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Market trends often have self-reinforcing dynamics, as illustrated by the strong uptrends in yields (Since mid-May) and the dollar (since mid-July). ‘Exhaustion’ of this kind of strong trend is often marked by data or news firmly coming out in line with the trend, but no longer supporting follow-through price action. Such a rupture occurred end last week. US yields and the dollar ran into resistance even after an outsized payrolls beat. The countermove was born. (Some) Fed members questioning the need for further tightening after the recent rise in yields helped to change the short-term market focus/narrative. Contrary to early last week, hawkish news doesn’t do the trick anymore. Soft messages now get more weight. There was little high profile news in EMU. Slightly higher than expected inflation expectations in the EMU consumer survey in the new environment evidently didn’t stop the bond market rebound. Some observers even see bonds taking back their safe haven status/inverse correlation with risk assets as geopolitical uncertainty reigns. We remain cautious to already draw this conclusion as long as the path of inflation returning to target remains highly uncertain. Short-term EMU/German yields are looking for a short-term equilibrium as the ECB is expected to keep the depo rate at 4% ‘sine die’, even in a risk-off context. The 2-y German yield at 3.09% adds 3 bps. The rally of longer bonds decisively continues with the 30-y ceding another 8 bps. The ‘spread rally’ in BTPS slowed. The 10-y Italian-German yield spread narrows just 1 bp (1,94%). Similar picture in the US with the 2-y gaining 4 bps. The 30-y is losing 8.5 bps (4.73% compared to a 5%+ peak on Friday). US September headline PPI at 0.5% M/M and 2.2% Y/Y printed above expectations. Core PPI was close to expectations. The market reaction was very limited. Later today, we keep an close eye at the Minutes of September Fedmeeting. The tone at the meeting was probably rather hawkish as a majority of the governors still saw a strong case for at least one additional 25 bps hike. We also look at the internal debate on a higher neutral policy rate. The US Treasury sells $35bn of 10-yr Notes. As indicated, we stay cautious to read any safe haven characteristics in the current bond market rally. Yesterday’s equity rebound lost some momentum (EuroStoxx +0.1%). US indices open mostly higher (Nasdaq % 0.5%). For now, oil doesn’t gain further on the Middle East tensions (Brent even eases slightly to $87/b).

In FX markets, the dollar rally stalled, but the correction momentum is less convincing than in bond markets. DXY is slowly drifting south (105.75 from 1053.8). EUR/USD (1.0615) struggles to extend gains beyond the 1.06 figure, with first resistance looming in the 1.0635/43 area (previous low/23.6% retracement decline since mid-July). The yen for now doesn’t profit from a smaller (negative) interest rate differential versus the likes of the dollar (USD/JPY 148.9, EUR/JPY 158 area). In technical trading, sterling again slightly outperforms (EUR/GBP 0.862, cable 1.2305). In Central Europe, the zloty outperforms with EUR/PLN easing to 4.51. Are markets anticipating a more EU friendly outcome at this weekend’s parliamentary elections?

News & Views:

Bloomberg cites sources close to the Indian government suggesting that the country will impose restrictions on its sugar exports after dry weather dried cane crops. The nation had its weakest monsoon season in five years and already introduced a quota system in 2022-2023, limiting exports to about 6 million tons compared with unrestricted levels of around 11 millon. Sugar futures already traded at highest levels in more than 12 years on supply concerns despite a bumper harvest from Brazil. Thailand, the second-largest exporter, is also expected to see reduced volumes because of the El Nino impact (severe draught).

The ECB published its August Consumer Expectations Survey. Median consumer inflation expectations for the next 12 months and those for three years ahead increased marginally, from 3.4% to 3.5% and from 2.4% to 2.5% respectively. Expectations for economic growth over the next 12 months became slightly more negative (-0.8% from -0.7%) and the expected unemployment rate in 12 months’ time increased marginally (11.1% from 11%). Expectations for growth in the price of homes over the next 12 months slightly increased (2.3% from 2.1%) as did expectations for mortgage interest rates 12 months ahead (5.2% from 5.1%)..

