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Daily Pivots: (S1) 0.6639; (P) 0.6657; (R1) 0.6693; More...

AUD/USD recovered after dipping to 0.6621 briefly and intraday bias is turned neutral first. Some consolidations would be seen but risk will stay on the downside as long as 0.6766 resistance holds. Break of 0.6621 and sustained trading below 38.2% retracement of 0.6348 to 0.6823 at 0.6642 will target 61.8% retracement at 0.6529. On the upside, though, above 0.6766 resistance will bring retest of 0.6823 instead.

In the bigger picture, overall, price actions from 0.6169 (2022 low) are seen as a medium term corrective pattern, with rise from 0.6269 as the third leg. Firm break of 0.6798/6870 resistance zone will target 0.7156 resistance. In case of another fall, strong support should be seen from 0.6169/6361 to bring rebound.

The stronger-than-anticipated core inflation data initially sent shockwaves through US equities overnight, sparking a deep sell-off. However, tech stocks led a remarkable recovery, with all major indexes finishing in green. Notably, S&P 500 posted a remarkable reversal, ending the day up more than 1% after having fallen over -1% intraday—a feat not seen since 2022.

The chances of a 50bps rate cut by Fed next week have now diminished significantly in the wake of recent robust non-farm payroll data and yesterday's core CPI release. Fed fund futures currently reflect just a 15% chance of such a cut, effectively taking it off the table. That said, market participants are still betting on cumulative rate cuts of 100bps by year's end, with over 80% probability attached to that scenario. Next week's release of Fed's economic projections, alongside the updated dot plot, will be crucial in shaping further market expectations regarding the pace and scale of future rate reductions.

Meanwhile, attention is now turning to ECB's upcoming decision today, where a 25bps rate cut is widely anticipated. Euro has remained under pressure this week, losing ground against most major currencies except for British pound and Swiss franc. While ECB President Christine Lagarde is expected to maintain a cautious, data-dependent stance on future policy moves, any dovish signals in the updated economic projections could lead to further market bets on a faster easing cycle, pushing the Euro lower.

Looking at overall currency performance this week so far, Aussie is currently the strongest, buoyed by the stock market rebound. Dollar follows closely, with Loonie in third place. On the other end, Swiss Franc is the worst performer, followed by Sterling and Euro. Yen and Kiwi are positioned in the middle of the pack.

Technically, CHF/JPY's breach of 166.79 support yesterday indicates that rebound from there has completed at 172.80, after rejection by 55 D EMA. Decline from 180.05 might be resuming for 61.8% projection 180.05 to 166.79 from 172.80 at 164.60. Nevertheless, break of 169.32 minor resistance will delay the bearish case and bring more sideway trading first.

In Asia, at the time of writing, Nikkei is up 2.90%. Hong Kong HSI is up 1.02%. China Shanghai SSE is down -0.05%. Singapore Strait Times is up 0.34%. Japan 10-year JGB yield is up 0.0198 at 0.873. Overnight, DOW rose 0.31% S&P 500 rose 1.07%. NASDAQ rose 2.17%. 10-year yield rose 0.007 to 3.653.

ECB to cut rates again, Lagarde to maintain data-dependent stance

ECB is widely expected to implement a 25bps rate cut today, marking the second adjustment in its current policy easing cycle. This cut would bring the deposit rate down to 3.50% and the main refinancing rate to 4.00%. However, the market's attention is not solely on today's decision but rather on the ECB's forward guidance.

One critical question is whether ECB will hint at another rate cut in October, or if it will maintain a more cautious pace by cutting once per quarter, with December being the next move when fresh economic projections are released. T

These issues are unlikely to be directly addressed in today's press conference, as ECB President Christine Lagarde will likely reiterate the data-dependent, meeting-by-meeting approach. Nonetheless, ECB's updated economic forecasts, particularly concerning growth, could offer insight into the bank's level of concern over the current economic slowdown.

In the currency markets, Euro's reaction to ECB decision will be watched closely, particularly against the British Pound and Swiss Franc.

Technically, EUR/GBP's price actions from 0.8399 short term bottom are still corrective looking. While stronger recovery might be seen, upside should be limited by 38.2% retracement of 0.8624 to 0.8399 at 0.8485. Break of 0.8399 will bring retest of 0.8382 low. Firm break there will resume larger down trend. However, sustained break of 0.8485 will bring stronger rally to 61.8% retracement at 0.8538 and possibly above.

As for EUR/CHF, a temporary low should be formed at 0.9305 with current recovery. But further decline is expected as long as 0.9444 resistance holds. Below 0.9305 will resume the fall from 0.9579 to retest 0.9209 low. Firm break there will resume larger down trend. However, decisive break of 0.9444 will argue that the pullback from 0.9579 has completed as a corrective move. In this case, rise from 0.9209 could be resume to resume through 0.9579 resistance instead.

