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• EURUSD broke key support level 1.1085
• Likely to fall to support level 1.1000

EURUSD currency pair recently broke the key support level 1.1085 (which stopped the previous correction ii) coinciding with the 61.8% Fibonacci correction of the upward impulse from the start of September.

The breakout of the support level 1.1085 should accelerate the active wave b of the higher impulse wave iii from the middle of September.

Given the bearish divergence on the daily Stochastic and the strongly bullish US dollar sentiment seen today, EURUSD currency pair can be expected to fall further to the next support level 1.1000 (which stopped the previous correction 4).

The euro continues to lose ground and is trading at 1.1080 in the North American session, down 0.49% on the day. The euro is down for a third consecutive day and has declined 0.9% during that time.

Eurozone CPI lower than expected

Eurozone inflation eased to 1.8% y/y in September, down from 2.2% in August and below the market estimate of 1.9%. This was the lowest rate since April 2021 and below the European Central Bank’s inflation target of 2%. The drop in inflation was largely driven by the sharp decrease in energy prices. Monthly, inflation declined by 0.1%, down from the 0.1% gain in August.

Services inflation, which has been a headache for the ECB, dropped from 4.1% to 4.0%. The core rate, which is a better indicator of long-term inflation trends, fell to 2.7%, down from 2.8% in August and below the market estimate of 2.8%. Inflation declined across the bloc, with Germany, France, Italy and Spain all recording inflation rates below 2%.

The ECB has approached the new rate-cutting cycle with caution, as high services inflation and wage growth are reminders that the battle against inflation isn’t over. The markets expect the ECB to remain on the sidelines at the October meeting and re-evaluate a possible rate cut in December.

The Federal Reserve is expected to be aggressive in its rate-cutting cycle, which started last month with a large cut of 50 basis points. On Monday, Fed Chair Powell poured cold water on expectations for another jumbo rate cut, saying that the economy was in “solid shape” and that the Fed was not in any rush to cut rates quickly. Powell’s remarks have lowered market odds of a 50-bps cut to 40%, compared to 58% one week ago, according to CME’s FedWatch.

EUR/USD Technical

EUR/USD pushed below support at 1.1096 and tested support at 1.1058 earlier. The next support level is 1.1001

1.1153 and 1.1191 are the next resistance lines

The ISM Manufacturing Index was unchanged in September, holding at 47.2 and a smidge below expectations for a 47.5 print. As in July and August, only five of 18 industries reported growth for the month, but as only one of the six largest industries grew, a greater share of manufacturing GDP contracted (77% vs. 65% in August).

Demand conditions remain soft. Although, the new orders index improve marginally for the month (46.1 from 44.6) it, along with new export orders, continues to signal a contraction. Backlogs or Orders also shrank at roughly the same pace as the month prior (44.1 vs 43.6).

One silver lining is that the production index rose 5 percentage points to 49.8 – close to the breakeven level. However, employment conditions deteriorated further in September, signaling a faster clip of contraction.

Last month's uptick in prices has faded, with the index falling back into contraction (48.3) for the first time since December 2023.

Key Implications

Not much change from last month in the manufacturing sector. New demand continues to shrink, and payrolls are coming under pressure again.

While the report paints a challenging picture for the sector, there are some reasons for optimism. The prices paid index signaled falling raw materials prices for the first time since late last year. Combined with the Fed embarking on its rate cutting cycle, there are some glimmers of optimism for a sector that has struggled under the weight of higher interest rates.

