Sample Category Title

The dollar index remains in a sideways mode for the third consecutive day and moving within a narrow range, just above new multi-month low.

Near-term price action slowed ahead of key event – Fed interest rate decision – which is expected to define fresh direction.

Technical picture on daily chart is firmly bearish as negative momentum continues to strengthen and MA’s are in bearish configuration (freshly formed 10/20DMA bear cross and converged 100/200DMA’s about to form a death cross), maintaining downside pressure and favoring scenario of bearish continuation.

However, bears need to clearly break pivotal supports at 100.33/00 (200WMA / psychological) to resume larger downtrend and focus on next technical support at 98.92 (Fibo 61.8% of 89.15/114.72 2021/2022 uptrend.

Immediate resistance lays at 100.68 (recent range top) with 101.00 zone (round figure / falling 10/20 DMA’s) marking the first pivot.

Bears are expected to remain fully in play while the price stays below this level, while break higher would generate initial warning.

The US central bank is expected to eventually start its policy easing cycle and make the first rate cut in more than four years, though with high uncertainty about the size of rate cut, as bets for cuts either by 25 or 50 basis points, recently moved in a large swings on quick changes in sentiment.

The latest numbers showed that bets for larger rate cut rose significantly in past few days, adding to hopes that the US policymakers may opt for more aggressive action today.

Growing concerns that the US economy might be in worse condition than initially thought, would add to such scenario (50 basis points cut) in which the dollar would come under fresh pressure.

Markets will also focus on the tone of Fed’s statement and following press conference, as well as signals for the next steps (markets expect more than 100 basis points cuts by the end of the year) which would contribute to overall picture.

Res: 100.68; 101.00; 101.46; 101.84
Sup: 100.22; 100.00; 98.92; 98.36

• The Dow Jones Industrial (DJIA) has managed to print a fresh all-time high in September while the S&P 500 and Nasdaq 100 have yet to break above their July all-time highs.
• The US Treasury yield curve bull steepener has reinforced a defensive rotation play in the US stock market.
• Watch the key medium-term support of 40,030 on the DJIA.

Since our last publication, the Dow Jones Industrial Average (DJIA) has rallied by 6%, surpassing the first 41,440 medium-term resistance mentioned in our report. Also, it printed a fresh all-time closing high of 41,622 on Monday, 16 September before the key US Federal Reserve monetary policy decision outcome due later today.

The Fed has been widely expected to kickstart its interest rate cut cycle by either 25 basis points (bps) or 50 bps cut on the Fed funds rate, currently at 5.25%-5.00% after it increased the rate to their highest level in nearly two decades and held it constant for 13 months.

50 bps cut is now baked into the interest rates market

Fig 1: FOMC meetings aggregated probabilities of cuts/hikes as of 18 September 2024 (Source: CME FedWatch tool, click to enlarge chart)

The Fed funds futures market based on data from the CME FedWatch tool has priced in a high odd (65% chance) at this time of the writing that the Fed is likely to enact a jumbo cut of 50 bps today and the expectations of a larger size of cut have increased from a probability of just 14% seen a week ago (see Fig 1).

Overall, the Fed funds futures market is also pricing in a potential 250 bps rate cut in total by the Fed from a year now to bring down the Fed funds rate to 2.75%-3.00% by the 17 September 2025 FOMC meeting from the current rate of 5.25%-5.50%.

Bull steepening US Treasury yield curve reinforces a defensive sector rotation play

Fig 2: Relative strength of key S&P sectors, Magnificent 7 plus Netflix, US Semiconductors & DJIA against S&P 500 as of 18 Sep 2024 (Source: TradingView, click to enlarge chart)

The expected pace of cuts to bring down the Fed funds rate to 2.75%-3.00% from a year now to just a whisker above the 2.5% median long-run projection pencilled in the previous economic “dot-plot” projections released on the prior June FOMC meeting suggests a recessionary environment in the US.

The US Treasury yield curve (10-year minus 2-year) has un-inverted from more than two years of inversion on 6 September where the 2-year US Treasury yield fell at a faster pace versus the drop of the longer-term10-year Treasury yield.

