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USD/CAD's fall from 1.3946 resumed by breaching 1.3418, but recovered since then. Initial bias remains neutral this week first. Outlook will stay bearish as long as 1.3646 resistance holds. On the downside, break of 1.3418 will target 61.8% projection of 1.3946 to 1.3439 from 1.3646 at 1.3333.

In the bigger picture, corrective pattern from 1.3976 (2022 high) is extending with another falling leg. While deeper decline could be seen, 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.

In the longer term picture, price actions from 1.4689 (2016 high) are seen as a consolidation pattern, which might have completed at 1.2005. That is, up trend from 0.9506 (2007 low) is expected to resume at a later stage. This will remain the favored case as long as 1.2947 resistance turned support holds.

GBP/JPY retreated sharply after edging higher to 195.95 last week and initial bias is neutral this week first. On the upside, above 195.95 temporary top will extend the corrective rebound from 180.00 to 61.8% retracement of 208.09 to 180.00 at 197.35 next. However, firm break of 190.11 will argue that this correction might have completed, and turn bias back to the downside for 183.70 support next.

In the bigger picture, price actions from 208.09 are seen as a correction to whole rally from 123.94 (2020 low). The range of consolidation should be set between 38.2% retracement of 123.94 to 208.09 at 175.94 and 208.09. However, decisive break of 175.94 will argue that deeper correction is underway.

In the longer term picture, considering bearish divergence condition in W MACD, 208.09 is at least a medium term top. It's still early to conclude that the up trend from 122.75 (2016 low) has completed. But it's at least in a medium term corrective phase, with risk of correction to 55 M EMA (now at 170.18).

EUR/JPY reversed after rebounding further to 163.47 last week. The development argues that corrective pattern from 154.40 might have completed with three waves to 163.47 already. Initial bias is back on the downside this week for retesting 154.40/155.14 support zone. For now, risk will stay mildly on the downside as long as 163.47 resistance holds, in case of recovery.

In the bigger picture, price actions from 175.41 are seen as correction to rally from 114.42 (2020 low). The range of consolidation should have been set between 38.2% retracement of 114.42 to 175.41 at 152.11 and 175.41 high. However, decisive break of 152.11 would argue that deeper correction is underway.

In the long term picture, considering bearish divergence condition in W MACD, 175.41 is at least a medium term top. It's still early to conclude that up trend from 94.11 (2012 low) has completed. But a medium term corrective phase is in progress with risk of deeper fall back to 55 M EMA (now at 145.99).

EUR/GBP's fall from 0.8624extended lower last week but recovered after hitting 61.8% projection of 0.8624 to 0.8399 from 0.8463 at 0.8324. Initial bias stays neutral this week for consolidations, and outlook will stay bearish as long as 0.8399 support turned resistance holds. On the downside, below 0.8316 will resume the fall from 0.8624 to 100% projection at 0.8237 next.

In the bigger picture, down trend from 0.9267 (2022 high) is in progress. Next target is 0.8201 (2022 low), but strong support should be seen there to bring rebound. However, outlook will remain bearish as long as 0.8624 resistance holds even in case of strong rebound.

In the long term picture, price action from 0.9499 (2020 high) is seen as part of the long term range pattern from 0.9799 (2008 high). Range trading should continue between 0.8201 and 0.9499, until there is clear signal of imminent breakout.

EUR/AUD's fall from 1.7180 resumed by breaking through 1.6256 last week. Initial bias stays on the downside this week for 61.8% projection of 1.7180 to 1.6256 from 1.6629 at 1.6058. Strong support should be seen from 1.5996 to contain downside and bring rebound. On the upside, above 1.6319 resistance will turn intraday bias neutral first.

In the bigger picture, outlook is mixed up by the deeper than expected fall from 1.7180. Yet as long as 1.5996 support holds, up trend from 1.4281 (2022 low) is still in favor to resume at a later stage. However, decisive break of 1.5996 will argue that the medium term trend has reversed.

In the longer term picture, price actions from 1.9799 (2020 high) are seen as a long term decline at the same scale as the rise from 1.1602 (2012 low). Rebound from 1.4281 is seen as the second leg. As long as 55 M EMA (now at 1.5999) holds, this second leg could still extend higher. However, sustained trading below 55 M EMA will open up the bearish case for extending the decline through 1.4281 low.

EUR/CHF reversed after edging higher to 0.9506 but stays above 0.9305 support. Initial bias remains neutral this week first. On the upside, above 0.9506 will resume the rebound from 0.9305 to 0.9579 resistance. However, break of 0.9305 will resume the fall for 0.9579 to retest 0.9209 low.