Markets

A series of weaker-than-expected national inflation figures culminated in the first sub 2% European-wide reading for September today. The 1.8% y/y outcome was the lowest since April 2021 with the first negative m/m (-0.1%) print since January this year. The limited details available yet do show it’s mainly an energy-driven event, with favourable base effects pushing prices a whopping 1.6% down in m/m terms (-6% y/y). There’s ongoing stickiness in services inflation, which barely eased from 4.1% in August to 4% last month. Core inflation (ex. food and energy) decelerated as slightly as consensus expected: from 2.8% to 2.7%. ECB president Lagarde fired up the debate about an October cut yesterday before the European Parliament. Markets are all but certain the ECB will pull the trigger for such a back-to-back move. They even added to their bets today (+/- 93% discounted) with the likes of Finish governing council member Rehn supporting the case. He said it’s too early to declare a soft landing and said there are more grounds for cutting rates at the October meeting. We think the implications of today’s data for the October meeting are less straightforward as money market pricing currently suggest. But it’s duly noted. The European yield curve move is interesting though with significant long end outperformance (-10 bps in Germany’s 30-yr, -4.4 bps in the 2-yr). With an October (and December) cut basically priced in and a terminal rate of a mere 1.75% (vs. 2-2.5% neutral), downward market pressure on yields now seems to shift towards longer maturities. The 10-yr yield snapped below the August low of 2.078%, triggering a technical acceleration that’s currently running to 2.03%. US Treasuries underperform a tad, with yields declining between -1.8 (2-yr) to -6 bps (30-yr) ahead of the first key data of this week. Dollar-favourable interest differentials push EUR/USD below the 1.11 handle. DXY advances towards 101.2.

US job openings picked up from 7711k to 8040k in August, defying expectations for a decline to 7693k. The manufacturing ISM came close to expectations on a headline basis (47.2 vs a marginal uptick to 47.5 expected). The underlying components were unconvincing with the order book only shrinking at a slower pace (46.1 from 44.6). Employment is declining at an accelerated tempo though (43.9), nearing the post pandemic low of July. Prices paid dropped in contraction territory for the first time this year. US yields extends their initial declines in a first response that’s concentrated at the ISM rather than the JOLTS. The dollar pares some of the earlier gains.

News & Views

The Riksbank published the minutes of the September 25 policy meeting when it decided to further reduce the policy rate by 25 bps to 3.25%. The RB flagged the possibility of a 50 bps step at one of the two remain meetings. It also sees room for one or two additional cuts next year. Deputy governor Perr Jansson raised the issue how the RB should react to headline inflation falling substantially below 2.0% (1.2%). The RB takes a symmetrical approach on over- and undershoots. Even so, developments in the real economy also play a major role in its assessment why it is now appropriate to opt for a slightly greater easing in monetary policy. Now that upside risks to inflation are clearly smaller than before, it is a good time to try to stimulate the real economy. It is important in itself that economic activity strengthens, but it is also a condition for inflation to stabilize near target. Most other governors with nuances mostly joined this analysis. Governor Thedeen ‘summarized’ that cuts in larger steps, given the favourable inflation outlook, this is now part of the RB gradual monetary policy strategy. The krone didn’t show much of a reaction to the soft RB assessment which is probably to a large extent discounted. EUR/SEK traders near 11.85.

The EU announced that from October 7 2024, it will launch its Repurchase Agreement (Repo) facility. According to the statement, the facility marks the implementation of the final measure to support the EU bond market that the EU committed to in its communication from December 2022. It marks a natural next step in the development of the EU as an issuer. The introduction of the facility aims to strengthen the role of EU-bonds as liquid and safe collateral, following the exponential growth in the secondary market. Under the facility, the EU will offer its Primary Dealers the possibility to source specific EU-Bonds on a temporary basis. By acting as a backstop to the Primary Dealers’ secondary market activity, the facility will allow investors to be more confident in the terms on which they can trade EU-Bonds in the secondary market, improving the overall efficiency and fluidity of the EU-bonds market, the statement says.

Graphs

EUR/USD: euro slides as money markets up bets for an October cut following Rehn’s endorsement and sub 2%-inflation print

German 10-yr yields snaps below August low. Downward market pressure shifts to longer maturities as front-end gets very crowded

EUR/SEK: SEK shrugs at Riksbank officials openly flirting with 50 bps cuts in September meeting minutes, suggesting it’s priced in

Brent oil ($/b) looks for a short-term equilibrium between $70-75 as China boost fades

US ISM Manufacturing PMI was unchanged at 47.2 in September, falling short of expectations of 47.8. This marks the sixth consecutive month of contraction in the manufacturing sector, which has now shrunk in 22 of the past 23 months.