Concurrently, since the current all-time high of the S&P 500 printed on 16 July 2024, the higher beta Information Technology sector, mega-cap seven cohort plus Netflix, and Semiconductor industry group that were leaders in the past two years of bull run seen in the S&P 500 have now underperformed (see Fig 2).

In contrast, the defensive sectors; Utilities, Real Estate, Consumer Staples, and Health Care have outperformed the S&P 500, together with the Dow Jones Industrial Average which has a lower combined weightage in three of the mega-cap seven stocks (Apple, Amazon, Alphabet, Meta, Microsoft, Nvidia, and Tesla) that represents a significant weightage in the S&P 500, and Nasdaq 100.

The impulsive upmove sequence from the 5 August low remains intact in DJIA

Fig 3: US Wall Street 30 major & medium-term trends as of 18 Sep 2024 (Source: TradingView, click to enlarge chart)

Based on the current price actions of the US Wall Street 30 CFD Index (a proxy of the DJIA futures), the impulsive upmove sequence from the 5 August 2024 low of its major uptrend phase in place since the 27 October 2023 low remains intact.

In addition, the daily RSI momentum indicator has continued to flash out a bullish momentum condition that reinforces the impulsive price action movements.

If the 40,030 key medium-term pivotal support holds, the Index may see the next medium-term resistances coming in at 42,900/43,170 and 43,930 next (also the upper boundary of the major ascending channel from the 27 October 2023 low) (see Fig 3).

On the other hand, a break below 40,030 invalidates the bullish scenario to trigger a potential medium-term corrective decline that may expose the next medium-term supports at 38,390 and 37,165.

The British pound has gained ground on Wednesday. In the European session, GBP/USD is trading at 1.3224, up 0.48% on the day.

UK core inflation surprises to the upside

First, the good news. UK headline inflation remained unchanged at 2.2% y/y in August, and matched the market estimate. The Bank of England had estimated that inflation would rise by 2.4%. Gasoline prices fell but this was offset by an increase in air fares. Monthly, headline inflation rose to 0.3%, up from -0.2% in July and in line with the market estimate.

The core inflation rate, which is a better gauge of inflation trends, showed a significant increase. Yearly, core inflation rose to 3.6%, up from 3.3% and above the market estimate of 3.5%. Monthly, the core rate climbed 0.4%, up from an upwardly revised 0.1% in July and matching the market estimate. Services inflation, which the Bank of England closely watches, rose from 5.2% to 5.6%.

The mixed inflation data isn’t expected to change minds at the BoE, which meets on Thursday. The central bank kicked off the new rate-cutting cycle on August 1 but is expected to maintain rates on Thursday. Inflation is moving in the right direction but services inflation remains a serious concern, given that the BoE’s inflation target is 2%.

All eyes on Mr. Powell

There’s little doubt that the Federal Reserve will finally join the rate-cutting club at today’s meeting, but will the cut be 25 or 50 basis points? Market pricing has been all over the map, which has only added to the anticipation and the suspense. A week ago, the odds of a 50-bps cut were just 14%; that has flipped to 65% currently, according the CME’s FedWatch. Investors will also be keenly interested in the ‘dot plot’ a projection of the FOMC’s outlook for interest rates.

GBP/USD Technical

• GBP/USD has pushed above resistance at 1.3178 and 1.3260
• 1.3127 and 1.3094 are providing support