Japan's wholesale price growth slows sharply to 2.5% yoy in Aug as Yen rebounds

Japan's corporate goods price index decelerated to 2.5% yoy in August, falling below market expectations of 2.8% yoy, marking the first slowdown in eight months. The data reflects a cooling in price pressures, which has been reinforced by a significant 7.4% appreciation in Yen during the month.

The stronger Yen drove a steep slowdown in Yen-based import prices, with the annual growth rate dropping sharply from 10.8% yoy in July to just 2.6% yoy in August. This marks a considerable easing in import costs, offering some relief to Japanese businesses relying on foreign goods.

On a month-to-month basis, CGPI fell by -0.2% mom, while import prices measured in yen contracted significantly by -6.1% mom. The sharp fall in import costs suggests that the stronger yen is playing a key role in softening inflationary pressures, especially in the context of global commodity prices.

BoJ's Tamura advocates for gradual rate increase to 1% neutral mark

BoJ board member Naoki Tamura indicated in a speech today that the likelihood of achieving 2% inflation target sustainably is improving. As a result, the central bank needs to gradually raise interest rates to neutral levels.

Tamura estimated Japan's neutral interest rate, or the rate that neither stimulates nor slows down economic activity, to be at least around 1%.

He added, "As such, it's necessary to push up our short-term policy rate at least to around 1% by the latter half of the fiscal year ending March 2026 to sustainably achieve the BoJ's price goal."

In light of growing labor shortages and rising wage pressures, Tamura warned that inflation risks were increasing. Companies are responding to tight labor market conditions by raising wages and passing on higher costs through price hikes.

Tamura underscored the need to "raise interest rates at an appropriate timing, and in several stages," in order to keep inflation under control.

This marked the first time a BoJ policymaker had publicly specified a target level for raising short-term interest rates.

Looking ahead

ECB rate decision is the main focus of the day. US will release PPI and jobless claims.

AUD/USD Daily Report

Daily Pivots: (S1) 0.6639; (P) 0.6657; (R1) 0.6693; More...

AUD/USD recovered after dipping to 0.6621 briefly and intraday bias is turned neutral first. Some consolidations would be seen but risk will stay on the downside as long as 0.6766 resistance holds. Break of 0.6621 and sustained trading below 38.2% retracement of 0.6348 to 0.6823 at 0.6642 will target 61.8% retracement at 0.6529. On the upside, though, above 0.6766 resistance will bring retest of 0.6823 instead.

In the bigger picture, overall, price actions from 0.6169 (2022 low) are seen as a medium term corrective pattern, with rise from 0.6269 as the third leg. Firm break of 0.6798/6870 resistance zone will target 0.7156 resistance. In case of another fall, strong support should be seen from 0.6169/6361 to bring rebound.

Economic Indicators Update

ECB is widely expected to implement a 25bps rate cut today, marking the second adjustment in its current policy easing cycle. This cut would bring the deposit rate down to 3.50% and the main refinancing rate to 4.00%. However, the market's attention is not solely on today’s decision but rather on the ECB's forward guidance.

One critical question is whether ECB will hint at another rate cut in October, or if it will maintain a more cautious pace by cutting once per quarter, with December being the next move when fresh economic projections are released. T

These issues are unlikely to be directly addressed in today’s press conference, as ECB President Christine Lagarde will likely reiterate the data-dependent, meeting-by-meeting approach. Nonetheless, ECB's updated economic forecasts, particularly concerning growth, could offer insight into the bank’s level of concern over the current economic slowdown.

In the currency markets, Euro’s reaction to ECB decision will be watched closely, particularly against the British Pound and Swiss Franc.

Technically, EUR/GBP's price actions from 0.8399 short term bottom are still corrective looking. While stronger recovery might be seen, upside should be limited by 38.2% retracement of 0.8624 to 0.8399 at 0.8485. Break of 0.8399 will bring retest of 0.8382 low. Firm break there will resume larger down trend. However, sustained break of 0.8485 will bring stronger rally to 61.8% retracement at 0.8538 and possibly above.

As for EUR/CHF, a temporary low should be formed at 0.9305 with current recovery. But further decline is expected as long as 0.9444 resistance holds. Below 0.9305 will resume the fall from 0.9579 to retest 0.9209 low. Firm break there will resume larger down trend. However, decisive break of 0.9444 will argue that the pullback from 0.9579 has completed as a corrective move. In this case, rise from 0.9209 could be resume to resume through 0.9579 resistance instead.