Among the key components, new orders showed a modest improvement, rising from 44.6 to 46.1, while production saw a notable jump from 44.8 to 49.8, approaching the neutral 50 level.

However, employment declined sharply, dropping from 46.0 to 43.9, with the past three months reflecting some of the weakest employment figures since July 2020. Price pressures also eased significantly, with the prices index falling from 54.0 to 48.3.

Historically, the relationship between the ISM Manufacturing PMI and overall economic activity suggests that the September reading of 47.2 corresponds to a modest 1.3% annualized increase in real GDP.

Full US ISM manufacturing release here.

Summary

• The European Central Bank (ECB) initially adopted a cautious and gradual approach to rate cuts during the early stages of its monetary easing cycle. However, given some deterioration in sentiment surveys, evidence of subsiding inflationary pressures, and recent benign comments from ECB President Lagarde, we now expect a more regular pace of rate cuts from the ECB over the next several months.
• We look for the ECB to cut rates by 25 bps at its October 2024, December 2024, January 2025 and March 2025 announcements. As ECB policy rates move closer to a neutral level, we see the central bank paring back the pace of its rate cuts to a quarterly frequency. We see the ECB cutting interest rates by 25 bps at the June 2025 and September 2025 meetings, bringing its policy rate to a low of 2.00% by late next year.
• The Riksbank is also set to ease monetary policy at a faster pace, after it cut its policy rate last week by 25 bps to 3.25%, lowered its growth and inflation forecasts, and offered dovish policy guidance in its accompanying statement. Soft data and dovish guidance means we now see a 50 bps rate cut in November, and with regular 25 bps rate cuts at each meeting thereafter, we expect the Riksbank's policy rate to reach a low of 2.00% by the end of Q1-2025.
• The Swiss National Bank (SNB) lowered its policy rate by 25 bps to 1.00% last week, while also noting a significant reduction of inflationary pressures and a recent strengthening of the Swiss franc. Given the potential for further franc gains against a backdrop of European Central Bank (and Federal Reserve) easing, and given the subdued outlook for Swiss inflation, we now expect the SNB to ease monetary policy further, and forecast a 25 bps rate cut in the SNB's policy rate, to 0.75%, at its December monetary policy announcement.

European Central Bank To Step Up The Pace Of Rate Cuts

During the early stages of its rate cut cycle, the European Central Bank (ECB) has adopted a cautious and gradual approach toward monetary easing. Given lingering concerns about elevated wage growth and persistent services inflation, the ECB lowered its policy rate 25 bps in June, paused in July, and delivered another 25 bps rate cut in September, bringing its Deposit Rate to 3.50%. However, with recent data pointing toward weaker growth and softening inflation, we believe the ECB is likely to pursue a more regular pace of rate cuts over the next several months. We expect the European Central Bank to lower its policy rate by 25 bps at every meeting through March of next year, before reverting to a quarterly pace of rate cuts thereafter. That would lower the ECB's Deposit rate to a terminal rate of 2.00% by September 2025.

After enjoying a moderate rebound in economic growth during the first half of this year, Eurozone expansion appears to be losing momentum during the second half of 2024. The ECB has increasingly indicated at recent announcements that risks to economic growth are tilted to the downside. That message was reinforced with the release of the Eurozone PMI surveys for September. The manufacturing PMI fell to 45.0, the lowest level since December of last year, with German manufacturing remaining especially weak. Meanwhile, the services PMI dropped much more than expected to 50.5, the lowest level since February, in part as the French services PMI reversed an Olympics-related boost seen in August. Combining both the manufacturing and services sector, the composite (or economy-wide) PMI dropped to 48.9 in September, which was also the first reading in contraction territory since February this year. In addition to the disappointing headline figures, the details of the PMI reports were also discouraging. The manufacturing PMI showed a softening in new orders and order backlogs, while the services PMI showed a softening in incoming new business.