Markets

Focus this morning briefly turned from this evening’s Fed meeting to tomorrow’s BoE policy decision following August UK CPI data. The report was almost exactly in line with expectations. Headline inflation rose 0.3% M/M and 2.2% (from -0.2% M/M and 2.2% in July). Core inflation reaccelerated to 0.5% M/M and 3.6% Y/Y (from 0.1% and 3.3%). Similar story applied to services prices rising by 0.4% M/M and 5.6% Y/Y (from 0.5% and 5.2%). While core services inflation is affected by some highly volatile components like airfares, today’s data still show too much stickiness for the Bank of England to take another advance on the hoped-for further cooling of inflation. Admittedly, at least part of the MPC is probably keen to turn the focus from inflation to growth. A new reassessment can only take place on the basis of the next Monetary policy report at the November 7 policy meeting. UK gilts underperformed Bunds and Treasuries with yields rising 6 7 bps across the curve. Markets for now only see room for further gradual easing by 25 bps steps in Q4 and Q1 next year. Sterling outperforms the dollar (GBP/USD 1.3215) and the euro (EUR/GBP 0.8415 from 0.8430). A test of the 0.8400/0.8383 support area might be on the cards. Even so, if the BoE holds such cautious approach against the background of weak UK activity data stay weak (cf last week’s rather poor July production/GDP data), it’s doubtful that ‘longer-lasting’ interest rate support will be a big help for sustained further sterling gains.

In global markets outside the UK, the countdown to this evening’s Fed interest rate decision caused some further mild profit taking on recent protracted easing bets. US yields add between 2 bps (2-y) and 3.5 bps (30-y). German Bunds slightly underperform treasuries with yields rising between 2.5 bps (2-y) and 5.5 bps (30-y). ECB Nagel, while supporting the start of easing, indicated that the ECB will have to show ‘staying power’ to fully reach to 2% target. In this process, he warned that policy rates certainly won’t go down as quickly and sharply as they went up. The dollar is losing a few ticks (DXY 100.8, EUR/USD 1.1135, USD/JPY 141.75). Equities show no clear trend (Eurostoxx -0.4%, S&P 500 unchanged) With respect to this evening’s Fed decision, we prefer a scenario of Powell and co starting with a substantial reduction of policy restriction (50 bps) to avoid an unnecessary weakening of the labour market. Current high policy yield levels allow to do so. It still leaves the Fed the option to make a revaluation on both inflation and growth with the policy rate above neutral (end this year/early next year). In this scenario, an assumed additional cumulative 75 bps of easing signaled in the median dot plot for the remainder of the year might still support recent dynamics of markets staying asymmetrically sensitive to softer than expected activity/labour market data. The message from the dots for 2025 might be much less aggressive than what markets are currently discounting, but it’s probably too early as a driver for markets in the near term. In this context we also stay cautious on the dollar.

News & Views

South African inflation slowed to 0.1% M/M in August from 0.4% in July and below 0.2% consensus. In Y/Y-terms, headline inflation fell below the 4.5%-midpoint of the South African central bank’s inflation target (3%-6%) for the first time since April 2021. Core inflation was flat in August but slowed from 4.3% Y/Y to 4.1%. Today’s benign inflation print cements the case for a first 25 bps by the SARB since hitting the current peak at 8.25% in May of last year. Fortunes of the South-African rand improved since the start of the summer on global USD-weakness as markets prepare for less restrictive monetary conditions. Emerging market currencies tend to profit from these prospects in general. USD/ZAR is setting new YTD lows today below 17.60.

US housing starts rebounded by 9.6% M/M in August, coming off a 6.9% drop in July. In absolute numbers, the 1356k annualized rate is the highest since April. New construction of single-family homes increased almost 16% to an annualized 992k pace (3 month best). Starts of multifamily projects declined for the first time since May. Overall building permits, a pointer for future construction, rose by 4.9% M/M (from -3.3% M/M) with the annualized rate of 1475k being the best since March. Both figures beat market consensus..

Graphs

EUR/GBP: Sterling outperforms the euro (and the dollar) as BoE for now has little room to cut interest rates aggressively.

USD/ZAR: rand profits from easing of global financial condtions even as softer inflation opens the door to SARB easing.

US 2y yield: Markets await Fed’s ‘nihil obstat’ to discount more frontloading

DXY TW USD ready to attack key support

Daily Pivots: (S1) 141.01; (P) 141.74; (R1) 143.16; More...

Outlook in USD/JPY remains unchanged and intraday bias stays neutral. Considering bullish convergence condition in 4H MACD, break of 143.03 resistance will indicate short term bottoming and turn bias back to the upside for rebound towards 147.20. However, decisive break of 139.26 fibonacci level would carry larger bearish implications, and target 61.8% projection of 161.94 to 141.67 from 149.35 at 136.82 next.

