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BoJ Board Member Asahi Noguchi, a known dovish, emphasized in a speech today that Japanese society still needs "considerable time" to go before fully adopting a mindset aligned with the central bank's 2% inflation target. Noguchi highlighted the importance of BoJ maintaining its accommodative monetary policy until this shift in mindset occurs.

With inflation surpassing the 2% target for over two years and nominal wages rising, Japanese firms are increasingly willing to pass on higher costs through price hikes. However, Noguchi highlighted that real consumption remains weak, as households continue to expect low price growth—a mindset shaped by Japan's prolonged deflationary period.

Japan’s services sector continued its expansion in September, although growth eased slightly. The final Services PMI was recorded at 53.1, down from 53.7 in August, marking a sustained rise in business activity for all but one of the past 25 months. Composite PMI, which includes both services and manufacturing, stood at 52.0, down from 52.9 in August, remaining above the 50-neutral threshold for the third consecutive month.

Usamah Bhatti, economist at S&P Global Market Intelligence, highlighted that the service sector’s strong performance carried into the end of Q3. The average reading for Q3 (53.5) was largely in line with Q1’s average of 53.4, signaling "sustained growth" in the service economy.

However, the manufacturing sector continued to struggle, weighing on overall private sector performance. While service sector remains a pillar of growth, aggregate new business growth slowed in September, and backlogs of work fell for the fifth consecutive month. The outlook for the wider private sector will depend on how the service economy responds to downside risks, including a stagnating economy.

Full Japan PMI service final release here.

ECB Executive Board member Isabel Schnabel, widely known for her hawkish stance, has shifted her tone, adding to growing signals from other officials that the central bank is preparing for a 25bps rate cut this month.

Schnabel acknowledged in a speech overnight the "headwinds to growth," pointing to weakening labor demand and progress in disinflation. She noted that a "sustainable fall of inflation back to our 2% target in a timely manner is becoming more likely," despite persistent inflation in services and strong wage growth.

Schnabel also highlighted that while the peak impact of monetary tightening is likely behind us and real incomes are rising, the recovery remains fragile. “Growth remains shallow,” she said, with the recovery repeatedly falling short of expectations over the past 18 months.

In separate remarks, Governing Council member Mario Centeno, a known dove, warned of the "new risk" of inflation undershooting the ECB’s target.

Centeno cautioned that this could "stifle economic growth," leading to fewer jobs and reduced investment. A sluggish economy, he said, could create a "vicious cycle," further driving inflation below the target and compounding economic challenges.

In the remarks overnight, Richmond Fed President Thomas Barkin expressed that he's still "more concern about inflation" than the labor market. He added due to solid demand and renewed labor market tightness, there are challenges in completing the "last mile" of of the inflation fight.

While Barkin dismissed the notion of a "big resurgence" in inflation, he acknowledged the "very real risk" of inflation "getting stuck".

He stated that he would be optimistic if, by Q1, inflation continued to show signs of stabilization, which would allow Fed to consider moving back to a "neutral" policy stance.

However, Barkin made it clear that "normalization comes when you're convinced that inflation hits 2%." He remains "open-minded" on how quickly rates could fall, leaving room for flexibility depending on future inflation data.

• The Japanese Yen faces uncertainty due to a new PM, snap elections, and shifting market sentiment.
• Despite a strong US Dollar and GBP, the Yen saw a temporary boost from safe-haven flows amid geopolitical risks.
• USD/JPY is range-bound, with a potential breakout above 146.37 hinting at a run toward 150.00.

The Japanese Yen is going through a bumpy week with a new PM incoming, snap elections and modest safe haven gains. The list of issues facing the currency continues to expand as markets assess the monetary policy path of the incoming PM.

Comments thus far do not suggest any significant changes with incoming PM Ishiba today stating he expects monetary easing trend to stay in place. The PM also mentioned that he expects to work closely with the BoJ to overcome deflation and improve the economy.

