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The release of labour market data kicked off a triptych of key UK data that should help clarify whether the time is right for the BoE to move to a ‘more activist approach’ when it comes to reducing policy restriction. The employment report didn’t change (money) markets’ positioning in any profound way (> 90% chance of a 25 bps cut in November and slightly less than 50% chance on an additional step in December). The unemployment rate declined to 4% from 4.1%. Employment growth in the 3M to August accelerated to 373k (from 265k), but a preliminary figure for September (payrolled employees) shows signs of a slowdown (-15k). Average weekly earnings (ex-bonus) as expected eased to 4.9% from 5.1%, but this is probably still too high to sustainably return inflation back to 2%. Tomorrow’s price data and/or Friday’s retail sales could still provide a more straightforward narrative. UK bond yields basically follow the broader decline in US Treasuries and Bunds. Sterling again outperforms (cable 1.3085; EUR/GBP 0.8335, nearing the October 01 correction low of 0.831).

US interest rate markets reopened after the Columbus Day holiday. Yesterday’s sharp drop in oil prices limited any tentative further upside pressure in inflation expectations and in US (and other core) yields. A weak NY Fed Empire Manufacturing survey (-11.9 from +11.5 vs 3 expected) pointed in the same direction. For now, the ‘hawkish’ repricing after stronger than expected early month US data has run its course. US yields decline between 3 bps (2-y) and 6.5 bps (30-y). German Bund yields are easing 4 to 5 bps across the curve. The expectations index of ZEW German investor sentiment improved slightly more than expected from 3.6 to 13.1, but understandably had hardly any impact on market pricing. After yesterday’s record levels for the Dow and the S&P 500, US equities show no clear trend even as US banks’ earnings published today mostly beat market expectations. After yesterday’s setback, Brent holds below $75/b. Lower core yields also prevent the dollar from building on its recent uptrend. DXY eases slightly (103.05) as nearby resistance (103.34, 50% retracement on April-September decline) is in play. The comparable level in EUR/USD (1.0907) looked like being broken this morning, but EUR/USD intraday also got some reprieve from lower US yields (1.0915 currently). Still the picture remains fragile.

News & Views

Canadian inflation just missed the bar in September. Headline prices dropped 0.4% m/m (-0.3% expected), bringing Y/Y reading down from 2% to 1.6%. That’s below the 1.8% estimate and the lowest since February 2021, after which the post-pandemic inflation surge began to materialize. Core readings (ex gasoline, median, trimmed) matched the August readings of 2.2-2.4%, compared with expectations for a slight acceleration in one of the three key metrics. Statistics Canada attributed the sharp drop of the headline Y/Y figure to energy (gasoline, -7.1% m/m following a 2.6% decline in August). Shelter price rises decelerated from 0.4% to 0.1% m/m. Clothing & footwear (+0.9% m/m) and health & personal care (+0.5%) printed some of the largest monthly gains. In sectoral terms, goods prices dropped for a second month straight by 0.6%, joined by a second consecutive easing in services prices (-0.2%). The CPI news comes after last week’s solid labour market report. In the end, it didn’t change much to market expectations (+/- 50%) of the Bank of Canada moving ahead in bigger steps, something governor Macklem didn’t rule out in September. Conviction grows today to more than 75% of a 50 bps move on October 23. The Canadian Loonie is headed for a tenth day of losses. USD/CAD pushes beyond 1.38(3).

The Polish government today launched a dual EUR-denominated bond sale. Its return to the FX bond market after several months of silence comes after the draft 2025 budget showed a jump in bond sales (net borrowing needs rise from PLN 215.7bn to PLN 366.9bn) in that presidential pre-election year. By tapping the international bond market, the Ministry of Finance seeks to further diversify funding. Poland successfully raised €1.75bn at MS+85 bps for its 7-yr (Oct 22, 2031) bond and €1.25bn for the 15-yr one (Oct 22, 2039) at MS+140. Books ran above €8.9bn for the former and €6.5bn for the latter. The sale follows the biggest EUR-denominated one (dual-tranche) ever in early January, tapping a combined €3.75bn. It raised $8bn from a sale in US dollars back in March.

Graphs

USD/CAD: Loonie stays in the defensive as markets see growing chance of 50 bps BoC rate cut

EUR/GBP nears YTD low as UK data provide ‘final input’ for November 07 BoE meeting.

US 10-y yields: decline in oil prices caps rebound in inflation expectations (yellow).

S&P 500 continues record race on combinaition of solid US growth and hoped for easing of financial conditions.