The “hard” activity data, although a bit more dated, are similarly weak with growth in retail sales volumes (-0.1% year-over-year) and industrial output (-2.2% year-over-year) both in negative territory in July. Finally, in terms of fundamental growth drivers, while gains in real household disposable income should support modest gains in consumer spending over time, falling net entrepreneurial income (a proxy for corporate profits) and declining capacity utilization suggest a retrenchment in investment spending. Against this backdrop we recently revised our Eurozone GDP growth forecasts lower to 0.7% for 2024 and 1.2% for 2025, though the risks are arguably still tilted to the downside.

In addition to the downside risks to growth, there are more encouraging signs that Eurozone inflation pressures are ebbing. The Eurozone September PMI surveys were also notable for a reported softening in input costs and output prices. That comes on the back of slower wage growth reported for Q2-2024, as the ECB's Indicator of Negotiated Wages slowed to 3.6% year-over-year and Compensation per Employee slowed to 4.3%. Importantly, those signals of reduced price pressure were also confirmed by the Eurozone September CPI. Headline inflation slowed to 1.8% year-over-year, below the ECB's inflation target for the first time since June 2021, while core inflation also eased to 2.7%, as did services inflation, to 4.0%.

The worsening growth outlook along with ebbing inflation pressures will, we think, provide ECB policymakers with enough comfort to once again lower interest rates at their October monetary policy announcement. Indeed, some recent dovish comments from ECB President Lagarde to the European Parliament appear consistent with that view. Lagarde said that disinflation has accelerated in the last two months, that the “latest developments strengthen our confidence that inflation will return to target in a timely manner,” and that we “will take that into account in our next monetary policy meeting in October.” In addition, sentiment surveys suggest the news on economic growth is likely to get worse before it gets better, while over time we would also expect wage growth and underlying inflation trends to continue a gradual deceleration. Against this backdrop, we expect a steady series of ECB rate cuts in the months ahead. We look for the ECB to cut rates by 25 bps at its October 2024, December 2024, January 2025 and March 2025 announcements. As ECB policy rates move closer to a neutral level, and as growth in economic activity perhaps starts to stabilize, we see the central bank paring back the pace of its rate cuts to a quarterly frequency. We see the ECB cutting interest rates by 25 bps at the June 2025 and September 2025 meetings, bringing its policy rate to a low of 2.00% by late next year.

Sweden's Riksbank To Also Get A Move On

The European Central Bank is not the only central bank for which we are now forecasting a faster pace of easing; Sweden’s Riksbank also makes the list. Underpinning our outlook for more timely Riksbank easing, last week the central bank cut its policy rate by 25 bps—for the 3rd time this year—to 3.25%, and communicated an overall dovish stance. In explaining the case for the rate cut, policymakers pointed to a fall in inflation pressures over the year. Officials also noted how they have shifted their concern from primarily price pressures, to economic activity, stating that the economy has been recovering at a slower pace than previously expected. The announcement also included more dovish updated forward guidance, with policymakers stating that “the policy rate can be cut at a faster pace than the Riksbank has previously communicated”. More specifically, if the outlook for prices and GDP growth remains unchanged, policy rate reductions can also be delivered at the November and December meetings, and most significantly, they signaled that there could be a 50 bps rate cut at a coming meeting. The Riksbank also added that one or two additional cuts could come in the first half of next year. Overall, this announcement was consistent with the general trend of increasingly dovish forward guidance from the Riksbank that we have seen over the course of this year.

When looking at the data from recent months, it is not surprising, in our view, that the Riksbank has continuously inched in a more dovish direction. CPIF inflation has continued to slow, coming in at just 1.2% year-over-year in August—below the central bank’s 2% target for the measure. Underlying price pressures measured via the CPIF excluding energy have also largely abated, having slowed from an above-4% year-over-year pace at the beginning of 2024 to 2.2% year-over-year in August. Nominal wage growth in Sweden—an area of concern for many other global central bankers amidst their respective battles against inflation—has also slowed consistently since the early part of this year. Meanwhile, GDP growth has also been subdued, with the Swedish economy having contracted on a quarter-over-quarter basis for four out of the past seven quarters, while the unemployment rate has also trended upward over the past year. This softer picture for price pressures and economic growth was also reflected in the Riksbank’s updated economic projections published last week. The central bank downwardly revised its CPI and CPIF inflation forecasts for this year and next, and downwardly revised its GDP forecast for 2024, to 0.8% from 1.1% previously.

