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Daily Pivots: (S1) 0.8908; (P) 0.8930; (R1) 0.8959; More....

Intraday bias in USD/CHF is back on the upside with break of 0.8915 resistance. Rise from 0.8551 is resuming for 0.9146 cluster resistance. On the downside, though, break of 0.8893 support will indicate short term topping, and turn bias to the downside for deeper pullback.

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) 1.2446; (P) 1.2479; (R1) 1.2523; More...

Intraday bias in GBP/USD is back on the downside with breach of 1.2432. Fall from 1.3141 is trying to resume, and further fall would be seen to 100% projection of 1.3141 to 1.2618 from 1.2799 at 1.2276. On the upside, however, firm break of 1.2547 resistance will now indicate short term bottoming, and bring stronger rebound.

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. But outlook will be neutral at best as long as 1.3141 resistance holds, and consolidation from there is set to extend, until further development.

Retail sales rose by 0.6% month-on-month (m/m) in August, up from the downwardly revised 0.5% (previously 0.7%) reading in July. This was notably above the median consensus forecast calling for a more muted gain of 0.1%.

Trade in the auto sector strengthened on the month rising by 0.3% m/m, relative to a -0.4% m/m decline in July. This largely reflected sales at motor vehicle dealers, which rose 0.4% (erasing a similar decline last month). Meanwhile, sales at automotive parts and accessory stores declined by -0.9% m/m – its first decline since March of this year.

The large gain in headline retail sales was driven by sales at gasoline stations, which soared by 5.2% m/m (the largest increase since March 2022). The rebound at gas stations largely reflects recent upward movements in gas prices. The building materials and equipment category rose by 0.1% m/m, but is down by 4.9% versus a year ago.

Sales in the retail sales "control group", which excludes the above volatile components (autos, building materials and gas) and is used to estimate personal consumption expenditures (PCE) came in at 0.1% m/m – this was above consensus forecast which called for a -0.1% decline. However, July's figure was revised lower to show an increase of 0.7% instead of the previously reported 1.0%.

• Among the control group, the largest contribution came from sales at clothing and accessory stores  (+0.9% m/m), health and personal care (+0.5% m/m), food and beverage stores (+0.4% m/m) and general merchandise store (+0.3% m/m).
• The main categories posting declines were sporting goods stores (-1.6% m/m) and miscellaneous stores retailers (-1.3% m/m).

Food services & drinking places – the only services category in the retail sales report – was up 0.3% m/m, the smallest increase since March.

Key Implications

Retail sales continued to pull ahead  in August, although downward revisions to July's numbers tempered pervious gains. With two months of data in for the third quarter, sales are currently tracking 4.4% annualized for 2023 Q3, notably above the revised 0.4% annualized gain recorded in Q2 (previously 0.6%). This should give a decent boost to consumer spending which continues to defy expectations for a major slowdown.

Even as retail spending continues to post gains, the headwinds facing U.S. consumers continue to gain traction. Notably, the labor market is gradually cooling, taking some of the steam out of consumers' sails, credit markets remain tight and student loan payments are coming due. Additionally, while overall price gains are moderating, the recent uptick in gasoline prices evident in today's numbers is causing consumers pain at the pump. Given these confluence of factors, we still expect to see a deceleration in spending towards the end of the year as consumers' resilience gets tested even more.

• Euro falls to the lowest levels in May after ECB hikes rates and delivers an abysmal growth forecasts, while upgrading 2023 and 2024 inflation outlooks
• Post ECB decision – October 26th ECB rate hike odds hover around 35.4%
• US retail sales remained strong on back-to-school spending and despite the extra energy costs at the pump

The euro initially spiked after the ECB raised rates, but quickly tumbled after traders digested the ECB forecasts that suggest stagflation might be here.  Shortly after, the US posted robust retail sales and jobless claims data, which basically drove home the message that the US economy will easily outperform the eurozone economy throughout the rest of the year.  Investors were thinking that the US might be poised to deliver more rate cuts than the eurozone, but that seems like that won’t be happening anytime soon.

EUR/USD – 30 minute chart

ECB

The summer break is over for the ECB and they have a tough job ahead.  Inflation remains too high and that is forcing the ECB to signal that they ” will ensure that the key ECB interest rates will be set at sufficiently restrictive levels for as long as necessary.” The market was split on whether they would raise rates, but when processed the forecasts, they realized stagflation risks are here.