• CHFJPY rally stalls after hitting record levels back in August
• But pair recovered last week, and remains in a clear uptrend
• If buyers push to new records, the focus would turn to 170 region

CHFJPY enjoyed a massive surge this year, cruising to new all-time highs. This rally stalled in September and prices corrected lower, but buyers stepped back in last week, boosting the pair to bring it just 1% away from those record highs. Overall, CHFJPY remains in a clear uptrend, something reflected in the upward slope of the simple moving averages (SMAs) on a weekly timeframe.

Momentum oscillators are currently flashing mixed signals. The RSI has turned higher towards its overbought region as the pair recovered lately, but the weekly MACD continues to drop below its red trigger line.

If buyers manage to pierce above the all-time high of 166.55, taking the market into uncharted territory, the focus could then turn towards round psychological numbers that might act as obstacles to any further advances. In this sense, the 170.00 region could act as the first line of defense.

Now in case sellers take back control, an initial barrier on the downside would probably be the recent low of 160.00. Falling below that, the next area to watch is around 151.40. The 50-week SMA is just above at 152.35 and could be considered part of the same area.

Summarizing, the period of consolidation in CHFJPY seems to be over and the bulls might take another shot at record highs.

• Gold extends rebound, tries to overtake 100-period SMA
• But risk that rally is becoming overstretched

Gold climbed to a near two-week high on Wednesday, briefly hitting 1,874.65, as the rebound from the seven-month low of 1,810.31 continued to gain traction. The momentum indicators point to an ongoing positive bias in the short term, but there is a risk the recovery could soon run out of breath.

The RSI is crossing into the overbought region above 70 and the stochastics are rising inside their respective overbought area. This may be a sign that a downside correction could be nearing.

For the bulls to maintain their upward charge, they would first have to tackle the 100-period simple moving average (SMA) at 1,875.00 in the 4-hour chart. They could also run into trouble at the 50% Fibonacci retracement of the September-October downleg at 1,878.81. Successfully clearing these hurdles would pave the way for the 61.8% Fibonacci of 1,894.98 as well as the 200-period SMA just above the crucial 1,900 level.

However, should the rebound falter, there could be immediate support at the 38.2% Fibonacci of 1,862.64 followed by the 20-period SMA at 1,851.58. If broken, the precious metal could next seek support from the 23.6% Fibonacci of 1,842.64, which is located not too far away from the 50-period SMA at 1,839.03. An even bigger selloff would put gold on path to retest the October low of 1,810.31.

In brief, despite the rising risk of the rally running out of steam soon, the short-term prospects are looking increasingly bullish. Reclaiming the 100-period SMA would reinforce the uptrend whereas a drop below the 50-period SMA would threaten to shift the short-term picture back to negative.

• Australian inflation expectations projection to decelerate

The Australian dollar has edged lower on Wednesday. AUD/USD is trading at 0.6419, down 0.20%. The Aussie is coming off a five-day rally, rising 120 basis points during that time.

Australian inflation expectations expected to decline

Australia will release MI inflation expectations on Thursday. Inflation expectations are closely watched as they can manifest into actual inflation. The trend has been downward, with inflation expectations falling slowly over the past two months. Inflation expectations eased to 4.6% in September, its lowest level since April. Another drop is expected for October, with a consensus estimate of 4.4%.

Australia’s inflation rate has generally been on a downtrend, although CPI rose unexpectedly from 4.9% to 5.2% in August. The RBA has held rates at four consecutive meetings and the third-quarter inflation report on October 25th could be the determining factor as to whether the RBA prolongs the pause. The markets have priced in a pause at 95%.

The Federal Reserve has sounded hawkish in recent months, warning that rate hikes could continue even as inflation has been falling. That message has changed in recent days, as some Fed members have sent out a very dovish message. This is a direct result of the sharp rise in US Treasury yields, with 10-year yields hitting a 16-year high on Tuesday. The spike in yields has made borrowing costs more expensive and could act as a brake on the economy and push inflation lower, allowing the Fed to avoid further hikes.