Looking ahead, we believe that the trend will remain for subdued inflation and economic growth data in the near term. In our view, an outlook for softer inflationary pressures coupled with more subdued economic growth justify a faster pace of easing from the Riksbank. In addition to domestic economic data, we believe actions by other major central banks, specifically the ECB and Federal Reserve, will help Riksbank policymakers feel comfortable adopting a more accelerated easing approach. The Fed started its easing cycle with a bang in September with a 50 bps rate cut, and we now also expect the ECB to pick up the pace of its easing to a 25-bps-per-meeting rate cut pace over the next several meetings. Taking together the considerations of near-term subdued price pressures and economic growth, downgrades to the Riksbank’s inflation forecasts and dovish forward guidance, along with other major central banks likely adopting a more hastened pace of rate cuts, we have adjusted our outlook for Riksbank monetary policy to include a faster pace of easing than previously expected. Near-term softness in the data and central bank signals lends itself, in our view, to a 50 bps rate cut at the Riksbank’s November meeting. After that, we see the central bank delivering 25 bps rate cuts at each meeting through the end of Q1-2025, to reach a policy rate of 2.00%. As the fairly aggressive pace of easing we expect to see through year-end 2024, and further easing in early 2025, helps the central bank to approach a neutral policy rate and helps Sweden’s economic recovery to gain steam, we see the Riksbank pausing its easing cycle once the policy rate reaches 2.00% in the early part of next year.

Swiss National Bank Likely To Cut Rates Again In December

The Swiss National Bank (SNB) was another central bank to offer a dovish perspective at its monetary policy announcement last week. The SNB lowered its policy rate by 25 bps to 1.00%, matching widespread expectations. The SNB said inflationary pressures in Switzerland had decreased significantly compared to the previous quarter, reflecting among other things the appreciation of the Swiss franc over past three months. Indeed, even incorporating the latest rate cut, the central bank significantly lowered its medium-term inflation forecast, reflecting the strength of the franc, lower oil prices and announced electricity price cuts, as well as weaker second-round price effect given lower headline inflation. The central bank's updated forecast is within the SNB's price stability range over its entire forecast horizon, envisaging annual inflation of 1.2% for 2024, 0.6% for 2025 and 0.7% for 2026.

Considering the benign inflation outlook, the SNB said further cuts in the policy rate may become necessary in the coming quarters to ensure price stability over the medium term. Given our outlook for more accelerated European Central Bank interest rate cuts, we see increased potential for further appreciation in the Swiss franc—a currency that is already at historically elevated levels as measured on a real effective exchange rate basis. Accordingly, given the likelihood of further franc gains against a backdrop of European Central Bank (and Federal Reserve) easing, and given the subdued outlook for Swiss inflation, we now expect the SNB to ease monetary policy further, and forecast a 25 bps rate cut in the SNB's policy rate, to 0.75%, at its December monetary policy announcement.

• Oil prices fell by 2.4% in early European trade, possibly due to demand concerns and rebalancing.
• Concerns about China’s economic recovery and the possibility of increased Libyan oil production are also weighing on oil prices.
• From a technical perspective, the H4 chart showing RSI divergence. Higher prices ahead?

Oil prices fell off sharply in early European trade, declining around 2.4% with Brent trading at 70.600 at the time of writing. There does not appear to be one reason in particular for the selloff, however demand concerns remain in play with Japan and China reporting underwhelming factory data.

When you factor in that today is the first day of Q4, could rebalancing be at play as well? This is along the line of my thinking given the lack of any singular reason for the drop in price.

The Reuters September poll on Oil prices downgraded for a fifth consecutive month. This is in line with what we have been seeing of late with oil prices as there seems to be concern around demand and potentially excess supply in Q4 and 2024 and Q1 2025.