BoJ board member Naoki Tamura indicated in a speech today that the likelihood of achieving 2% inflation target sustainably is improving. As a result, the central bank needs to gradually raise interest rates to neutral levels.

Tamura estimated Japan's neutral interest rate, or the rate that neither stimulates nor slows down economic activity, to be at least around 1%.

He added, "As such, it’s necessary to push up our short-term policy rate at least to around 1% by the latter half of the fiscal year ending March 2026 to sustainably achieve the BoJ’s price goal."

In light of growing labor shortages and rising wage pressures, Tamura warned that inflation risks were increasing. Companies are responding to tight labor market conditions by raising wages and passing on higher costs through price hikes.

Tamura underscored the need to "raise interest rates at an appropriate timing, and in several stages," in order to keep inflation under control.

This marked the first time a BoJ policymaker had publicly specified a target level for raising short-term interest rates.

Japan's corporate goods price index decelerated to 2.5% yoy in August, falling below market expectations of 2.8% yoy, marking the first slowdown in eight months. The data reflects a cooling in price pressures, which has been reinforced by a significant 7.4% appreciation in Yen during the month.

The stronger Yen drove a steep slowdown in Yen-based import prices, with the annual growth rate dropping sharply from 10.8% yoy in July to just 2.6% yoy in August. This marks a considerable easing in import costs, offering some relief to Japanese businesses relying on foreign goods.

On a month-to-month basis, CGPI fell by -0.2% mom, while import prices measured in yen contracted significantly by -6.1% mom. The sharp fall in import costs suggests that the stronger yen is playing a key role in softening inflationary pressures, especially in the context of global commodity prices.

Full release here.

According to UOB analysts, the New Zealand Dollar (NZD) could test the 0.6115 level, provided it stays below 0.6185. However, a significant break below this level isn't expected at the moment. In the longer term, if NZD does manage to drop below 0.6115, it could potentially move further towards 0.6085. Earlier today, NZD traded between 0.6129 and 0.6164, ending mostly unchanged at 0.6150. Despite the quiet movement, the overall trend remains slightly weak, suggesting a possible test of lower levels before a recovery.

NZDCAD – H3 Timeframe

The price action on the 3-hour timeframe chart of NZDCAD shows that price has recently formed two new lows after sweeping off the previous lows; thereby establishing a bearish trend. Confirming this further is the crossing of the 50-period SMA below the 100-period SMA. My area of interest for an entry, however, is the highlighted supply zone, since it fits perfectly with the 76% of the Fibonacci, as well as the trendline resistance.

Analyst’s Expectations:

• Direction: Bearish
• Target: 0.82350
• Invalidation: 0.83890

NZDUSD – H3 Timeframe

NZDUSD as seen, has just broken below the pivot zone on the daily timeframe after crossing below the 100-period SMA on the 3-hour timeframe. Therefore, it is my belief that price is headed for the highlighted demand zone around the 0.60100 region, or 0.60500 price region at the very least.

Analyst’s Expectations:

• Direction: Bearish
• Target: 0.60125
• Invalidation: 0.61877

• USDJPY reversed from the support zone
• Likely to rise to the resistance level 144.00

USDJPY currency pair recently reversed up from the support zone set between the pivotal support level 140.75 (which has been reversing the price from December) and the lower daily Bollinger Band.

The upward reversal from this support zone created the daily Japanese candlesticks reversal pattern Hammer – which stopped the previous ABC correction (2).

Given the strength of the support level 140.75 and the oversold daily Stochastic, USDJPY currency pair can be expected to rise further to the next resistance level 144.00 (former support from the end of August).

GBPUSD accelerated lower after US inflation data on Wednesday and hit the lowest in three weeks, pressuring psychological 1.30 support.

US inflation data were mainly in line with expectations, but core CPI showed signs of stickiness, cooling bets for 50 basis points rate cut by Fed and inflating the US dollar.

Technical picture on daily chart is weakening, as 14-d momentum slid into negative territory and the price dipped below converging 10/230 DMA’s which are about to form a bear-cross.

Completion of bearish failure swing pattern on daily chart also contributes to negative signals, with firm break of 1.30 pivot to generate fresh bearish signal and open way towards targets at 1.2965 )50% retracement of 1.2664/1.3266) and 1.2922/1.2894 (55DMA / Fibo 61.8%.

Near-term action is expected to remain biased lower while the price stays below 1.3100 zone (20DMA / today’s high).

Res: 1.3049; 1.3094; 1.3111; 1.3124
Sup: 1.3000; 1.2965; 1.2922; 1.2894

Summary

August's inflation data probably cement a 25 bps, rather than a 50 bps, reduction in the federal funds rate at next week's FOMC meeting in our view. The 0.2% increase in headline CPI was in line with expectations, while the 0.3% increase in core CPI was slightly higher than consensus forecasts.

