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UK August inflation numbers this morning fell short of analyst expectations. The headline figure only rose by 0.3% m/m, unexpectedly lowering the yearly reading from 6.8% to 6.7%. Core inflation (ex. food and energy) eased from 6.9% to 6.2% compared to the 6.8% consensus. All other consumer prices gauges (CPIH, retail price index) similarly showed prices rising less than expected. The numbers come a day ahead of the Bank of England and follow a recent string of disappointing data, including PMIs. Markets since end August significantly pared back bets up to a point where the once almost 75 bps of additional tightening is reduced to a less than 50% chance for one final hike at the meeting tomorrow. Given the Bank of England’s reputation of erring to the dovish side there’s a real risk it is going to (ab)use this morning’s data not just to pause but to conclude, though not officially, the tightening cycle. UK gilts hugely outperform US Treasuries and German Bunds today. Yields tank more than 11 bps at the front end of the curve. Longer tenors shed 5.5-9 bps. Knock-on effects pushed German and US yields lower. They ease about 2 to 3.5 bps. Pound sterling declines but nothing dramatic, especially given the size of the yield declines. EUR/GBP rose from 0.862 to the mid 0.86/87 area. The dollar trades slightly weaker, giving EUR/USD another shot at the 1.07 big figure. DXY (trade-weighted greenback) eases marginally to trade sub 105. USD/JPY temporarily moved beyond the recent highs and went north of 148 before paring gains again. Other currencies including the AUD, SEK and NZD lead the scoreboard. These cyclicals enjoy a healthy risk bid as markets bet that yet another major central bank is (almost) done tightening. That brings us to tonight’s Fed policy meeting.

The Fed is expected to deliver a telegraphed, but still hawkish skip (5.25%/5.50% target range). However, with the decline in headline inflation at risk of slowing down, amongst others, due to a higher oil price and US economic growth holding up well, there is little reason for Fed governors to change the dot plot signaling an additional 25 bps step later this year. The higher for longer mantra might be reinforced by a further scaling back of rate cut expectations for end 2024 (4.6% in June). Fed governors also might raise their standing assessment on the 2.5% long term equilibrium rate. If so, it would be a clear confirmation that monetary policy has entered a new era. At the press conference, we don’t expect Fed Chair Powell to change his message from June in a profound way. From a bond market point of view, question is whether the tone of the Fed will be hawkish enough to force a break beyond recent cycle yield peak levels. The downside in yields in any case should stay well protected. The dollar will likely stay in the drivers’ seat.

News & Views

New EU car registrations rose by 21% Y/Y in August, marking the thirteenth consecutive month of growth. YTD, car registrations rose by 17.9%, totaling 7.1 million units. The market share of battery-electric cars exceeded 20% for the first time (21%, up from 11.6% in August last year), overtaking diesel for the second time this year and becoming the third-most-popular choice for new car buyers after hybrid-electric cards (24% market share from 22.5%) and petrol cars (32.7% from 38.7%). EU battery-electric car registrations surged by 118.1% Y/Y with Belgium recording the highest growth rate of 224.5%.

Polish central banker Wnorowski followed up on this morning’s comments by governor Glapinski. He said that the zloty’s drop since the unexpected 75 bps rate cut has been excessive and that a further weakening is not desirable. He added that the central bank learned its lesson and that any next moves will be more gradual. He hopes that November forecasts will show a faster decline of CPI towards target, backing such approach. The Polish zloty in a two-stage move rallied from EUR/PLN 4.6750 this morning to 4.61 currently. Polish zloty swap yield rise by up to 13 bps at the front end of the curve (2-yr).

• China maintains one-year and five-year loan prime rates
• Australian dollar records strong gains

The Australian dollar has posted strong gains on Wednesday. In the European session, AUD/USD is trading at 0.6491, up 0.58% and its highest level in three weeks.

China holds loans prime rates

China’s banks maintained their benchmark loan rates for September, a sign that the Chinese economy may be finding its footing after government support. As expected, the People’s Bank of China kept 1-year and 5-year loan prime rates at 3.45% and 4.2%, respectively. Recent Chinese releases have shown signs of improvement, including Friday’s retail sales and industrial production which beat expectations.

The world’s second-largest economy has deteriorated over the past few months and a CPI report in July which showed the economy was experiencing deflation set off alarm bells in the markets. The PBoC decision was seen as a vote of confidence in the economy, and the Australian dollar has responded with strong gains.