ECB Forecasts: 

• 2023 GDP forecast cut from 0.9% to 0.7%
• 2024 GDP forecast cut from 1.5% to 1.0%
• 2023 GDP forecast cut from 1.6% to  1.5%
• 2023 Inflation forecast raised from 5.4% to 5.6% (core steady at 5.1%)
• 2024 Inflation forecast raised from 3.0% to 3.2%(a tick lower to 2.9%
• 2025 Inflation forecast lowered from 2.2% to 2.1%(core a tick lower to 2.2%)

ECB’S Lagarde Press Conference

When asked if she was done with rate hikes, Lagarde noted that some members preferred to pause, but that still a solid majority of members agreed with the decision.  One of the key takeaways from Lagarde is that they won’t be cutting rates anytime soon as inflation is still far from target.  Lagarde repeated this quote a few times, “based on current assessment…. the key ECB interest rates have reached levels that, maintained for a sufficiently long duration, will make a substantial contribution to the timely return of inflation to the target.”

EUR/USD – Daily Chart

The euro might not be ready to punch a one-way ticket to the 1.05 level, but it sure seems like it is heading there.  Price action on the EUR/USD daily highlights the bearish trend has firmly been in place since mid-July.  As the risks for growth continue to deteriorate even further, the euro could see short-term weakness before a bottom is put in place.  Major long-term support could be provided by the 1.04 level, which is the 50% Fibonacci retracement of the September low to July high move.

On the other side of the Atlantic, another round of US data supported USD strength after it reminded investors how strong the US economy remains; retail sales ex-auto had a fifth straight increase, producer prices came in hotter-than-expected, and jobless claims remained low.

Daily Pivots: (S1) 1.0706; (P) 1.0735; (R1) 1.0760; More...

EUR/USD's fall from 1.1274 resumed by breaking through 1.0685 temporary low today. Intraday bias is back on the downside for 1.0609/34 cluster support zone next. On the upside, break of 1.0767 resistance will now indicate short term bottoming, and turn bias back to the upside for stronger rebound to 1.0944 resistance 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. Break of 1.0944 will indicate the start of the second leg, and target retest of 1.1274. However, sustained break of 1.0609/0634 will raise the chance of bearish trend reversal, and target 61.8% retracement at 1.0199.

In a twist of events today, Euro takes a considerable hit following ECB's dovish rate hike which communicated a possibly peak in the tightening cycle. The downgrading of core CPI and GDP growth forecasts for the coming years - 2024 and 2025 - further aggravates the descent. This bearish sentiment spills over to Sterling and Swiss Franc, painting a subdued picture for European majors across the board.

In a contrasting scenario, Dollar exhibits a spirited performance, leveraging off the back of a stream of encouraging economic data releases. US retail sales and PPI figures emerged strong, coupled with data pointing to a hearty employment market echoed by jobless claims report. Despite this upbeat tide, Dollar finds itself outshone slightly by Australian and Canadian dollars in the financial market space.

Aussie Dollar is seen deriving some backing from China's decision to cut RRR, a move aiming to inject liquidity and stimulate economic activity. On another front, Canadian dollar rise on the rally observed in WTI oil, which notably surges past 90 handle.

Technically, as the greenback is rallying against European majors, the focus is on whether buying momentum could continue. In particular, EUR/USD and GBP/USD will have to sustain below 1.0685 and 1.2432 temporary lows. USD/CHF will also have to sustain above 0.8951 temporary high. Otherwise, the greenback will be back to square one.

In Europe, at the time of writing, FTSE is up 1.04%. DAX is up 0.34%. CAC is up 0.49%. Germany 10-year yield is down -0.070 at 2.584. Earlier in Asia, Nikkei rose 1.41%. Hong Kong HSI rose 0.21%. China Shanghai SSE rose 0.11%. Singapore Strait Times rose 0.95%. Japan 10-year JGB yield dropped -0.0013 to 0.709.

Dovish ECB hike, peak reached already, 2024 & 2025 core inflation and growth downgraded

ECB delivers a dovish 25bps rate hike today. The accompany statement indicated that the current tightening cycle could have reached its peak already. Also, core inflation and growth forecasts for 2024 and 2025 were revised down.

The newly set rates are as follows: main refinancing operations rate at 4.50%, marginal lending facility rate at 4.75%, and deposit facility rate at 4.00%.

ECB President cited the persistent nature of inflation being "too high for too long" as the primary motivator behind this strategy to "reinforce progress" in ushering inflation back to the target in a "timely manner".

ECB added, "the Governing Council considers that the key ECB interest rates have reached levels that, maintained for a sufficiently long duration, will make a substantial contribution to the timely return of inflation to the target". Future decisions will "ensure" that the interest ares are set at "sufficiently restrictive levels for as long as necessary.

In the new economic projections, inflation is forecast to be at 5.6% in 2023 (prior projection at 5.1%), 3.2% in 2024 (prior 3.0%) and 2.1% in 2025 (prior 2.3%).  The upward revision for 2023 and 2024 mainly reflects a higher path for energy prices.

Core inflation is projected to average 5.1% in 2023 (unchanged), 2.9% in 2024 (prior 3.0%), and 2.2% in 2025 (prior 2.3%).