Governor of the BoJ Kazuo Ueda who was brought in largely to facilitate a normalization in policy looks likely to continue his work without too much outside influence. At present markets are still unsure as to when the BoJ may raise rates again and this is in part responsible for recent Yen weakness.

The Yen did catch a bid on Tuesday as heightened geopolitical risks saw a flood into haven assets as the risk-off mood began to take hold. However, today we are seeing a strong US Dollar and GBP in particular which has pushed yen pairs higher on the day.

Economic Data Ahead

On the economic data front there is nothing major expected this week from Japan, EU or the UK. The biggest data release is the NFP and jobs report on Friday out of the US which could affect USD/JPY but could also have a knock on effect on overall market sentiment.

Beyond that it is key to keep an eye on developments in the Middle East. Any changes could see a flood into safe havens once more which could work in the Yens favor, even if it only proves to be temporary.

Technical Analysis

USD/JPY

The USD/JPY pair has been hovering in a range of about 500 pips for the last 8 trading days. The return of USD strength has helped the pair stave off a retest of the psychological 140.00 handle.

At the time of writing USDJPY is eyeing a candle close above a key resistance area which could open up a run toward the 150.00 psychological mark. A rejection at the 146.37 handle could however lead to a push toward the most recent lows.

On the daily timeframe price action is messy as well with a higher high followed by a lower low and change in structure. A daily candle close above the 145.00 is enough to see another change in structure which would suggest that favor currently rests with the bulls.

Support

• 145.00
• 143.65
• 141.67

Resistance

• 146.37
• 147.20
• 150.00

USD/JPY Daily Chart, October 2, 2024

Source: TradingView.com (click to enlarge)

GBP/JPY

GBP/JPY is at a key confluence area which could help define the upcoming price action for the pair. Having been stuck in a range since Monday it was nice to see a bit of GBP strength return and push the GBP/JPY to closer to the 200.00 psychological mark.

Immediate resistance rests at 195.859 which is provided by the 100-day MA. A break beyond this level opens up a potential run toward 200.00.

GBP/JPY Daily Chart, October 2, 2024

Source: TradingView.com (click to enlarge)

Support

• 192.77
• 190.00
• 185.00

Resistance

• 195.86
• 198.00
• 200.00

EUR/JPY

The EUR/JPY is almost identical in terms of price action to the GBP/JPY. The increasing rate cut bets where the ECB are concerned has failed to dampen the spirits of EUR/JPY bulls.

Technically speaking, following the significant selloff in EUR/JPY which began on July 11, EUR/JPY has yet to retrace even 50% of that move.

This means room for a deeper recovery remains in EUR/JPY and given the lack of data expected out this week we could very well get a continuation of the recent bullish price action.

Immediate resistance rests at 161.85 with a break higher facing a key confluence zone around the 163.50-164.00 handles.

EUR/JPY Daily Chart, October 2, 2024

Source: TradingView.com (click to enlarge)

Support

• 160.00
• 158.00
• 156.72

Resistance

• 161.85
• 163.50
• 165.00

• WTI reversed from pivotal resistance level 71.30
• Likely to fall to support level 68.00

WTI crude oil recently reversed down from the pivotal resistance level 71.30 (former double bottom from August) intersecting with the upper daily Bollinger Band and the resistance trendline of the daily down channel from July.

The downward reversal from the resistance level 71.30 is likely to form the daily Japanese candlesticks reversal pattern Shooting Star.

Given the clear daily downtrend, WTI crude oil can be expected to fall further to the next support level 68.00.

The Chinese stock market is closed for a national holiday, but futures and ETFs are trading and are on another strong run today. The Hang Seng Index is up 9.6% from its close on 30 September (there was no trading on Tuesday), the second strongest rise since the surge on 16 March 2022. Then it rebounded after a setback, but now it is an acceleration of the rally, taking the index cumulatively up 34% from the 11 September lows.

Wednesday’s rally is the result of a short squeeze, as it comes at the close of the main Chinese markets and is not fuelled by optimism on global exchanges. On the contrary, global markets have moved away from risk in recent days, and the S&P 500 has been trading near the top for almost a week.