Atlanta Fed President Raphael Bostic said on Tuesday that the Fed didn’t need to raise rates anymore in order to push inflation back to the Fed’s 2% target. Dallas Fed President Lorie Logan and San Francisco Fed President Mary Daly also stated that the increase in Treasury yields could mean less need for the Fed to raise rates in the current tightening cycle. The futures markets have priced in a rate hike before the end of the year at 26%, according to the CME FedWatch Tool.

AUD/USD Technical

• 0.6372 and 0.6338 are providing support
• There is resistance at 0.6458 and 0.6528

Daily Pivots: (S1) 181.90 (P) 182.35; (R1) 183.14; More...

GBP/JPY's break of 183.00 resistance suggests that pull back from 186.75 has completed at 178.02 already. Intraday bias is back on the upside. Stronger rally would be seen back to 185.67/186.75 resistance zone. However, below 181.53 minor support will mix up the outlook and turn intraday bias neutral first.

In the bigger picture, fall from 186.75 is currently seen as a corrective move only. As long as 176.29 support holds, larger up trend from 123.94 (202 low) should still be in progress. Break of 186.75 will target 195.86 (2015 high). Nevertheless, firm break of 176.29 will confirm medium term topping, and bring lengthier and deeper consolidations.

Daily Pivots: (S1) 148.21; (P) 148.66; (R1) 149.15; More...

Outlook in USD/JPY is unchanged. Intraday bias stays neutral as consolidation from 150.15 is still extending. On the downside, below 148.24 minor support will turn bias to the downside for another down leg through 147.28. But there is no confirmation of bearish trend reversal before firm break of 144.43 support. Another rally remains mildly in favor through 150.15 to retest 151.93 high.

In the bigger picture, while rise from 127.20 is strong, it could still be seen as the second leg of the corrective pattern from 151.93 (2022 high). Rejection by 151.93, followed by sustained break of 145.06 resistance turned support will be the first sign that the third leg of the pattern has started. However, sustained break of 151.93 will confirm resumption of long term up trend.

Daily Pivots: (S1) 0.9026; (P) 0.9055; (R1) 0.9075; More....

Intraday bias in USD/CHF stays mildly on the downside. Corrective fall from 0.9243 could extend further to 38.2% retracement of 0.8551 to 0.9243 at 0.8979. On the upside, above 0.9081 minor resistance will turn intraday bias neutral first. But risk of another fall will remain as long as 0.9243 resistance holds.

In the bigger picture, current development indicates that rise from 0.8551 is reversing whole down trend from 1.0146. Further rally would then be seen to 61.8% retracement at 0.9537 and above. For now, this will be the favored case as long as 55 D EMA (now at 0.8969) holds, even in case of deep pullback.

Daily Pivots: (S1) 1.0567; (P) 1.0593; (R1) 1.0632; More...

Intraday bias in EUR/USD stays neutral with immediate focus on 1.0616 resistance. Decisive break there will confirm short term bottoming, and turn bias back to the upside for stronger rebound. Nevertheless, rejection by 1.0616 will retain near term bearishness. Break of 1.0447 will resume the fall from 1.1274 to 1.0199 fibonacci level next.

In the bigger picture, fall from 1.1274 medium term top could still be a correction to rise from 0.9534 (2022 low). But chance of a complete trend reversal is rising. In either case, current fall should target 61.8% retracement of 0.9534 to 1.1274 at 1.0199 next. For now, risk will stay on the downside as long as 55 D EMA (now at 1.0725) holds, in case of rebound.

Daily Pivots: (S1) 1.2235; (P) 1.2263; (R1) 1.2314; More

Intraday bias in GBP/USD stays on the upside at this point. Rebound from 1.2036 short term bottom is in progress for near term channel resistance (now at 1.2338). Firm break there will target 38.2% retracement of 1.3141 to 1.2036 at 1.2458 next. Nevertheless, break of 1.2161 minor support will revive near term bearishness and bring retest of 1.2036 low.