Looking more closely at the Reuters Poll of 41 analysts and economists conducted over the past two weeks, the projection for Brent Crude was revised down to 81.52 a barrel from a previous 82.86. (period average forecasts).

Source: LSEG, Reuters

This follows downgrades from both the IEA and OPEC + ahead of tomorrow’s meeting by the oil cartel. Markets still seem concerned that OPEC + may go ahead with an increase in production from December with many analysts believing the same. However, given the rhetoric from OPEC + members and Saudi Arabia and Russia in particular I think this may be a misguided notion. I foresee further delays in the production increase as long as oil prices remain in the lower $70-75 a barrel range.

China a Concern as Stimulus Needs Time to Take Effect

Meanwhile concerns were raised once more around China following the release of Manufacturing PMI data yesterday. This comes a week after the stimulus measures which have had a profound impact on the Chinese stock market as well as those of emerging markets and commodities.

However, on the Oil front there remains concerns that the stimulus will not be enough for China to reach its 2024 GDP target and may be too late to see a stark increase in oil demand. This could be another factor weighing on Oil in the European session.

Libya Oil Production and Oil Inventories

An agreement in Libya has also gained traction following yesterday’s announcement by Libya’s eastern based parliament that a new Central Bank Governor would be approved for nomination. This could see the return of Libyan Oil production and exports which could add around 1-1.5 million barrels back to the market at full capacity.

US PMI data this week could also have a minor impact on oil prices before inventory data will once again be key. A poll was conducted by Reuters for US Crude stockpiles which estimated a drop of around 2.1 million barrels for the week ended September 27, 2024. The API will release their data at 20h30 GMT on Tuesday.

Technical Analysis

From a technical perspective, oil has printed a lower high and looks poised for a lower low. However the whipsaw price action in European trade does not instill a lot of confidence in bears at this stage, so close to the psychological 70 a barrel mark.

The daily candle close today could go some way to providing a clearer picture in regard to Oils technical outlook in the near term.

Given the messy picture i have dropped down to a four-hour chart (H4) where we are seeing an aggressive bounce following the selloff this morning. This has now led to a RSI divergence play coming into focus as you can see on the chart below. RSI made a higher low while price made a lower low which could lead to a deeper recovery in oil prices.

Immediate resistance rests at 72.39 before the 100-day MA at 72.95. A break above this could open the door for an aggressive run toward the 200-day MA and the 75.00 psychological level,

Brent Crude Oil Daily Chart, October 1, 2024

Source: TradingView (click to enlarge)

Support

• 70.50
• 70.18
• 69.50 (key area of confluence)

Resistance

• 72.39
• 72.95
• 75.00

Daily Pivots: (S1) 142.21; (P) 143.07; (R1) 144.48; More...

Intraday bias in USD/JPY remains neutral for the moment. On the downside, below 141.63 will target 139.57 low. But strong support could be seen again from 139.26 fibonacci level to bring rebound. On the upside, above 146.48 will resume the rebound from 139.57 to 38.2% retracement of 161.94 to 139.57 at 148.11. However, firm break of 139.26 will carry larger bearish implications.

In the bigger picture, fall from 161.94 medium term top is seen as correcting whole up trend from 102.58 (2021 low). Strong support could be seen from 38.2% retracement of 102.58 to 161.94 at 139.26 to contain downside, at least on first attempt. But in any case, risk will stay on the downside as long as 149.35 resistance holds. Sustained break of 139.26 would open up deeper medium term decline to 61.8% retracement at 125.25.

Daily Pivots: (S1) 0.8415; (P) 0.8445; (R1) 0.8486; More…

Intraday bias in USD/CHF remains neutral as range trading continues. On the downside, break of 0.8374 will resume the fall from 0.9223 to retest 0.8332 low. Decisive break there will indicate larger down trend resumption. Nevertheless, firm break of 0.8548 will turn bias back to the upside for stronger rebound to 0.8747 resistance instead.

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).