USD/JPY has been struggling to break past the resistance level at 149.55 despite repeated attempts over the past five trading sessions. The Japanese yen remains under pressure as the Federal Reserve signals a more moderate approach to interest rate cuts in its upcoming meetings, contrasting with the broader expectations of more aggressive rate reductions.

Further complicating the currency dynamics, recent fiscal stimulus announcements from China have yet to manage to bolster market confidence. Over the weekend, China's Finance Minister Lan Fo'an detailed plans for additional capital injections into state-owned banks and measures to support the property market. However, the lack of specific details regarding the spending amount and the precise nature of these measures left investors feeling uncertain about the effectiveness and scale of the proposed stimulus.

In Japan, dovish comments from Bank of Japan Governor Kazuo Ueda and opposition from new Prime Minister Shigeru Ishiba against further rate hikes have added to the pressure on the yen. Earlier this month, Ishiba expressed concerns that the current economic conditions do not warrant additional rate increases. However, other senior officials later softened this stance, indicating some internal conflict or reassessment within the Japanese government regarding monetary policy.

Technical analysis of USD/JPY

The USD/JPY pair is currently within a broad consolidation range around 149.22. The range has expanded to 149.96, and the market is now forming a downward movement towards 149.22, testing this level from above. If the market rebounds from here, we might see an ascent towards 150.22. A break above this level could signal a continuation towards 153.22. Conversely, a drop below 148.88 could lead to a further correction down to 147.47. The MACD indicator supports this view, with the signal line high above zero but starting to descend towards it, suggesting a potential shift in momentum.

On the hourly chart, USD/JPY has completed a growth wave to 149.96 and is undergoing a correction to 149.22. Following this corrective phase, the market is expected to resume its upward trajectory towards 150.22. This movement aligns with the Stochastic oscillator's current trajectory, which shows the signal line moving upwards from 50 towards 80, indicating potential for further gains in the short term.

Daily Pivots: (S1) 1.0886; (P) 1.0911; (R1) 1.0935; More....

Intraday bias in EUR/USD remains on the downside for the moment. Sustained trading below 38.2% retracement of 1.0447 to 1.1213 at 1.0920 will argue that fall from 1.1213 is the third leg of the corrective pattern from 1.1274. In this case, deeper decline would be seen to 61.8% retracement at 1.0740 next. On the upside, above 1.0953 minor resistance will turn intraday bias neutral again first.

In the bigger picture, rejection by 1.1274 resistance suggests that corrective pattern from 1.1274 (2023 high) is not completed yet. Instead, decline from 1.1213 might be another falling leg. Sustained break of 55 W EMA (now at 1.0877) will validate this case, and bring deeper fall towards 1.0447 support again.

Daily Pivots: (S1) 1.3035; (P) 1.3054; (R1) 1.3077; More...

Intraday bias in GBP/USD remains neutral and outlook is unchanged. Strong support should be seen from 1.3000 cluster support (38.2% retracement of 1.2298 to 1.3433 at 1.2999) to complete the correction from 1.3433. On the upside, break of 1.3174 minor resistance will turn bias back to the upside for retesting 1.3433. However, sustained break of 1.3000 will carry larger bearish implications and target 61.8% retracement at 1.2732.

In the bigger picture, as long as 1.3000 support holds, the up trend from 1.0351 (2022 low) is still in progress. Next target is 61.8% projection of 1.0351 to 1.3141 from 1.2298 at 1.4022. However, considering mild bearish divergence condition in D MACD, decisive break of 1.3000 will argue that a medium term top is already in place, and bring deeper fall back to 1.2664 support next.

Daily Pivots: (S1) 0.8583; (P) 0.8612; (R1) 0.8655; More…

USD/CHF's rise from 0.8374 is still in progress. Intraday bias stays on the upside for 38.2% retracement of 0.9223 to 0.8374 at 0.8698. Sustained break there will argue that fall from 0.9223 has completed after defending 0.8332 low. Further rally should be seen to 61.8% retracement at 0.8899 next. On the downside, below 0.8557 minor support will turn intraday bias neutral again first.

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).

Daily Pivots: (S1) 149.20; (P) 149.59; (R1) 150.15; More...

Intraday bias in USD/JPY is turned neutral again with current retreat. Another rise is expected for now, and break of 149.97 will resume the rise from 139.57 to 61.8% retracement of 161.94 to 139.57 at 153.39 next. However, firm break of 146.48 will argue that such rebound has completed, and turn bias back to the downside for retesting 139.57 low.

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 now 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.

Headline CPI inflation eased in September to 1.6% year-on-year (y/y), below expectations for a 1.8% y/y print and less than the 2.0% y/y reading from August.