The RBA minutes, released on Tuesday, noted that board members listed weak domestic demand and contagion from China’s slowdown as risk factors for an economic slowdown. Despite these concerns, the RBA has signalled that inflation remains too high and has left the door open to further hikes. Inflation is currently running at 6% and the RBA has forecast that inflation will slow to around 3.25% by the end of 2024 and won’t fall back into the 2%-3% target range until late 2025.

It’s decision day at the Federal Reserve, which is widely expected to hold rates for only the second time in the current rate-tightening cycle. That doesn’t mean the meeting will be a sleeper. Investors will be interested to see if there are any revisions to the June dot plot, which projected one more hike this year and 100 basis points in rate cuts in 2024. Any changes in these forecasts could shift the Fed rate odds for the October meeting, which are currently at 27%, according to the FedWatch tool.

AUD/USD Technical

• AUD/USD is putting pressure on resistance at 0.6477. The next resistance line is 0.6524
• 0.6381 and 0.6332 are the next support levels

Everyone at the Bank of England undoubtedly breathed a collective sigh of relief this morning, joining the rest of us, as inflation subsided much more than expected in August.

Not only did the headline CPI rate not rise last month, as was expected, it actually fell slightly, with the core rate falling a lot. So despite the unfavourable base effects for fuel, which many expected would lift the headline rate, price increases are finally easing at a decent rate.

There is obviously still a long way to go and further substantial progress will likely be made in the final months of the year but there are also upside risks, most notably oil prices. That said, the situation in the oil market is very different from the last couple of years so there isn't necessarily cause for panic on that front, it may just complicate things on the way back to the Bank's 2% target.

There is plenty more to celebrate in the breakdown of the data though, most notably the drop in services inflation which has been a major concern for the MPC amid soaring wages. But with inflation falling, energy prices declining and the labour market tightness easing, there is hope that pressures here will further subside too.

What's interesting is that markets now view tomorrow's BoE interest rate decision as a coin toss between 25 basis points and hold. Perhaps the MPC's words from earlier this month in front of the Treasury Select Committee are still ringing in traders ears but given the entirety of the data, I think we're more likely to see an ECB-style dovish hike tomorrow than a Fed-style stuttered exit.

Fed likely to pause but may refrain from suggesting they're done with hikes

The Fed meeting today is widely expected to end in an agreement not to hike interest rates this month with the key takeaway being whether they intend to again in this cycle. The ECB strongly hinted that it is probably done last week but I'm not convinced we'll get the same signal from the Fed and neither, it would appear, are markets.

We have seen the odds of another hike creeping up a little recently amid more resilience in the economy which will likely make the central bank a little apprehensive about declaring victory or even suggesting they believe they've done enough. If they are so bold as to follow in the footsteps of the ECB, it will be interesting to see what that does to yields and the dollar.

Oil pares gains amid possible pre-Fed profit-taking

Oil prices are down today after ending the session in negative territory on Tuesday as well, perhaps a sign that the trend is finally starting to run on fumes. I wouldn't say the price has peaked, despite this sudden reversal, but perhaps it could trigger some profit-taking. What is interesting is that there was no clear shortage of momentum ahead of the reversal which may make some question how significant a correction we're looking at.

Of course, the closer we get to $100 Brent, the more nervous some traders may get which may show more clearly in momentum indicators. Ultimately, with oil inventory data to come today and the Fed later, the coming period for crude is likely to be driven by the outcome of those events, as opposed to traders' current view. And the Fed in particular may have contributed to some of the profit-taking we're already seeing.

Gold steadies ahead of the Fed decision

The gold rebound has stalled over the last couple of sessions with the Fed meeting likely strongly contributing to that. There's clearly a lot of uncertainty ahead of the decision, not to mention the new economic projections and dot plot, so it's probably not surprising that we're seeing some caution. Arguably the most realistically favourable outcome for gold may be a pause and an ECB-like declaration that they've done enough, although with so much to absorb from the meeting, there will be other drivers too.

Daily Pivots: (S1) 147.61; (P) 147.77; (R1) 148.02; More...

Intraday bias in USD/JPY remains mildly on the upside at this point. Current rise from 127.20 should target a retest on 151.93 high. On the downside, below 147.49 minor support will turn intraday bias neutral first. But outlook will stay bullish as long as 145.88 support holds, in case of retreat.

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 break of 137.22 support will indicate 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) 0.8956; (P) 0.8970; (R1) 0.8993; More....

