outlook

Daily Pivots: (S1) 187.82; (P) 189.11; (R1) 190.77; More...

Intraday bias in GBP/JPY remains on the upside for the moment. Rise from 183.70 is seen as the third leg of the corrective pattern from 180.00. Further rally would be seen to 193.45 and possibly further to 61.8% retracement of 208.09 to 180.00 at 197.35. Nevertheless, break of 186.68 minor support will turn bias back to the downside for 183.70 instead.

In the bigger picture, price actions from 208.09 are seen as a correction to whole rally from 123.94 (2020 low). The range of consolidation should be set between 38.2% retracement of 123.94 to 208.09 at 175.94 and 208.09. However, decisive break of 175.94 will argue that deeper correction is underway.

Economic Indicators Update

BoJ left its uncollateralized overnight call rate unchanged at around 0.25% during today's meeting, as widely anticipated and decided by unanimously.

In the accompanying statement, BoJ maintained a positive outlook for the Japanese economy, projecting continued growth at a rate above its potential. The central bank expects "overseas economies will continue to grow moderately," further supporting Japan’s economic expansion. Domestically, the "virtuous cycle from income to spending" will gradually intensify, aided by accommodating financial conditions.

On the inflation front, core CPI is forecast to rise through fiscal 2025. BoJ also noted that underlying inflation will "increase gradually" as output gap narrows and medium- to long-term inflation expectations firm up.

However, the central bank also outlined several risks to its outlook, including global economic developments, commodity prices, and the pace at which firms adjust wage and price setting.

Full BoJ statement here.

Japan's core CPI, excluding fresh food, rose to 2.8% yoy in August, matching expectations and marking the fourth consecutive month of acceleration. This increase is up from 2.7% yoy in July and continues the upward trend from 2.2% yoy in April, keeping inflation above BoJ's 2% target since April 2022.

Core-core CPI, which strips out both fresh food and energy, also rose from 1.9% yoy to 2.0% yoy, highlighting broader inflationary pressures in Japan. Headline CPI, which includes all categories, increased from 2.8% yoy to 3.0% yoy.

Energy prices surged 12.0% yoy, while food prices increased by 2.9% yoy, and household durable goods saw a significant rise of 7.7% yoy. These numbers indicate persistent inflationary pressures across a wide range of goods and services.

UK GfK Consumer Confidence dropped sharply in September, falling from -13 to -20, marking the biggest decline since April 2022. The seven-point drop reflects growing concerns about the economic outlook and personal finances, with households bracing for a difficult budget next month.

Key forward-looking indicators worsened significantly. Expectations for the general economy over the next 12 months dropped by -12 points to -27, while personal finance expectations fell by -9 points to -3. The major purchase index, which gauges consumers' willingness to buy big-ticket items, also dropped -10 points to -23.

GfK noted, “Despite stable inflation and the prospect of further rate cuts, this is not encouraging news for the UK’s new government.” Neil Bellamy, Consumer Insights Director at GfK, linked the drop to concerns over Prime Minister Keir Starmer's warnings of a "painful" budget. Bellamy said, “Consumers are nervously awaiting the Budget decisions on Oct. 30 after the withdrawal of winter fuel payments and warnings of further difficult measures."

Key Highlights

• USD/JPY started a fresh increase above the 142.00 resistance.
• It cleared a major bearish trend line with resistance at 142.20 on the 4-hour chart.
• EUR/USD failed to extend gains above the 1.1120 resistance.
• Bitcoin climbed higher above the $61,200 and $62,000 resistance levels.

USD/JPY Technical Analysis

The US Dollar found support near the 139.60 zone against the Japanese Yen. USD/JPY started a decent upward move above the 141.20 and 142.00 resistance levels.

Looking at the 4-hour chart, the pair climbed above the 38.2% Fib retracement level of the downward move from the 147.20 swing high to the 139.58 low. There was a break above a major bearish trend line with resistance at 142.20.

The pair even spiked above the 100 simple moving average (red, 4-hour) and the 50% Fib retracement level of the downward move from the 147.20 swing high to the 139.58 low.

On the upside, the pair could face hurdles near the 144.30 level and the 200 simple moving average (green, 4-hour). A clear move above the 144.30 zone might set the pace for a move toward 145.00. Any more gains might call for a test of the 146.00 zone.

On the downside, immediate support sits near the 142.40 level, below which the pair might test 142.00. The next key support sits near the 141.20 level. Any more losses could send the pair toward the 140.00 support zone.

Looking at Bitcoin, the bulls came into action, and they were able to push the price above the $62,000 resistance zone.

Upcoming Economic Events:

• UK Retail Sales for August 2024 (YoY) - Forecast +1.4%, versus +1.4% previous.
• UK Retail Sales for August 2024 (MoM) - Forecast +0.5%, versus +0.7% previous.
• ECB's President Lagarde speech.

The US Federal Reserve has chosen a ‘sprint first, then dawdle’ approach to rates normalisation. Dawdling makes sense given the neutral rate is uncertain and probably higher than pre-pandemic.