In the bigger picture, medium term corrective pattern from 0.9407 (2022 low) might have completed with three waves to 0.9928. Decisive break of 0.9252 (2023 low) will confirm long term down trend resumption. Next target will be 61.8% projection of 1.1149 to 0.9407 from 0.9928 at 0.8851. For now, outlook will stay bearish as long as 0.9928 resistance holds, even in case of strong rebound.

In the long term picture, fall from 1.2004 (2018 high) is part of the multi-decade down trend. Firm break of 0.9928 resistance is needed to be the first sign of long term bottoming. Otherwise, outlook will remain bearish.

Monday, Sep 30, 2024

Tuesday, Oct 1, 2024

Wednesday, Oct 2 2024

Thursday, Oct 3, 2024

Friday, Oct 4, 2024

• Fed policymakers maintain a dovish stance, and market participants are pricing in a potential 50 basis point rate cut in November.
• The US dollar hit a fresh YTD low, while Gold and Silver continued to advance.
• The week ahead features key data releases, including Eurozone inflation and US nonfarm payrolls, which could shape central bank policies and market sentiment.

Week in Review: Fed Policymakers Deliver Dovish Rhetoric

As the week wraps up, US data continues its downward trend, with the Fed’s preferred inflation measure maintaining pressure for a potential 50 basis point rate cut in November. Market participants are increasingly factoring in this cut, with the probability now exceeding 50%.

Source: CME FedWatch Tool (click to enlarge)

The week started with a stimulus package from China which helped propel Emerging Market (EM) stock indexes on track for their best week in 4 years. From South Africa to India emerging markets and EM currencies have done well and the Shanghai composite index logged its biggest weekly gain since 2008.

Source: LSEG Workspace (click to enlarge)

Comments from Fed Policymakers have struck a rather dovish chord of late which has emboldened market participants. The softer data from the US and uncertain geopolitical risks and tensions are also playing a key role in the current market dynamic.

No surprise that the precious metals arena continues to rise with both Gold and Silver rising this past week to fresh highs. Gold reaching a high of $2685/oz this week before a pullback has it languishing in the mid 2650’s at the time of writing.

Oil prices struggled to hold onto early week gains despite OPEC + updating its longer term outlook. The cartel says it sees peak oil demand to only be reached in 2050 as a result of emerging market demand. Brent traded at a low of around 71.00 on Thursday before a modest bounce ahead of the weekend.

On the FX front the US Dollar hit a fresh YTD low on Friday and struggled for the majority of the week. As things stand markets are now more dovish on the Fed than the ECB and BoE which have helped both currencies eke out impressive gains to the greenback.

This sets up an interesting week for Global Markets with the Euro Area inflation release and the US jobs report. Both events could be key in shaping the respective policies of each of the Central Banks with market participants fully pricing in a rate cut from the ECB in October. Will the Euro Area inflation report and US jobs report confirm such moves?

The Week Ahead: EU Inflation and US Jobs Data

The week ahead is packed with high impact data releases in both developed and emerging markets. Next week, investors will have the chance to hear from numerous Fed members, including Fed Chair Powell on Monday. However, since the dot plot already provides a clear indication of the Fed’s future plans, upcoming data, particularly Friday’s non-farm payrolls, might garner more attention.

Asia Pacific Markets

In Asia, On Monday, China will release the official PMIs for September. In August, the composite PMI was at 50.1, barely above the 50 threshold that distinguishes expansion from contraction. It remains to be seen if business activity improved this month or slipped into contractionary territory. Of course it’s way too early to see if the stimulus will have an impact on actual production numbers as that will take some time to filter through to the data but the print will be an intriguing one nonetheless and could set the early risk tone for the week.

Japan has a new Prime Minister who is seen as someone who will support policy normalization by the BoJ and support Governor Ueda in his endeavor. The week ahead brings the release of the BoJ summary of opinions from the most recent Central Bank meeting. Governor Ueda stated that the BoJ will continue to raise rates if the economy aligns with their outlook. Consequently, investors might scrutinize the summary for clues about the likelihood of another rate hike before year-end.

Japan’s employment data for August, set to be released during the Asian session on Tuesday, along with the Tankan survey on Thursday, could also influence investors’ perspectives.

Europe + UK + US

In developed markets, Eurozone inflation numbers will be in focus as markets expect to see a further slowdown in inflationary pressure. This has ramped up bets of another rate cut from the ECB at its October meeting.

Unemployment figures are due next week and have remained at historically low levels for some time. While no immediate changes are expected, the labor market outlook appears to be softening, with labor shortages becoming slightly less of an issue.