USD/CHF is staying in consolidation from 0.8982 and intraday bias remains neutral. Further rally is expected as long as 0.8893 support holds. Above 0.8982 will resume the rally from 0.8551 to 0.9146 cluster resistance. However, firm break of 0.8893 will argue that a short term top is possibly formed, and turn bias back to the downside for 55 D EMA (now at 0.8858).

In the bigger picture, rebound from 0.8551 medium term bottom is currently seen as a correction to the downtrend from 1.0146 (2022 high). Further rally would be seen to 0.9146 cluster resistance (38.2% retracement of 1.0146 to 0.8551 at 0.9160). Strong resistance could be seen there to limit upside, at least on first attempt.

Daily Pivots: (S1) 1.2366; (P) 1.2396; (R1) 1.2421; More...

Intraday bias in GBP/USD stays on the downside for the moment. Current fall from 1.3141 should target 1.3141 to 100% projection of 1.3141 to 1.2618 from 1.2799 at 1.2276. Decisive break there will target 1.2075 fibonacci level next. On the upside, above above 1.2423 minor resistance will turn intraday bias neutral again. But near term outlook will stay bearish as long as 1.2618 support turned resistance holds, in case of strong recovery.

In the bigger picture, fall from 1.3141 medium term top is seen as a correction to up trend from 1.0351 (2022 low). Deeper decline would be seen to 38.2% retracement of 1.0351 to 1.3141 at 1.2075. Strong support would be seen there to bring rebound on first attempt. However, sustained break of 1.2075 will raise the chance of bearish trend reversal.

Daily Pivots: (S1) 1.0663; (P) 1.0691; (R1) 1.0706; More...

EUR/USD is still bounded in established range and intraday bias remains neutral. Strong rebound from current level, followed by break of 1.0767 resistance, should confirm short term bottoming. Intraday bias will be back on the upside for 1.0944 resistance. However, sustained break of 1.0609/34 support zone will carry larger bearish implication, and target 1.0515 support next.

In the bigger picture, fall from 1.1274 medium term top is seen as a correction to up trend from 0.9534 (2022 low). Strong support could be seen from 1.0634 cluster support (38.2% retracement of 0.9534 to 1.1274 at 1.0609) to bring rebound, at least on first attempt. However, sustained break of 1.0609/0634 will raise the chance of bearish trend reversal, and target 61.8% retracement at 1.0199.

Dollar is slightly softer today as the financial world holds its breath for FOMC rate decision. With the market strongly anticipating a hold, eyes will turn to the dot plot for insights. The pivotal question remains: Will there be hints of another rate hike slated for this year? Furthermore, how the dot plot for 2024 maps out the anticipated timeline and pace of rate cuts will be under close observation. Complementing the dot plot, growth and inflation projections will offer a clearer lens on Fed's viewpoint.

Across the pond, Sterling has taken a hit, emerging as the day's weakest performer in the wake of weaker than expected consumer inflation figures. This has led the market to rapidly adjust its expectations, with the possibility of a BoE rate hike tomorrow now seeming less likely. Current swap-market data places this chance at under 50%. Historically, however, BoE's voting in tight situations has been unpredictable. Regardless of the outcome, the consensus is that UK interest rates will probably reach their upper limit post the decision.

Elsewhere in the currency markets, Australian Dollar stands out as the top performer, closely trailed by New Zealand Dollar and then Euro. Canadian Dollar's position is mixed, with Japanese Yen and Swiss Franc trailing behind as weaker contenders.

Looking at the technical aspects, investor sentiment toward Fed's decision and projections would be significantly illuminated by DOW's performance. To confirm a positive reception, DOW would need to convincingly break 34977.97 resistance level. Should this occur, it would suggest that the corrective fall from 35679.13 has concluded, paving the way for resumption of the larger uptrend. Conversely, should 34029.22 support threshold be breached, it would signify a more negative investor sentiment. As is customary, the direction of Dollar will likely move inversely to market risk sentiment.

In Europe, at the time of writing, FTSE is up 0.77%. DAX is up 0.60%. CAC is up 0.52%. Germany 10-year yield is down -0.016 at 2.726. Earlier in Asia, Nikkei dropped -0.66%. Hong Kong HSI dropped -0.62%. China Shanghai SSE dropped -0.52%. Japan 10-year JGB yield rose 0.0064 to 0.725.

Swiss SECO downgrades 2024 growth forecast, raises inflation

In the update to Swiss State Secretariat for Economic Affairs economic forecasts, a marginal upgrade has been bestowed upon Switzerland's 2023 GDP outlook, leveraging the robust performance in the first quarter. The forecast, adjusted for sporting events, now stands at 1.3%, a slight increase from the 1.1% predicted in June.

