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In a speech today, ECB Executive Board member Isabel Schnabel addressed the recent declines in inflation across parts of the Eurozone, describing them as "welcome developments." However, she cautioned that the "current level of headline inflation understates the challenges monetary policy is still facing."

Schnabel highlighted that domestic inflation remains elevated at 4.4%, driven largely by "persistent price pressures in the services sector," where disinflation has stalled since last November. She pointed out that the continued high inflation momentum, particularly the annualized three-month-on-three-month change, indicates that services prices are still rising at a significant pace of almost 5%.

Schnabel noted that while incoming data broadly supports ECB's baseline outlook, caution is needed as policy rates approach the upper band of the neutral rate, "the less certain we are how restrictive our policy is"

The pace of policy easing, she emphasized, "cannot be mechanical" and must be guided by data and analysis to ensure that monetary policy does not itself become a factor hindering disinflation.

Full speech of ECB's Schnabel here.

Swiss KOF Economic Barometer edged up to 101.6 in August, slightly above expectations of 100.6, signaling a modest improvement in economic activity. The indicator remains just above its medium-term average, suggesting that Swiss economy is on what KOF describes as a "hesitant recovery path."

The upward movement in the Barometer was driven primarily by gains in the other services sector, consumer demand, and construction industry. Additionally, the manufacturing and hospitality sectors saw modest improvements.

Meanwhile, the indicators for foreign demand remained nearly stable, while the financial and insurance services sector faced a slight decline.

Full Swiss KOF release here.

• USDCAD changes the outlook to bearish after the fall below 1.3600
• Stochastic ticks up but RSI still holds near 30 zone

USDCAD is recouping some losses after the strong selling interest that started from the penetration of the 1.3600 round number and the 200-day simple moving average (SMA). The pair found support near the 1.3440 level, which is an almost six-month low.

Currently the market is trying to remain above the 1.3480 barricade with the technical oscillators suggesting more buying interest. The stochastic is pointing upwards following a bullish crossover within its %K and %D lines, while the RSI is flattening near the 30 level after it bottomed in the oversold region.

In case of more bullish movements the next battle would come again with the 1.3600 psychological mark ahead of the 20- and 50-day SMAs at 1.3635 and 1.3685 respectively.

On the other hand, a slide beneath the 1.3420-1.3440 support area could open the way for a new low in the short-term, meeting the 1.3360 barricade, taken from the trough on January 31.

All in all, USDCAD has decreased around 4% from the 22-month high of 1.3947 and switched the near-term outlook to bearish.

Daily Pivots: (S1) 1.1043; (P) 1.1091; (R1) 1.1127; More....

While EUR/USD's retreat from 1.1200 extended lower, downside is contained above 1.1007 resistance turned support. Intraday bias remains neutral and larger rally is still expected to continue. On the upside, break of 1.1200 will resume recent rally to 161.8% projection of 1.0665 to 1.0947 from 1.0776 at 1.1232, and then 1.1274 high.

In the bigger picture, break of 1.1138 resistance indicates that corrective pattern from 1.1274 has 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) 1.3133; (P) 1.3180; (R1) 1.3215; More...

Intraday bias in GBP/USD remains neutral as consolidation from 1.3265 is still expected. Downside of retreat should be contained well above 1.3043 resistance turned support to bring rebound. On the upside, above 1.3265 will resume larger up trend to 100% projection of 1.2298 to 1.3043 from 1.2664 at 1.3409.

In the bigger picture, up trend from 1.0351 (2022 low) is resuming. 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.

Daily Pivots: (S1) 144.28; (P) 144.92; (R1) 145.61; More...

Intraday bias in USD/JPY stays neutral but further fall is in favor with 146.47 minor resistance intact. Break of 143.43 will bring retest of 141.67 low. Firm break there will resume the whole fall from 161.94 to 140.25 support next. On the upside, above 146.47 will turn intraday bias back to the upside for 149.35 resistance instead.

In the bigger picture, fall from 161.94 medium term top is seen as correcting whole up trend from 102.58 (2021 low). Deeper decline could be seen to 38.2% retracement of 102.58 to 161.94 at 139.26, which is close to 140.25 support. In any case, risk will stay on the downside as long as 55 W EMA (now at 149.38) holds. Nevertheless, firm break of 55 W EMA will suggest that the range for medium term corrective pattern is already set.

Daily Pivots: (S1) 0.8418; (P) 0.8456; (R1) 0.8512; More…..

Intraday bias in USD/CHF remains neutral as consolidation continues above 0.8399. Outlook will remain bearish as long as 0.8747 resistance holds. Break of 0.8339 will resume the decline from 0.9223 and target 61.8% projection of 0.9049 to 0.8431 from 0.8747 at 0.8365, and then 0.8332 low.

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) 0.6776; (P) 0.6800; (R1) 0.6822; More...

AUD//USD continues to lose upside moment as seen in 4H MACD, but there is no clear sign of topping yet. Further rally is expected as long as 06696 support holds. Current rally should target 0.6870 resistance. Firm break there will target 100% projection of 0.6269 to 0.6870 from 0.6348 at 0.6949. However, break of 0.6696 will indicate short term topping, and turn bias back to the downside for deeper pullback.