Another month of tepid food inflation and falling energy prices kept headline inflation in check. Excluding food and energy, the deflation in core goods remained in effect, led by a 1.0% drop in prices for used autos. A larger-than-expected drop in prices for core goods was more than offset by faster-than-expected services inflation. A bounce back in travel-services prices such as lodging away from home and airfares ended a run of unusually soft readings for these categories. Primary shelter inflation also came in high relative to our expectations and at odds with leading indicators from private sector data sources. Overall, we see the lingering split between goods and services inflation as a sign that the unwinding of pandemic-era effects on prices is taking somewhat longer, rather than as an indication disinflation is running out of steam.

On balance, today's data suggest that a 25 bps rate cut is more likely than 50 bps next week, but we would not be completely shocked if the FOMC elected to move by 50 bps. Furthermore, starting with a 25 bps move does not rule out a pickup in the pace of policy easing at future meetings. The ongoing deterioration in the labor market has become an increasing focus for the FOMC, and inflation is slowly but surely returning to 2% on trend. The core CPI has increased at a 2.1% annualized pace over the past three months, a slow enough pace that 50 bps rate cuts at future meetings remain squarely on the table if the labor market data spur faster action. Regardless, all signs point to additional rate cuts beyond next week in our view.

Split Between Goods and Services Inflation Was Amplified in August

Inflation in August came in roughly in line with expectations, rising 0.2% in the month and 2.5% over the past year according to the Consumer Price Index. A relatively small 0.8% decline in energy prices in the month helped keep headline inflation in check, led lower by a 0.6% dip in gasoline prices and a 1.9% drop in utility gas service. Based on the limited data available for September and the recent trend in oil prices, another decline in energy prices appears likely to come in next month's CPI release. Food inflation also continued its run of relatively benign gains, rising 0.1% in August. Price growth for food consumed away from home (0.3% month-over-month and 4.0% year-over-year) once again outpaced inflation at the grocery store (prices unchanged over the month and up 0.9% compared to one year ago).

Monetary policymakers like those at the Federal Reserve tend to focus on inflation excluding food and energy given that these two components are quite volatile and their prices are often determined by factors other than the stance of monetary policy. That said, headline inflation better reflects the price growth that consumers experience in their daily lives. Much slower food and energy inflation over the past year has brought good news for households on the inflation front. The 2.5% increase in the headline CPI over the past 12 months is more or less in line with where this indicator was on the eve of the pandemic (2.3% in February 2020).

Core inflation picked up in August, rising 0.3% after a 0.2% gain in July. The slower pace of disinflation when excluding food and energy comes amid what is still rather sticky services inflation. Core services prices advanced 0.4% in August, the largest increase since April. The moderation in shelter inflation remains painfully slow. Despite the notably lower pace of rental inflation signaled by private sector measures, primary shelter (the weighted average of rent of primary residences and owners' equivalent rent) rose 0.5% in August. We have not given up the view that shelter inflation should slow more materially ahead, with the BLS's All Tenant Rent Index having fallen sharply. That said, the stubbornly high pace of official shelter inflation raises some doubts about the extent to which it may ultimately ease further this cycle.

Core services ex-shelter also got a boost in August from higher travel-related prices (lodging away from home +1.8%, airfares +3.9%). Given that these categories are some of the more volatile components of core services, we are less concerned about their monthly rise in the context of further services disinflation ahead. Meanwhile, outright deflation in the goods sector continues. Core goods fell 0.2%, led by a drop in used autos (-1.0%). While auction prices point to a rebound in used vehicle prices over the next month or two, outside the auto space, goods prices also declined in August, signaling the benefits of smoother supply chains and cooler demand have yet to run their course.

While core prices rose more in August relative to the prior three-month average pace of monthly gains (0.13%), the early summer pace likely understated the trend in inflation just as the first quarter's average gain of 0.37% seemed to overstate it. August's figures likely give a somewhat cleaner read, in our view. The three-month annualized rate of core CPI inflation was just 2.1% in August, below the year-over-year pace of 3.2%. With food and energy related commodity prices having retreated of late and ongoing cooling in the labor market, we expect inflation to remain in check in the months to come.

The combination of today's CPI report, last Friday's employment report and recent communication from key Fed officials leads us to believe that the FOMC will reduce the federal funds rate by 25 bps at its meeting next week. That said, we would not be completely shocked if the FOMC opted for a 50 bps rate cut instead. Nonfarm payroll growth has slowed significantly in recent months, and the upward trend in the unemployment and under-employment rates is concerning. The pickup in core CPI inflation from July to August is unwelcome news for those hoping for a larger cut next week, but the underlying trend in price growth remains down in our view.