Despite this adjustment, outlook for 2024 has experienced a cut, settling at 1.2% as opposed to the earlier estimation of 1.5%. This renders the prospects for economic growth considerably below-average for both 2023 and 2024.

Shifting focus to CPI forecasts, the estimation for 2023 have been marginally trimmed down to 2.2%, a -0.1% decrease from June forecast. Conversely, 2024 projection experiences a hike, ascending from 1.5% to 1.9%.

SECO points towards substantial economic risks looming on the horizon. A pressing concern is the international persistence of inflation. The panorama of economic challenges also encompasses escalating risks tied to the global debt scenario fluctuations in property and financial markets. Monetary policy transmission could also be stronger than assumed.

Furthermore, the evolving situations in Germany and China emerge as potent risk factors, not just for the global economy but significantly impacting Swiss foreign trade.

UK CPI slowed to 6.7%, BoE's hike tomorrow could be the last

Sterling is facing headwinds after release of UK's CPI inflation data, which came in lower than market forecasts. This development strengthens the speculation that BoE might be drawing curtains on its tightening cycle, with the one more hike expected tomorrow potentially being the concluding move.

The reported data illustrated deceleration in CPI from of 6.8% yoy to 6.7% yoy in August, a result that fell short of the projected escalation to 7.1% yoy. This is the lowest rate witnessed since February 2022.

A deeper dive into the components reveals that this softening of annual CPI into August 2023 emerged from six out of the 12 sectors. Notably, restaurants and hotels, along with food and non-alcoholic beverages, played a pivotal role in pulling down the numbers. However, the motor fuels category within the transport sector exerted upward pressure, somewhat counterbalancing the decline.

Furthermore, core CPI, which is calculated by excluding variables such as energy, food, alcohol, and tobacco, followed suit, decelerating from 6.9% yoy to 6.2% yoy. This stands significantly below anticipated rate of 6.8% yoy.

Breaking it down further, while CPI goods noted a slight acceleration from 6.1% yoy to 6.3% yoy, CPI services delineated a slowdown from 7.4% yoy to 6.8% yoy.

For the month. CPI rose 0.3% mom, below expectation of 0.7% mom.

Japan's exports to China tumble further, trade with US flourishes

Japan's economic data shows a dwindling momentum in the country's export sector, registering a decline of -0.8% yoy to JPY 7994B in August, with a particularly notable decrease in its trading activities with China.

The continued dip in exports is largely attributed to diminishing overseas demand and the trade restrictions imposed by China, which have significantly impacted Japan's trade balance.

A striking example is seen in the sharp -11.0% yoy decline in exports to China, to a total of JPY 1.44T. This downturn marks the third consecutive month of double-digit drops in export activities to China, severely affected by the -41.2% yoy plunge in food exports due to China's ban on Japanese seafood.

However, a beacon of positivity trading rapport with US, which saw a growth spurt of 5.1% yoy, aggregating to a record JPY 1.62T for the month of August. This surge has been primarily fueled by a heightened demand for Japanese cars, mining, and construction machinery.

On the import front, Japan noted a considerable -17.8% yoy reduction to JPY 8925B, with imports from China dipping -12.1% to JPY 1.93T, and those from US falling -9.5% yoy to JPY 967.39B. The nation's trade balance has consequently been reported at a deficit of JPY -930.5B.

When analyzed in seasonally adjusted terms, both exports and imports showcase a month-on-month decrease, registering -1.7% mom to JPY 8267.8B and -2.1% mom to JPY 8823.6B, respectively. Thankfully, there is a silver lining as the trade deficit has slightly narrowed compared to the previous month, standing at JPY -555.7B.

Australia Westpac leading index edged up to -0.5%, growth struggles despite population boom

Westpac Leading Index for Australia indicates that the nation's growth outlook remains subdued. The index inched up marginally from -0.56% to -0.50% in August, marking a year since it began registering negative readings. These figures suggest that the prospect of per capita GDP advancing in the coming 3–9 months appears bleak.

Westpac's forecasts for the next year resonate with the index's gloomy narrative, anticipating an economic growth of less than 1% for the year leading up to June 2024. Interestingly, there's a potential silver lining: with predictions pointing to population growth surpassing 2% in 2023, this could introduce some upside risks to the otherwise somber economic projections.

However, despite this population surge, the economy is projected to trail behind, as evident from the March and June quarter results. Both quarters witnessed a contraction of -0.3% in GDP per capita, a pattern that's predicted to persist in the forthcoming year.