Growth is projected to be at 0.7% in 2023 (prior 0.9%), 1.0% in 2024 (prior 1.5%), and 1.5% in 2025 (prior 1.6%).

US retail sales up 0.6% mom, ex-auto sales up 0.6%, above expectations

US retail sales rose 0.6% mom to USD 697.6B in August, above expectation of 0.2% mom. Ex-auto sales rose 0.6% to USD 564.0B, above expectation of 0.4% mom. Ex-gasoline sales rose 0.2% mom to USD 642.3B. Ex-auto & gasoline sales rose 0.2% mom to USD 508.8B

In the three months through August, sales were up 2.2% yoy from the same period a year ago.

US PPI rose 0.7% mom in Aug, highest since Jun 2022

US PPI for final demand rose 0.7% mom in August, above expectation of 0.4% mom. That's also the largest monthly increase since June 2022.

80% of the rise in PPI is attributable to the 2% mom jump in PPI goods, highest since June 2022, mostly attributable to energy prices which was up 10.5% mom. Prices for services rose 0.2% mom.

For the 12 months ended in August, PPI rose 1.6% yoy, above expectation of 1.2% yoy.

PPI less foods, energy, and trade services rose 0.3% mom. For the 12 months period, PPI less foods, energy, and trade services was up 3.0% yoy, largest annual advance since April.

Also released, initial jobless claims rose slightly from 217k to 220k in the week ending September 8, below expectation of 229k.

PBOC cuts reserve requirement ratio to release CNY 500B liquidity

People's Bank of China slashed the Reserve Requirement Ratio for a majority of banks by 25bps today. This marks the second such reduction in this calendar year, aiming to spur liquidity in the market and support the economy. Following this adjustment, the weighted average RRR for banks will stand at 7.4%. This strategic step is slated to unleash medium to long-term liquidity exceeding CNY 500B (approximately USD 68.7B) into the financial system.

In the aftermath of this announcement, the offshore Yuan experienced a mild depreciation, fueling a recovery in the USD/CNH from its day low at 7.2603. While fall from 7.3679 could extend lower, strong support is likely at around 7.2387 to contain downside to bring rebound. Break of 7.3145 resistance will bring stronger rise back to 7.3679. But for the near term, some more range trading is likely because USD/CNH would have enough momentum to take on 7.3745 high.

UK RICS house price balance fell to 14-year low, deepening slump

In the latest sign of mounting pressures in the UK property market, RICS house price balance deteriorated notably, plummeting to -68 in August, down from -55 in the previous month. This development has surpassed the grim expectation set at -56 and marks the most unfavorable reading since February 2009.

Dissecting the UK reveals that almost every region is grappling with "relatively steep fall in house prices," as noted by RICS.

Looking ahead, surveyors anticipate that the upcoming months will not bring any reprieve. Short-term projections illustrate a more pronounced dip, with net balance drifting deeper into negative terrain at -67%, a decline from prior figure of -60%.

Furthermore, long-term outlook remains relatively unchanged but still under a cloud, with expectations cementing around a net balance of -48%, mirroring the sentiment recorded in both June and July.

EUR/USD Mid-Day Outlook

Daily Pivots: (S1) 1.0706; (P) 1.0735; (R1) 1.0760; More...

EUR/USD's fall from 1.1274 resumed by breaking through 1.0685 temporary low today. Intraday bias is back on the downside for 1.0609/34 cluster support zone next. On the upside, break of 1.0767 resistance will now indicate short term bottoming, and turn bias back to the upside for stronger rebound to 1.0944 resistance 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. Break of 1.0944 will indicate the start of the second leg, and target retest of 1.1274. 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

US PPI for final demand rose 0.7% mom in August, above expectation of 0.4% mom. That's also the largest monthly increase since June 2022.

80% of the rise in PPI is attributable to the 2% mom jump in PPI goods, highest since June 2022, mostly attributable to energy prices which was up 10.5% mom. Prices for services rose 0.2% mom.

For the 12 months ended in August, PPI rose 1.6% yoy, above expectation of 1.2% yoy.

PPI less foods, energy, and trade services rose 0.3% mom. For the 12 months period, PPI less foods, energy, and trade services was up 3.0% yoy, largest annual advance since April.

Full US PPI release here.

US retail sales rose 0.6% mom to USD 697.6B in August, above expectation of 0.2% mom. Ex-auto sales rose 0.6% to USD 564.0B, above expectation of 0.4% mom. Ex-gasoline sales rose 0.2% mom to USD 642.3B. Ex-auto & gasoline sales rose 0.2% mom to USD 508.8B

In the three months through August, sales were up 2.2% yoy from the same period a year ago.

Full US retail sales release here.

ECB delivers a dovish 25bps rate hike today. The accompany statement indicated that the current tightening cycle could have reached its peak already. Also, core inflation and growth forecasts for 2024 and 2025 were revised down.