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) 0.8443; (P) 0.8460; (R1) 0.8490; More…

USD/CHF is still bounded in sideway trading and intraday bias stays neutral. With 0.8548 resistance intact, further decline is still expected. 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. However, considering bullish convergence condition in 4H MACD, break of 0.8548 resistance will confirm short term bottoming, and turn bias back to the upside for 0.8747 resistance.

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) 1.1101; (P) 1.1124; (R1) 1.1136; More....

Intraday bias in EUR/USD stays neutral and outlook is unchanged. On the upside, break of 1.1153 resistance will suggest that later rally is ready to resume and target 1.1200, and then 1.1274 high. On the downside, below 1.1072 minor support will turn bias back to the downside for 38.2% retracement of 1.0665 to 1.1200 at 1.0996 again.

In the bigger picture, prior break of 1.1138 resistance indicates that corrective pattern from 1.1274 might have completed at 1.0665 already. Decisive break of 1.1274 (2023 high) will confirm whole up trend from 0.9534 (2022 low). Next target will be 61.8% projection of 0.9534 to 1.1274 from 1.0665 at 1.1740. This will now be the favored case as long as 1.0947 resistance turned support holds.

Daily Pivots: (S1) 1.3127; (P) 1.3178; (R1) 1.3211; More...

Immediate focus is now on 1.3265 resistance as GBP/USD's rise from 1.3000 extends today. Decisive break of 1.3265 will resume larger rally 1.3364 projection level next. On the downside, however, break of 1.3145 support will turn bias to the downside, to extend the corrective pattern from 1.3265 with another leg.

In the bigger picture, up trend from 1.0351 (2022 low) is in progress. Next target is 38.2% projection of 1.0351 to 1.3141 from 1.2298 at 1.3364. For now, outlook will stay bullish as long as 1.2664 support holds, even in case of deep pullback.

Sterling strengthened across the board today after UK CPI data revealed reacceleration in core inflation. The uptick in core CPI provides additional support for hawkish members of the BoE's MPC, bolstering the case for a rate hold at tomorrow's decision. A rate cut is still expected in November, when new economic projections will be available. But for the near term, the question is whether Sterling can maintain its momentum and extend its rally against the Euro before then.

On the other hand, Dollar is weakening as markets await the much-anticipated FOMC rate decision later today. With just hours to go, market sentiment remains split, with a 60% probability of a 50bps rate cut and a 40% chance of a 25bps reduction. US stock markets are treading water in early trading as traders exercise caution ahead of this pivotal event.

In addition to the rate decision, Fed will also release updated economic projections and the dot plot. While the size of the rate cut will grab headlines, the broader outlook—especially the projected path of easing for the remainder of this year and next, along with the terminal interest rate—will also be key drivers of market reactions.

Technically, in the event of a Dollar rebound, several support levels need to be watched closely: 1.1072 in EUR/USD, 1.3145 in GBP/USD, 0.6730 in AUD/USD, and 0.8548 resistance in USD/CHF. As long as these levels hold, there’s no confirmation of significant underlying strength in the greenback.

In Europe, at the time of writing, FTSE is down -0.64%. DAX is down -0.08%. CAC is down -0.50%. UK 10-year yield is up 0.078 at 3.852. Germany 10-year yield is up 0.045 at 2.193. Earlier in Asia, Nikkei rose 0.49%. Hong Kong was on holiday. China Shanghai SSE rose 0.49%. Singapore Strait Times fell -0.03%. Japan 10-year JGB yield fell -0.0032 to 0.827.

Eurozone CPI finalized at 2.2% in Aug, core CPI at 2.8%

Eurozone CPI was finalized at 2.2% yoy in August, down from July's 2.6% yoy. Core CPI (ex-energy, food, alcohol & tobacco) was finalized at 2.8% yoy, down from prior month's 2.9% yoy.

The highest contribution to the annual Eurozone inflation rate came from services (+1.88 percentage points, pp), followed by food, alcohol & tobacco (+0.46 pp), non-energy industrial goods (+0.11 pp) and energy (-0.29 pp).