The US Federal Reserve has started its cutting cycle with an outsized 50 basis point move. This was larger than what we had expected, though the direction and timing was obvious. Starting with 50 basis points is what you do when you want to get to where you need to go as soon as you reasonably can. The counterargument to this approach is that you might not want to risk scaring the horses with an outsized move that hints you think something is seriously wrong with the US economy. These are matters of judgement. Not all the FOMC members were persuaded, with Michelle Bowman dissenting.

The former central banker in me expected that Fed policymakers would not want to risk another episode of market volatility and economic catastrophising like the one seen a few months ago, and so would choose the more conservative approach. It turns out that you can word up key people in the media to soften the surprise factor. (This is another thing that does not sit well in the Australian context, where a media leak would be a conduct issue.)

For the record, the Fed’s outsized cut has no implications for the RBA’s decision next week or at subsequent meetings. As we have noted in the past, because Australia has a floating exchange rate, the RBA can set monetary policy here according to domestic circumstances. We continue to expect the RBA to hold rates next week and for the rest of the year.

Sprint first, then dawdle

The Federal Reserve does not need to be in a hurry. The US economy is not slowing precipitously, and growth in US real consumer spending remains robust. Indeed, the median FOMC member only expects to cut a further 50 basis points over the next two meetings, and a notable fraction of members expect only 25 basis points.

Central banks are characterising their rate cutting cycles as normalisation cycles. Policy had needed to be tight to address the high inflation stemming from the pandemic supply shocks and the policy-related demand shock that occurred in response to the pandemic. Now that inflation is close to target in many economies, policy does not need to be as tight as it was. And as we have explained before, because policy works with a lag, central banks need to start normalising before inflation is all the way back to target.

If the objective is to normalise, typically that would call for a measured initial response. By moving more quickly initially, the Federal Reserve has broken the mould to an extent. And they took this approach despite the exuberant equity market and other measures that suggest US financial conditions are not that tight. The FOMC members have also taken this approach to the early phase of the rate-cutting cycle even though the ‘dot plots’ that accompanied the announcement suggest the Fed funds rate will not return to neutral levels until 2026.

This ‘sprint first, then dawdle’ implied future path for the US can be reconciled by the considerable uncertainty implied by the members’ projections for the long-run level of the Fed funds rate, a proxy for their view of neutral. If you know exactly how far you need to go, you can get there quickly. But if you are unsure of your destination, tread more carefully. A rapid reversion to a level still a bit above neutral and slow from there makes sense in that situation. It is also consistent with our existing expectations that the pace of decline in the Fed funds rate would be faster in the first six months of the cycle than the second.

Many forces are lifting neutral

The FOMC’s uncertainty about the level of the neutral policy rate is warranted, more to the upside than down. Their latest forecasts upgraded their estimate, but it is not clear if they have gone far enough; the methods central banks use to estimate neutral policy rates are inherently incremental. A deeper look at underlying developments suggests that there are a range of global factors pushing in the direction of the global rate structure being higher than it was in the period between the Global Financial Crisis and the pandemic.

Among these factors are the geopolitical and sociological forces that are pushing towards larger public sectors in advanced economies. The IMF has recently noted political support coalescing behind greater government spending. The root causes are multifaceted. Geopolitics is now more multipolar, with the United States and China treating each other as strategic rivals rather than purely as trade partners. This pushes governments to boost spending on defence and national security, as well as expanding strategic manufacturing capability. Population ageing is also necessitating more health-related spending. Governments are also heavily involved in investing in the energy transition, along with the private sector.

More broadly, we see a sociological shift towards greater demand for – or at least tolerance of – government intervention in the economy to forestall risks and harms that sections of the community perceive. The pandemic may have amplified that shift. In Australia, at least, higher public demand and taxation have become a trend in recent years.

The balance of investment and saving in the private sector has also tilted towards more investment. Like governments, the private sector needs to execute on the energy transition, adopt energy-intensive innovations in AI and adapt to changing patterns of trade. There also might be more scope to fund investment, noting that the global banking sector is no longer in the mode of building up capital to meet new Basel requirements, as it was in the period between the GFC and the pandemic.

All these forces mean that investment demand is stronger relative to the past. While the Asian region remains an important source of saving, it is not an even bigger source than it was during the period of the so-called ‘global savings glut’. The net is therefore likely to be a tilt towards investment relative to saving. The way that the demand for and supply of funding for investment equilibrates is through a higher structure of global interest rates. This implies a higher risk-free ‘neutral’ rate. It might also have implications for things like average term premia and risk premia.

There are some forces pushing in the other direction. For example, global goods inflation is likely to remain low given weak domestic demand in China and the approach the authorities there are taking to growth and development, principally by boosting manufacturing supply capacity. The additional investment involved would tend to boost the global neutral real rate. However, the disinflationary impact means that actual nominal rates could be lower than otherwise, even if neutral rates are not.

Also working in this direction, population ageing is tending to boost participation and labour supply rather than reduce it in most western economies – though not the United States; we saw more evidence of this in the rising trend in participation here in Australia this week. As well as being disinflationary, abundant labour supply relative to population means less incentive to invest in labour-saving technologies. This is not so great for global productivity but could help offset increases in investment demand from other sources.

At this stage, though, we think the net of all these forces takes the global structure of interest rates higher than it was pre-pandemic. Indeed, we think neutral rates are more likely to in the low to mid 3% range than the high 2% level implied by the Federal Reserve’s current projections.