In the bigger picture, fall from 1.3141 medium term top could still be a correction to up trend from 1.0351 (2022 low) only. But risk of complete trend reversal is rising. Sustained break of 38.2% retracement of 1.0351 to 1.3141 at 1.2075 will pave the way to 61.8% retracement at 1.1417. For now, risk will stay on the downside as long as 55 D EMA (now at 1.2440) holds, in case of rebound.

Dollar is exhibiting mixed performance in today's relatively calm trading environment. Earlier losses were swiftly counteracted, illustrating the greenback's resilience amidst fluctuating conditions. Interestingly, the extended pullback in treasury yield has left Dollar unscathed, and it has similarly shrugged off stronger than expected PPI data. All eyes are now set on the release of the FOMC minutes, although tomorrow's CPI data release is anticipated to be the significant market mover.

On the European front, Sterling and Swiss Franc are leading the pack, demonstrating noticeable strength. Euro is lagging behind after two ECB policymakers who expressed the belief that the tightening cycle might have reached its conclusion. The commodity currencies, alongside the Yen, are on a slight decline.

From a technical viewpoint, CHF/JPY's rally from 159.95 extends higher today. Current development suggests that corrective pull back from 166.57 has completed already. Further rise is in favor as long as 163.46 support holds, for retesting 166.57 high. At this point, it's unsure yet whether CHF/JPY is ready to break through 166.57 to resume the larger up trend. The development in other Yen and Franc pairs will be monitored to gauge the chance. However, it remains uncertain whether the cross is prepared to breach the 166.57 mark to resume its broader uptrend. To evaluate this possibility, analysts are keeping a close eye on the development in other Yen and Franc pairs.

In Europe, at the time of writing, FTSE is up 0.16%. DAX is up 0.11%. CAC is down -0.26%. Germany 10-year yield is down -0.0535. Earlier in Asia, Nikkei rose 0.60%. Hong Kong HSI rose 1.29%. China Shanghai SSE rose 0.12%. Singapore Strait Times dropped -0.19%. Japan 10-year JGB yield rose 0.0046 to 0.779.

US PPI up 0.5% mom, 2.2% yoy in Sep, largest annual rise since Apr

US PPI for final demand rose 0.5% mom in September, above expectation of 0.4% mom. PPI less foods, energy, and trade services increased 0.2% mom, the fourth consecutive advance. PPI goods rose 0.9% mom while PPI services rose 0.3% mom.

For the 12 months period, PPI rose 2.2% yoy, above expectation of 1.6% yoy. That's the largest annual increase since April's 2.3% yoy. PPI less foods, energy and trade services was up 2.8% yoy.

Fed's Bowman: Policy rate may need to rise further

Fed Governor Michelle Bowman acknowledged in a speech the progress made in curbing inflation. However, she quickly pointed out "inflation remains well above the FOMC's 2 percent target."

She highlighted the robust pace of domestic spending and the prevailing tightness in the labor market. These factors indicate that "the policy rate may need to rise further and stay restrictive for some time to return inflation to the FOMC's goal."

Shifting her attention to the broader challenges faced by central banks, she elucidated, "As they have confronted price stability challenges, central banks have also faced new financial stability risks."

Specifically, she cited concerns related to the substantial fluctuations in interest rates amidst an environment characterized by sustained, heightened inflation.

Moreover, Bowman emphasized the potential risks arising from geopolitical tensions, explaining how they can instigate "greater financial market volatility." She also underscored the indirect impacts such tensions could have, including influencing economic activity and inflation.

ECB's consumer survey reveals rising inflation expectations amid subdued growth outlook

ECB's latest Consumer Expectations Survey for August paints a picture of an economy where consumers anticipate higher inflation rates but remain pessimistic about economic growth.