The deceleration was led by gasoline, which was down 10.7% y/y and 7.1% in September alone. Fears over weakening global economic growth have pulled down oil prices, which has fed through to cheaper prices at the pump.

Encouragingly, inflation in services has started to ease (4.0% y/y from 4.3% y/y in August). Shelter costs have been a big driver of services inflation, but with lower interest rates, mortgage interest cost inflation has decelerated (16.7% y/y from 18.8% y/y in August), while rent prices too are easing (8.2% y/y from 8.9% y/y in August). Another swing factor over the last few months has been the cost of air travel. With the end of the summer travel season, this category is starting to drop (-4.4% y/y).

The Bank of Canada's preferred "core" inflation measures held firm at 2.4% y/y in September. On a three-month annualized basis, the average moved from 2.3% in August to 2.1% in September, essentially at the BoC's target. This points to further easing in the core metrics in the months ahead.

Key Implications

With headline inflation now decisively below the Bank of Canada's (BoC's) target and core inflation looking likely to follow, inflation risks have eroded over the last few months. Below the surface, this trend looks to continue with housing costs finally starting to subside, with inflation excluding shelter running at a paltry 0.4% y/y. All in, the inflation outlook is looking a bit softer than we expected in our recently published forecast.

The BoC is scheduled to meet next week and debate over whether the central bank will go big with a 50 basis point cut is rising. Thus far, the bank has been predictable, with a steady streak of 25 bp cuts over the last three meetings. Given the persistent strength of the jobs market, the BoC would be validated in maintaining its steady rate cutting pace. On the other side, market participants are increasingly betting on a 50 bp cut, assuming that the BoC will focus on the downside risks now that headline inflation has moved closer to the bottom end of its target range. Either way, it will be a close call for the BoC next week.

Daily Pivots: (S1) 1.3768; (P) 1.3786; (R1) 1.3816; More...

Intraday bias in USD/CAD remains on the upside as rise from 1.3418 is in progress. Next target is a test on 1.3946/76 key resistance zone. On the downside, 1.3769 minor support will turn intraday bias neutral first. But further rally will be expected as long as 1.3646 resistance turned support holds, in case of retreat.

In the bigger picture, sideway consolidation pattern from 1.3976 (2022 high) might still extend further. While another decline cannot be ruled out, strong support should emerge above 1.2947 resistance turned support to bring rebound. Rise from 1.2005 (2021 low) is still in favor to resume at a later stage.

Canadian Dollar weakens broadly decline in early US session following weaker-than-expected inflation data. The drop in headline CPI, driven primarily by falling gasoline prices, was steeper than anticipated. However, core inflation measures, especially the closely-watched CPI common, remained near 2% level. This further solidifies expectations that BoC would accelerate its policy easing, with a 50bps rate cut likely at the October 23 meeting.

In contrast, British Pound found some support from a mixed set of labor market data. UK unemployment rate unexpectedly fell to 4%, while wage growth slowed to its lowest point in over two years. This data leaves the decision for a BoE rate cut in November finely balanced. However, the market's focus is now shifting to tomorrow's UK CPI release, which is expected to carry more weight in shaping BoE's course of action.

For the day, Yen has surprising emerged as the strongest performer. Many traders are still hesitant to push USD/JPY above 150 psychological level. Sterling follows, while the Swiss Franc also shows strength. Canadian Dollar is the weakest performer so far, followed by Australian and New Zealand Dollars. The continued uncertainty over China's fiscal policy, despite another upcoming press conference from key ministries, is keeping sentiment subdued for Chinese and Hong Kong stocks, weighing further on the Aussie and Kiwi.

Looking ahead, New Zealand’s CPI data, to be released in the next Asian session, could be pivotal in determining whether the RBNZ will follow through with a second 50bps rate cut in November. Technically, NZD/USD continues to hover in tight range above 61.8% retracement of 0.5849 to 0.6378 at 0.6051. Further decline is expected as long as 0.6172 resistance holds. Firm break of 0.6051 will extend the decline from 0.6378 to 0.5849 support next.

In Europe, at the time of writing, FTSE is down -0.42%. DAX is up 0.30%. CAC Is down -0.91%. UK 10-year yield is down -0.0571 at 4.185. Germany 10-year yield is down -0.049 at 2.232. Earlier in Asia, Nikkei rose 0.77%. Hong Kong HSI fell -3.67%. China Shanghai SSE fell -2.53%. Singapore Strait Times fell -0.01%. Japan 10-year JGB yield rose 0.0241 to 0.976.