On a daily timeframe, RSI is approaching 91, the highest reading since 1987. The market was almost as hot in recent years in January 2018 and April 2015. In both cases, it fell for almost a year.

While this is a different case, and the multi-year sell-off in Chinese equities should be considered, the current overbought situation on daily timeframes could still be a good reason to shake out positions locally when the major Chinese markets open on 8 October.

Moreover, at current levels, the Hang Seng is approaching the 22500-resistance area, which has been in place since March 2022, and this will strengthen the resistance to growth in the short term.

However, one cannot overlook the more global picture emerging on the weekly timeframe. This week, the price has broken above the 200-week moving average after retreating from the 50-week average in early September.

This could potentially attract more capital and provide fuel for further upside. The RSI is also moving into overbought territory (above 70), but past examples suggest further upside, and a sharp drop to levels below 70 should be seen as a correction signal.

In the long term, a successful break of 22500 would open the door to 25000 and on to 30000, where we have seen major portfolio corrections in the past.

• The Euro’s appeal has diminished due to expectations of ECB rate cuts, fueled by softer economic data and dovish policymaker comments.
• The US Dollar is gaining strength amid Middle East tensions, potentially attracting safe-haven flows.
• EUR/USD has formed a double top pattern at 1.1200 and is facing immediate support at 1.1000.

The Euro has lost some of its appeal over the past two weeks as softer data has increased the likelihood of an October rate cut. ECB Policymakers have struck a dovish tone as well with German Economy Minister Robert Habeck stating rate cuts are coming too slowly for his liking.

This should come as no surprise to anyone who has been following developments around the German economy over the last 12 months. Europe’s most industrialized economy which is usually a driver of growth is struggling.

Yesterday’s inflation data from the EU has ramped up rate cut expectations which means Minister Habeck may soon get his wish. This was followed by a UBS warning today that the ECB may have to drop rates to the 1-1.5% range if growth does not improve in the coming quarters. As many analysts have suggested, the ECB may pivot its focus to growth now that inflation appears out of the way.

Markets are now pricing in around six consecutive rate cuts from the ECB starting in October. A 25 bps cut in October is now priced at around 93% which is a stark increase from where we were a month ago.

Source: LSEG

This could not come at a worse time for the Euro as the DXY has begun a recovery and may also benefit from some safe haven flows. The increasing tension in the Middle East could reignite some safe haven appeal in the US Dollar and thus weigh further on EUR/USD.

There is of course still some data ahead this week with the NFP report on Friday likely to lead to some volatility as well. Markets have shifted their focus in the US to the Labor market and thus the importance of Friday’s release. If the US unemployment rate remains steady I could see EUR/USD revisiting the 1.1000 handle and possibly lower.

Technical Analysis

EUR/USD has been on a steady move lower since forming a double top pattern at the key 1.1200 handle. The move has been swift and this leaves the door open for a potential retracement before the next leg to the downside.

Immediate support is at the 1.1000 psychological level with a break below opening up a retest of 1.0950. The 100-day MA rests at 1.09260 and would be the next hurdle to pay attention to.

Conversely, a bullish move from here first needs to gain acceptance back above the 1.1100 handle before the recent highs and double at 1.1200 become an area of focus.

The NFP report on Friday could be a catalyst for a significant move in either direction while further escalation in the Middle East could increase the US Dollars’ haven appeal and push EUR/USD below the 1.1000 handle.