The newly set rates are as follows: main refinancing operations rate at 4.50%, marginal lending facility rate at 4.75%, and deposit facility rate at 4.00%.

ECB President cited the persistent nature of inflation being "too high for too long" as the primary motivator behind this strategy to "reinforce progress" in ushering inflation back to the target in a "timely manner".

ECB added, "the Governing Council considers that the key ECB interest rates have reached levels that, maintained for a sufficiently long duration, will make a substantial contribution to the timely return of inflation to the target". Future decisions will "ensure" that the interest ares are set at "sufficiently restrictive levels for as long as necessary.

In the new economic projections, inflation is forecast to be at 5.6% in 2023 (prior projection at 5.1%), 3.2% in 2024 (prior 3.0%) and 2.1% in 2025 (prior 2.3%).  The upward revision for 2023 and 2024 mainly reflects a higher path for energy prices.

Core inflation is projected to average 5.1% in 2023 (unchanged), 2.9% in 2024 (prior 3.0%), and 2.2% in 2025 (prior 2.3%).

Growth is projected to be at 0.7% in 2023 (prior 0.9%), 1.0% in 2024 (prior 1.5%), and 1.5% in 2025 (prior 1.6%).

Full ECB statement here.

Inflation continues to decline but is still expected to remain too high for too long. The Governing Council is determined to ensure that inflation returns to its 2% medium-term target in a timely manner. In order to reinforce progress towards its target, the Governing Council today decided to raise the three key ECB interest rates by 25 basis points.

The rate increase today reflects the Governing Council's assessment of the inflation outlook in light of the incoming economic and financial data, the dynamics of underlying inflation, and the strength of monetary policy transmission. The September ECB staff macroeconomic projections for the euro area see average inflation at 5.6% in 2023, 3.2% in 2024 and 2.1% in 2025. This is an upward revision for 2023 and 2024 and a downward revision for 2025. The upward revision for 2023 and 2024 mainly reflects a higher path for energy prices. Underlying price pressures remain high, even though most indicators have started to ease. ECB staff have slightly revised down the projected path for inflation excluding energy and food, to an average of 5.1% in 2023, 2.9% in 2024 and 2.2% in 2025. The Governing Council's past interest rate increases continue to be transmitted forcefully. Financing conditions have tightened further and are increasingly dampening demand, which is an important factor in bringing inflation back to target. With the increasing impact of this tightening on domestic demand and the weakening international trade environment, ECB staff have lowered their economic growth projections significantly. They now expect the euro area economy to expand by 0.7% in 2023, 1.0% in 2024 and 1.5% in 2025.

Based on its current assessment, the Governing Council considers that the key ECB interest rates have reached levels that, maintained for a sufficiently long duration, will make a substantial contribution to the timely return of inflation to the target. The Governing Council's future decisions will ensure that the key ECB interest rates will be set at sufficiently restrictive levels for as long as necessary. The Governing Council will continue to follow a data-dependent approach to determining the appropriate level and duration of restriction. In particular, the Governing Council's interest rate decisions will be based on its assessment of the inflation outlook in light of the incoming economic and financial data, the dynamics of underlying inflation, and the strength of monetary policy transmission.

Key ECB interest rates

The Governing Council decided to raise the three key ECB interest rates by 25 basis points. Accordingly, the interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will be increased to 4.50%, 4.75% and 4.00% respectively, with effect from 20 September 2023.

Asset purchase programme (APP) and pandemic emergency purchase programme (PEPP)

The APP portfolio is declining at a measured and predictable pace, as the Eurosystem no longer reinvests the principal payments from maturing securities.

As concerns the PEPP, the Governing Council intends to reinvest the principal payments from maturing securities purchased under the programme until at least the end of 2024. In any case, the future roll-off of the PEPP portfolio will be managed to avoid interference with the appropriate monetary policy stance.

The Governing Council will continue applying flexibility in reinvesting redemptions coming due in the PEPP portfolio, with a view to countering risks to the monetary policy transmission mechanism related to the pandemic.

Refinancing operations

As banks are repaying the amounts borrowed under the targeted longer-term refinancing operations, the Governing Council will regularly assess how targeted lending operations and their ongoing repayment are contributing to its monetary policy stance.

***

The Governing Council stands ready to adjust all of its instruments within its mandate to ensure that inflation returns to its 2% target over the medium term and to preserve the smooth functioning of monetary policy transmission. Moreover, the Transmission Protection Instrument is available to counter unwarranted, disorderly market dynamics that pose a serious threat to the transmission of monetary policy across all euro area countries, thus allowing the Governing Council to more effectively deliver on its price stability mandate.

The President of the ECB will comment on the considerations underlying these decisions at a press conference starting at 14:45 CET today.