Canadian CPI down -0.4% mom in Sep, annual rate slows to 1.6% yoy

Canada's CPI fell -0.4% mom in September, much worse than expectation of -0.2% mom. Over the 12-month period, CPI slowed from 2.0% yoy to 1.6% yoy, below expectation of 1.8% yoy. That was the lowest figure since February 2021. The main contributor to headline deceleration was lower year-over-year prices for gasoline in September (-10.7%). CPI ex-gasoline was unchanged at 2.2% yoy.

The core measures showed CPI median unchanged at 2.3% yoy. CPI trimmed unchanged at 2.4% yoy. CPI common rose from 1.9% yoy to 2.1% yoy. All matched expectations.

Germany's ZEW jumps to 13.1 in Oct, driven by optimism on inflation and ECB rate cuts

Germany's ZEW Economic Sentiment index surged significantly to from 3.6 to 13.1 in October, surpassing market expectations of 10.2. However, Current Situation Index dropped further into negative territory, falling from -84.5 to -86.9, slightly worse than forecast of -85.0.

For the Eurozone, ZEW Economic Sentiment rose from 9.3 to 20.1, beating expectations of 16.9. Current Situation Index, however, saw a small decline, edging lower by -0.4 points to -40.8.

ZEW President Achim Wambach highlighted the mixed signals, noting that despite a very weak current economic situation in Germany, optimism is growing. He cited "stable inflation" expectations and the prospect of "further interest rate cuts" by ECB as key contributors to this improved outlook.

Wambach added that positive signals from key export markets such as the US, China, and the Eurozone also played a role in improving the outlook for Germany’s economy. China's recent economic stimulus measures have contributed to this optimism too, boosting expectations for Germany's exports.

Eurozone industrial production rises 1.8% mom in Aug, driven by capital goods

Eurozone industrial production increased by 1.8% mom in August, meeting market expectations. This growth was supported primarily by a significant 3.7% rise in capital goods production. Durable consumer goods also saw a notable rise of 1.7%, while energy production edged up by 0.4%. However, intermediate goods saw a contraction of -0.3%, and non-durable consumer goods posted a modest gain of 0.2%.

Across the broader European Union, industrial production rose by 1.3% mom. Ireland led the gains with a robust 4.5% rise, followed by Germany and Lithuania, which both saw increases of 3.3%. Malta also posted solid growth of 2.7%. On the downside, Luxembourg experienced a sharp decline of -9.2%, while Croatia and Denmark saw drops of -4.6% and -4.5%, respectively.

UK payrolled employment falls -15k in Sep, unemployment rate dips to 4% in Aug

In September, UK payrolled employment decreased -15k or -0.0% mom, but increased by 113k or 0.4% yoy, to 30.3m. Median monthly pay rose 5.3% yoy, down from prior 6.0% yoy, but stays well above June's 3.8% yoy. Claimant count rose 27.9k to 1.797m, above expectation of 20.2k.

In the three months to August, unemployment rate fell from 4.1% to 4.0%, below expectation of 4.0%. Average regular earnings excluding bonuses rose 4.9% yoy, down from prior 5.1% yoy, below expectation of 5.0% yoy. Average regular earnings including bonuses rose 3.8% yoy, down from prior 4.0% yoy, matched expectations.

USD/CAD Mid-Day Outlook

Daily Pivots: (S1) 1.3768; (P) 1.3786; (R1) 1.3816; More...

Intraday bias in USD/CAD remains on the upside as rise from 1.3418 is in progress. Next target is a test on 1.3946/76 key resistance zone. On the downside, 1.3769 minor support will turn intraday bias neutral first. But further rally will be expected as long as 1.3646 resistance turned support holds, in case of retreat.

In the bigger picture, sideway consolidation pattern from 1.3976 (2022 high) might still extend further. While another decline cannot be ruled out, strong support should emerge above 1.2947 resistance turned support to bring rebound. Rise from 1.2005 (2021 low) is still in favor to resume at a later stage.

Canada's CPI fell -0.4% mom in September, much worse than expectation of -0.2% mom. Over the 12-month period, CPI slowed from 2.0% yoy to 1.6% yoy, below expectation of 1.8% yoy. That was the lowest figure since February 2021. The main contributor to headline deceleration was lower year-over-year prices for gasoline in September (-10.7%). CPI ex-gasoline was unchanged at 2.2% yoy.

The core measures showed CPI median unchanged at 2.3% yoy. CPI trimmed unchanged at 2.4% yoy. CPI common rose from 1.9% yoy to 2.1% yoy. All matched expectations.

Full Canada CPI release here.