In the UK, it’s a relatively quiet week with GDP data on Monday the only highlight. As cable holds the high ground, the week ahead could see a potential pullback ahead of the NFP release.

US markets are the most intriguing with ISM services and manufacturing data coming out before the all important NFP report. When it comes to the job market, recent benchmark revisions have shaken confidence in the data, while leading surveys on hiring demand are declining. Additionally, consumer confidence readings indicate that households are beginning to feel the effects of a cooling economy. A significant downside miss could weigh heavily on the US Dollar and thus reignite recessionary fears.

Unemployment rate at or below 4.4% would be ideal. Any uptick could further complicate matters going forward for the Federal Reserve and may have a massive impact on the size of the rate cut the Central Bank deliver in November.

Chart of the Week

This week’s focus is on the S&P 500 given the recent rally and technical patterns at play.

The S&P is on course for its third consecutive week of gains and could face some form of correction next week. However the overall trend remains extremely bullish with the recent triangle pattern breakout hinting at a bullish target around the 6170 area.

The index may retest the top of the triangle pattern which rests around the 5650 handle before a potential move higher. This would be ideal for would be longs looking to get involved.

Immediate resistance on the upside rests around the 5910 handle before the psychological 6000 handle comes into focus.

S&P 500 Daily Chart – September 27, 2024

Source: TradingView.Com (click to enlarge)

Key Levels to Consider:

Support:

• 5669
• 5650
• 5538

Resistance:

• 5771
• 5910
• 6000

U.S. Highlights

• The Federal Reserve’s preferred inflation metric, the core PCE index, continued to cool in August with the 3- and 6-month annualized trends converging closer to the Fed’s 2% target.
• Federal Reserve officials who spoke this week noted that the slowing labor market was a key consideration in their monetary policy decision last week and that further rate cuts were expected moving forward.
• Congress managed to pass a continuing resolution this week to fund the federal government through December 20th, removing the risk of a government shutdown until after the upcoming election.

Canadian Highlights

• Canada’s jobs market loosened again in July, with the ratio of job vacancies-to-unemployed workers falling further below its 2019 average.
• Canada’s economy grew by a better-than-expected 0.2% month-on-month in July. Still, third quarter growth will likely come in well shy of the BoC’s 2.8% projection.
• Population growth eased through Q2, although at 7.3% the temporary resident share of Canada’s population is far away from the federal target of 5% by 2027.

U.S. – Government Shutdown Averted as Price Pressures Continue to Ease

The first week of fall was largely consumed by lingering consternation regarding the Federal Reserve’s latest monetary policy decision. Federal Reserve officials who spoke this week provided further clarity on the central bank’s rationale to go big with the first rate cut in over four years, as the latest reading on inflation showed price pressures continued to cool in August. Financial markets were little changed on the week, with Treasury yields rising a few basis-points and the S&P 500 up 1.0% as of the time of writing.

Friday’s personal income & spending data release for August showed that the health of the American consumer remained favorable on aggregate through the end of the summer. Real personal consumption expenditures rose 0.1% relative to July, with goods spending roughly flat while service expenditures expanded. Consumers continued to receive support from healthy real disposable personal income gains (+3.1% year-on-year in August), although this growth has continued to moderate. This has led to some slowing in consumer spending, which has helped to push the three- and six-month annualized percentage change in core PCE inflation closer to the Fed’s 2% target after the flare-up earlier in the year (Chart 1).

With inflation pressures continuing to cool, the Federal Reserve’s downward policy path trajectory appears to continue to be supported by the incoming data. Federal Reserve officials who spoke this week broadly echoed the statements of Chair Powell last week, noting that the balance of risks has shifted towards the labor market and that ensuring a soft landing would merit looser financial conditions moving forward. Although the majority of officials who spoke this week were focused on downside risks to the economy, Governor Bowman, the lone dissenting vote from last week’s decision, noted that inflation risks remained elevated and that this would necessitate caution moving forward. Market pricing is roughly 50/50 between a quarter- and a half-point cut at the next meeting in November as of the time of writing.

Markets will likely be equally focused on fiscal policy risks moving forward with the U.S. election now less than six weeks away. Thankfully, Congress managed to avoid the risk of a government shutdown this week by passing a continuing resolution through to December 20th. However, with federal government funding and the debt limit suspension both now expiring at the end of the year, fiscal risks are likely to remain top-of-mind in the final two months of the year.

Looking ahead to next week, the biggest item on the docket will be the September employment report released on Friday, with consensus expectations for a gain of 130k jobs. This will likely cap-off the weakest quarter for job gains since the onset of the pandemic (Chart 2). Markets will also be watching Chair Powell’s speech at the National Association for Business Economics Annual Meeting on Monday, in addition to the Vice-Presidential debate in New York City on Tuesday.