EUR/USD Daily Chart, October 2, 2024

Source: TradingView.com

Support

• 1.1000
• 1.0950
• 1.0900

Resistance

• 1.1100
• 1.1200
• 1.1300

Markets

Oil markets show some of the biggest swings today. Brent rose as much as 3.5% before paring gains to 2.7% currently in response to Iran’s missile attack on Israel yesterday. Israeli PM Netanyahu vowed to retaliate and singled out Iran’s oil infrastructure as potential target. As the tit-for-tat strategy intensifies and geopolitical tensions flare up so do fears for a supply disruption. The black gold is currently trading north of $75, compared to $70 less than two days ago. Oil prices are boosting the likes of the Norwegian krone on currency markets. The NOK outperforms G10 peers with EUR/NOK easing to 11.66. First support in the pair approaches around 11.6. On the other side of the FX spectrum is the Japanese yen. JPY slips more than 1%, hurling USD/JPY back above 145. Japan’s freshly appointed prime minister Shigeru Ishiba sat down with Bank of Japan governor Ueda today. Ishiba said in the wake of that meeting that he doesn’t “think that the environment is ready for an additional rate hike”. Whatever little was still priced in for October is now all but gone. Not much happens in between both extremes. EUR/USD is holding a tight sideways 1.105/1.108 range. Some minor dollar strength kicked in after ADP jobs data. The September report topped estimates, coming in at 143k vs 125k expected, following the 103k in August. ADP said “job creation showed a widespread rebound after a five-month slowdown. Only one sector, information, lost jobs. Manufacturing added jobs for the first time since April.” Year-over-year pay gains eased slightly last month, to 4.7%. The small beat is enough to push DXY a tad higher towards 101.47. US Treasuries extended previous losses. The 2-yr yield even printed a small gap following the release of what is usually considered a second tier data point, suggesting perhaps the front end gets a bit crowded with Fed easing bets. Net daily changes vary between 4.5 (2-yr) and 8.2 bps (30-yr). German Bund yields follow closely with gains ranging from +3.5 (2-yr) to +7.5 bps (10-yr). Yesterday’s break of the 10-yr below the August low doesn’t get confirmed today and the failed test of the 2-yr below 2% now triggers some return action higher, even as Latvian governing council member of the ECB Kazaks today greenlighted market expectations for an October cut. The usually hawkish policymaker said “recent data clearly point in the direction of a cut”, adding that “the direction for rates also after October [December] is going to be down”. Both are fully discounted.

News & Views

The Hungarian government debt management agency, AKK, updated this year’s funding plan after the government on Monday reported government deficit and debt levels. AKK won’t change its finance plan because it has a sufficient cash buffer to deal with a higher government cash-flow deficit. That’s mainly because of higher than expected HUF institutional bond (96% of HUF 2481bn target) and T-bill issuance in the first three quarters of the years. By the end of September 2024, 77% of the 2024 annual funding plan (HUF 717bn vs HUF 9277bn target) was met. The average term-to-maturity of central government debt was 5.9y at the end of September, a slight decline from 6y at the end of June but still above the 5.5y benchmark target. Contrary to previous plans, and with particular regard to the 30% FX debt share benchmark, there will be neither an FX issuance in the Chinese market, nor a private placement in 2024, which could result in a lower FX debt ratio at the end of the year. The forint suffers in toughening risk climate with EUR/HUF heading to the key resistance and psychological level of 400.

The BoE’s Financial Policy Committee in its quarterly assessment concludes that risks to UK financial stability are broadly unchanged since the June report. Significant financial market and global vulnerabilities remain. The spike in volatility across global markets early August was short-lived. However, the extent of the moves, in response to relatively limited economic news, illustrates the potential for vulnerabilities. Due to a quick rebound thereafter, valuations of equities in particular are seen as having returned to stretched levels. Markets remain susceptible to a sharp correction, which could affect the cost and availability of credit. With respect to the domestic market, there have been further signs of easing in UK credit conditions, reflecting improvements to the macroeconomic outlook. UK household and corporate borrowers remain resilient to the higher interest rate environment although some highly leveraged firms remain under pressure. The UK banking system is seen as being in a strong position to support households and businesses, even if economic and financial conditions were substantially worse than expected.

Graphs

EUR/PLN nears recent highs as the zloty awaits NBP governor Glapinski’s presser following another status quo decision

German 2-yr yield’s test of the 2% barrier failed, triggering some return action higher in a broader core bond decline today

Brent ($/b) extends recent rally as rising geopolitical tensions poses risks for supply

EuroStoxx 50’s topside test failed, edging back below the 5k barrier