EU CPI was finalized at 2.4% yoy. The lowest annual rates were registered in Lithuania (0.8%), Latvia (0.9%), Ireland, Slovenia and Finland (all 1.1%). The highest annual rates were recorded in Romania (5.3%), Belgium (4.3%) and Poland (4.0%). Compared with July 2024, annual inflation fell in twenty Member States, remained stable in one and rose in six.

UK CPI unchanged at 2.2%, core CPI rises to 3.6%, services accelerates to 5.6%

UK inflation data for August came in as expected, with headline CPI remaining unchanged at 2.2% yoy, in line with forecasts. Meanwhile, core CPI, which excludes volatile items such as energy, food, alcohol, and tobacco, showed accelerated from 3.3% yoy to 3.6% yoy.

The breakdown of the data reveals a mixed picture. Goods prices continued to decline, with CPI for goods falling from -0.6% yoy to -0.9% yoy. However, services inflation moved higher, rising from 5.2% yoy to 5.6% yoy, indicating persistent domestic price pressures.

The main driver of the inflationary uptick was airfares, which rose this year after a drop in prices during the same period last year. On the downside, motor fuels, restaurants, and hotels contributed to the moderation of price pressures.

On a monthly basis, CPI increased by 0.3% mom, also meeting expectations.

Japan's exports rise for ninth month, but auto sector weighs on growth

Japan's export growth continued in August, rising 5.6% yoy to JPY 8,442B, marking the ninth consecutive month of growth. However, this increase fell significantly short of market expectations of 10% yoy growth. The weaker export performance was largely driven by -9.9% yoy decline in auto exports.

In terms of regional performance, exports to the US fell -0.7% yoy, marking the first decline in nearly three years, with auto sales slumping -14.2% yoy. Exports to Europe also suffered, falling -8.1% yoy. In contrast, exports to China were a bright spot, rising by 5.2% yoy.

On the import side, Japan saw 2.3% yoy increase, reaching JPY 9,137B, but this was also far below the expected growth of 13.4% yoy. Despite this, the import figure was the second-largest on record for the month of August.

The country's trade balance recorded a deficit of JPY -695B, remaining in the red for the second consecutive month.

In seasonally adjusted terms, both exports and imports declined on a month-over-month basis. Exports dropped -3.9% to JPY 8,759B, while imports fell -4.4% to JPY 9,354B. This left Japan with a seasonally adjusted trade deficit of JPY -596B.

GBP/USD Mid-Day Outlook

Daily Pivots: (S1) 1.3127; (P) 1.3178; (R1) 1.3211; More...

Immediate focus is now on 1.3265 resistance as GBP/USD's rise from 1.3000 extends today. Decisive break of 1.3265 will resume larger rally 1.3364 projection level next. On the downside, however, break of 1.3145 support will turn bias to the downside, to extend the corrective pattern from 1.3265 with another leg.

In the bigger picture, up trend from 1.0351 (2022 low) is in progress. Next target is 38.2% projection of 1.0351 to 1.3141 from 1.2298 at 1.3364. For now, outlook will stay bullish as long as 1.2664 support holds, even in case of deep pullback.

Economic Indicators Update

Eurozone CPI was finalized at 2.2% yoy in August, down from July's 2.6% yoy. Core CPI (ex-energy, food, alcohol & tobacco) was finalized at 2.8% yoy, down from prior month's 2.9% yoy.

The highest contribution to the annual Eurozone inflation rate came from services (+1.88 percentage points, pp), followed by food, alcohol & tobacco (+0.46 pp), non-energy industrial goods (+0.11 pp) and energy (-0.29 pp).

EU CPI was finalized at 2.4% yoy. The lowest annual rates were registered in Lithuania (0.8%), Latvia (0.9%), Ireland, Slovenia and Finland (all 1.1%). The highest annual rates were recorded in Romania (5.3%), Belgium (4.3%) and Poland (4.0%). Compared with July 2024, annual inflation fell in twenty Member States, remained stable in one and rose in six.

Full Eurozone CPI final release here.