Canada – Second Verse...Same as the First

It’s been clear for some time that the Canadian economy is operating with slack. The Bank of Canada certainly reinforced as much in their summer Monetary Policy Report, but perhaps the clearest signal is that Canada’s unemployment rate has jumped 1.6 percentage points from its 2023 low. This week’s economic dataflow simply reinforced this narrative. The payrolls report – which grabs fewer headlines than it’s timelier Labour Force Survey counterpart but shares a stronger correlation with GDP for many industries – showed that payrolls expanded by 0.2% month-on-month in July. Although this counts as an above-trend gain, it was paired with another sizeable decline in job vacancies, suggesting that the demand for future workers continues to shrink. Meanwhile, the job vacancy to unemployment ratio (a closely watched indicator of job market tightness) dropped yet again, pointing to further loosening (Chart 1).

The softening up in the labor market squares with what we’re seeing in the monthly GDP data. Canada’s economy managed to post a better-than-expected 0.2% monthly advance in July, but August’s preliminary estimate is calling for no growth. For the third quarter overall, industry-based GDP performances so far are flagging significant downside risk to the Bank of Canada’s hefty Q3 2.8% growth projection. This implies an even larger build-up of slack than policymakers had anticipated and provides some justification for a market that’s almost fully built in a 50 basis-point point move from the Bank of Canada at the October meeting. Also helpful from this perspective is the fact that crude oil prices continue to fall, weighed down this week by Saudi Arabia’s announcement that regardless of market conditions, they will begin increasing output on December 1st – doing away with their $100 per barrel unofficial price target.

Lastly, Canada’s headline GDP growth has been flattered by robust population gains but, on a per capita basis, the economy is shrinking. This week’s population report confirmed this soft trend extended through the second quarter. Indeed, Canada’s population surged 3% year-on-year in Q2, against just a 0.9% increase in real GDP (Chart 2). Now, for a federal government trying to wrap their arms around Canada’s ballooning population, the report had some things to like. Namely, growth edged down from the prior quarter on the back of a smaller increase in temporary residents. In an encouraging sign for the government, non-permanent inflows have cooled for three straight quarters, although they remain elevated. Less encouraging was that the share of Canada’s population accounted for by temporary residents rose to 7.3% and could push even higher in the next quarter or two. This is a far cry from the government’s stated goal of getting this share down to 5% by 2027.

All told, Canadian events this week echoed many of the same trends that have been evident for the economy for some time and provided little scope to change our outlook on rates. Second verse, same as the first.

All eyes will be on U.S. jobs data on Friday for signs of weakness after the U.S. Federal Reserve kicked off its easing cycle with an outsized 50 basis point cut in September.

The Fed took pains to frame the cut (larger than earlier 25 basis point cuts from most other advanced economy central banks) as the beginning of a “recalibration” process rather than driven by urgent concerns about the economy. But, U.S. labour markets have shown signs of softening, even if at a very gradual pace, and Fed Chair Jerome Powell has reinforced that further weakening is a concern for the central bank.

The unemployment rate ticked down to 4.2% in August, but that only partially reversed an increase to 4.3% in July that triggered the so-called “Sahm Rule” recession indicator—when the three-month moving average of the unemployment rate rises by 0.5% or more relative to its low during the previous 12 months. In short, even the gradual increases in the U.S. unemployment rate to date have not happened historically outside of recessions. Job counts have continued to rise with much of the increase in unemployment coming from longer job searches for new entrants into the labour force, particularly younger workers, rather than layoffs, and initial jobless claims have remained low.

But the average 116,000 increase in payroll employment over the last three months was the softest since early 2021, and early estimates from the Bureau of Labor Statistics already have flagged that payroll employment earlier this year is overcounted by about 818,000 jobs. Hiring demand has continued to slow with job openings back down to pre-pandemic levels. Layoffs are still low, but they have been creeping gradually higher. Like the Sahm Rule for the unemployment rate, this is also unusual outside of recessions. Survey data suggests consumers are less confident in the job market than they were, and wage growth has been slowing.

Our base case assumption remains that labour markets are normalizing rather than faltering. We look for payroll employment to rise 147k in September and for the unemployment rate to tick back up to 4.3%—still historically low but up 0.5 percentage points from a year ago. Interest rates impact the economy with significant lags, and the Fed’s start to interest rate cuts will help limit headwinds from monetary policy in the year ahead. An exceptionally large government budget deficit also helps demand in the U.S. economy. Still, labour markets will be analyzed for further red flags with risks tilted to the downside for it, and the Fed’s policy rates.

Week ahead data watch