Regarding next RBA rate decision on October 3, Westpac said it's "almost certain to hold rates steady for another month". The crucial data for the next move would be September quarter inflation report, which will not be available until the November RBA meeting.

EUR/USD Mid-Day Outlook

Daily Pivots: (S1) 1.0663; (P) 1.0691; (R1) 1.0706; More...

EUR/USD is still bounded in established range and intraday bias remains neutral. Strong rebound from current level, followed by break of 1.0767 resistance, should confirm short term bottoming. Intraday bias will be back on the upside for 1.0944 resistance. However, sustained break of 1.0609/34 support zone will carry larger bearish implication, and target 1.0515 support next.

In the bigger picture, fall from 1.1274 medium term top is seen as a correction to up trend from 0.9534 (2022 low). Strong support could be seen from 1.0634 cluster support (38.2% retracement of 0.9534 to 1.1274 at 1.0609) to bring rebound, at least on first attempt. However, sustained break of 1.0609/0634 will raise the chance of bearish trend reversal, and target 61.8% retracement at 1.0199.

Economic Indicators Update

WTI oil price extends pullback from new 2023 high ($93.71) into second consecutive day (down around 2% in Asian / European trading today) as traders partially collected profits and positioning for the Fed policy decision.

Overall picture remains bullish, with the price being underpinned by tighter supply (Saudi Arabia and Russia extended production cut until the end of the year) and brightening demand outlook, as China’s economic recovery gains traction.

Traders look for more details about the US economic growth outlook and its subsequent reflection on demand, which will contribute to oil’s near-term direction signals.

The Fed is widely expected to stay on hold this time, with focus to be on the central bank’s projections for the policy path in coming months, as well as signals whether the US economy is heading towards soft or hard landing.

Technical indicators on daily chart also point to correction (fading bullish momentum / RSI emerging from overbought territory) though larger picture is bullish and suggesting limited correction before bulls resume.

Broken psychological $90 resistance (reinforced by daily Tenkan-sen) and $89.17 (broken Fibo 38.2% of $130.48/$63.63) reverted to solid supports which should ideally contain dips.

In such scenario, bulls could be revived quickly for fresh push towards pivotal barriers at $93.71 / $94.00 (Sep 19 high / top of thick weekly cloud), violation of which would spark stronger rally.

Initial warning on loss of $89.17 support, but increased downside risk to be expected od drop and close below $87.56 (Fibo 38.2% of $77.60/$93.71 bull-leg).

Res: 91.67; 92.32; 93.71; 94.00.
Sup: 89.71; 89.17; 88.27; 87.56.

Cable fell to new multi-month low (the lowest since May 26) early Tuesday, hit by softer than expected UK inflation readings in August.

Annualized CPI dropped to 6.7% (the lowest since Feb 2022) from 6.8% in July and beating forecast for 7.0% increase, while core inflation (excluding volatile components) was down to 6.2% y/y in August, compared to 6.8% forecast and 6.9% previous month.

Although inflation remains high (over three times above 2% target) August data bring some optimism and provides relief to the Bank of England which was widely expected to raise interest rates for the 15th consecutive time in a policy meeting on Thursday, as bets now stand at 50-50 chance for staying on hold this time.

However, there is a risk of fresh increase in inflationary pressure, as oil and food prices continue to rise, maintaining inflationary pressure and keeping in play risk of further policy tightening.

Technical picture on daily chart is bearish (bear-cross 5/200DMA’s / strong negative momentum) but oversold conditions produce headwinds as the price is approaching key short-term support at 1.2307 (May 25 trough).

Upticks should be capped by broken 200DMA (1.2432) to keep larger bears intact for attack at 1.2307 pivot, break of which would open way for deeper correction of a larger 1.0348/1.3141 uptrend and expose targets at 1.2074 (Fibo 38.2% of 1.0348/1.3141) and 1.2000 (psychological).

Conversely, sustained break above 200DMA would signal stronger correction, with lift above pivotal 1.2500 zone to generate initial signal of reversal.

Market await Fed’s verdict (due later today and expected to stay on hold) and more significant decision of the Bank of England on Thursday.

Sterling is likely to come under fresh pressure if BoE pauses this time, while bulls may gain traction if the central bank opts for another rate hike and keeps hawkish stance.

Res: 1.2432; 1.2482; 1.2504; 1.2522.
Sup: 1.2332; 1.2307; 1.2274; 1.2190.