Specifically, the survey indicates that median inflation expectations for the next 12 months have risen from 3.4% to 3.5%. A similar uptrend was observed for the three-year horizon, with expectations inching up from 2.4% to 2.5%.

Household income expectations for the next year showed a slight increase, moving from 1.1% to 1.2%. However, a contrasting sentiment emerged for spending , with expectations slightly decreasing from 3.4% to 3.3%.

In terms of economic growth, the mood appears somewhat bearish. The survey revealed that median expectations for growth over the coming 12 months have declined, shifting from -0.7% to -0.8%.

ECB's Knot: Policy is in a good place

ECB Governing Council member Klaas Knot acknowledged the recent strides the central bank has made towards achieving its inflation target, but he emphasized that there's still "a long and winding road ahead". Nevertheless, expressing contentment with the current policy stance, he mentioned, "I do believe that policy at this moment is in a good place."

Knot did not shy away from underscoring ECB's readiness to take further action if needed, affirming, "we will remain vigilant and we stand ready to adjust interest rates even more if the disinflation process were to stall." He emphasized that ECB has a "credible prospect" of achieving its inflation target by 2025.

Highlighting challenges in the short term, Knot pointed out that the eurozone is currently grappling with economic stagnation. While the manufacturing sector is already in a recession, the services sector is also beginning to feel the pressure.

Nevertheless, Knot views this slowdown as "desirable in a way." Despite the immediate hurdles, Knot remains optimistic about the medium-term outlook, suggesting that growth is poised for a rebound in the foreseeable future.

ECB's De Cos: Market confidence reflects in rate expectations

ECB Governing Council member Pablo Hernandez de Cos noted that market pricing indicated a clear understanding of the central bank's communication, finding its intended policy path to be credible.

"They are interpreting well that there might be a need for the current rate to remain in the current (setting) for sufficiently long," he mentioned"

"They are also expecting that rates will decline, which for me is a kind of a confidence of the market that we will fulfil our mandate," he added.

However, De Cos voiced concerns about unforeseen challenges that might arise, emphasizing the high level of uncertainty surrounding economic prospects. New shocks could dictate different policy decisions by the ECB.

Offering insight into the economy, de Cos observed a potential dip in the near-term, hinting at a possible negative outcome for the third quarter. Despite this near-term pessimism, he expressed a lack of alarm, reassuring that a recovery is on the horizon for next year, driven by rejuvenating real incomes.

RBA's Kent: Some further tightening may be required

In a speech, RBA Assistant Governor, Chris Kent, indicated that while the effects of previous monetary tightening have not yet been fully realized, "some further tightening " might be on the horizon to keep inflation in check.

Kent asserted that the policies currently in place are beginning to stymie demand growth, a crucial step towards mitigating inflation.

"The lags of transmission mean that some further effects of rate increases to date are still to be felt through the economy, which will provide further impetus to lower inflation in the period ahead," he added.

However, with inflation persisting at elevated levels, Kent hinted at the necessity for additional measures. "The Board is paying close attention to economic developments here and overseas, and some further tightening of monetary policy may be required to ensure that inflation, which is still too high, returns to target in a reasonable timeframe."

GBP/USD Mid-Day Outlook

Daily Pivots: (S1) 1.2235; (P) 1.2263; (R1) 1.2314; More

Intraday bias in GBP/USD stays on the upside at this point. Rebound from 1.2036 short term bottom is in progress for near term channel resistance (now at 1.2338). Firm break there will target 38.2% retracement of 1.3141 to 1.2036 at 1.2458 next. Nevertheless, break of 1.2161 minor support will revive near term bearishness and bring retest of 1.2036 low.

In the bigger picture, fall from 1.3141 medium term top could still be a correction to up trend from 1.0351 (2022 low) only. But risk of complete trend reversal is rising. Sustained break of 38.2% retracement of 1.0351 to 1.3141 at 1.2075 will pave the way to 61.8% retracement at 1.1417. For now, risk will stay on the downside as long as 55 D EMA (now at 1.2440) holds, in case of rebound.

Economic Indicators Update