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.

Daily Pivots: (S1) 1.3459; (P) 1.3475; (R1) 1.3500; More...

USD/CAD continues to consolidate above 1.3439 temporary low and intraday bias remains neutral. Upside of recovery should be limited below 1.3617 resistance to bring another fall. On the downside, below 1.3439 will resume the decline from 1.3946 and target 1.3176 support next.

In the bigger picture, current development suggests that 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.

Markets

Fixed income and FX markets yesterday had to cope with a divergent message from EMU and US data. German and Spanish August headline inflation slowed more than expected (German HICP -0.2% M/M and 2.0% from 2.6% vs 2.2% expected, Spain 0.0% M/M and 2.4% Y/Y from 2.9%). This provides some comfort for the ECB as it intends to further reduce policy tightening next month. However, the slowdown mainly came from lower energy prices. The progress in measures of underlying inflation was far less impressive (Spain core 2.7% from 2.8, Germany 2.8% from 2.9%, with still rather robust services inflation 0.4% M/M). Still, the data initially pushed EMU yields lower in a steepening move. However, global bond market momentum changed after the publication of US data. US Q2 GDP growth was upwardly revised from 2.8% Q/Qa to 3.0% due to strong personal consumption (2.9% from 2.3%). Weekly jobless claims also held a relatively low 231k. The Q2 GDP revision is old news but was enough for yields to close 2-3 bps higher across the curve. German yields reversed part of the initial decline though the 2-y yield still lost -2.8 bps. The 30-y added 2.1 bps. After recent dollar weakness, softer EMU CPI data this timed triggered a correction of the euro. EUR/USD dropped from the 1.1140 area to close at 1.1077. DXY rebounded from 101.00 to 101.34, but gains in the likes of USD/JPY (close 145) were modest. Equities initially also enjoyed some reflationary dynamics (EuroStoxx 50 +1.08%). US indices also opened with a constructive momentum, but mostly couldn’t hold on to initial gains (Nasdaq -0.23%). The Dow (+0.58%) finished at a new record. Markets for now apparently embrace a favourable (US) soft landing scenario.

This morning, Asian equities show broad-based gains with China outperforming. The yuan extends its comeback from earlier this month with USD/CNY testing the end-December low. The yen trades little changed after higher than expected Tokyo CPI data (USD/JPY 144.9). Later today, EMU August flash CPI probably will confirm yesterday trends from Germany and Spain (headline expected at 0.2%M/M and 2.2% Y/Y, core 2.8% from 2.9%, risks for downside ‘surprise’). With 3 additional 25 bps ECB rate cuts at each of the remaining meetings this year still not fully discounted, there is still room for some further decline in yields at the short end of the EMU yield curve. This also might trigger some further euro correction ST. In the US, the July income and spending data and the PCE deflators will be published. For the latter, a 0.2% M/M price dynamics is expected. Even in case of a mild soft surprise, we don’t expect a big market reaction with already 100 bps of cumulative Fed rate cuts discounted for this year. US markets are heading for a long weekend (Labour day). The focus will turn to next week’s key ISM’s and US labour market data. In this respect, we don’t change our call yet for the dollar to stay rather weak in the run-up the September Fed meeting.

News & Views

Tokyo inflation, the closely watched frontrunner of national inflation (September 20 release) put an October rate hike (updated GDP/CPI forecasts contrary to September meeting) by the Bank of Japan on the table. The central bank’s preferred gauge, CPI ex. fresh food, rose by 0.5% M/M with the Y/Y-figure unexpectedly accelerating from 2.2% to 2.4%. Headline inflation increased by 0.6% M/M and 2.6% Y/Y, matching the highest level YTD. Details showed goods inflation increasing by 0.8% M/M and services inflation rising by 0.3% M/M with sharper increases in costs of eating out, household services and entertainment driving the latter. While some of the inflation pick-up was the result of one-offs and base effects, it does not change the picture of a broad upswing in (service) prices. This bolsters the case for a further, be it gradual policy normalization by the Bank of Japan. The BoJ’s July hike came partially unexpected and helped cause the early August market riot, prompting some soothing comments from the central bank afterwards. Money markets therefore don’t expect much from the September 20 meeting and expect the next rate hike by December at the very earliest. Japanese bond yields trade little changed today as does the yen. USD/JPY oscillates around opening levels just south of 145.

Graphs

GE 10y yield

The ECB cut policy rates by 25 bps in June. Stubborn inflation (core, services) make follow-up moves less evident. Markets nevertheless price in two to three more cuts for 2024 as disappointing US and unconvincing EMU activity data rolled in, dragging the long end of the curve down. The move accelerated during the early August market meltdown.

US 10y yield

The Fed in its July meeting paved the way for a first cut in September. It turned attentive to risks to the both sides of its dual mandate as the economy is moving to a better in to balance. Markets tend to err in favour of a 50 bps lift-off. The pivot weakened the technical picture in US yields with another batch of weak eco data pushing the 10-yr sub 4%. Powell at Jackson Hole didn’t challenge markets’ positioning.

EUR/USD

EUR/USD moved above the 1.09 resistance area as the dollar lost interest rate support at stealth pace. US recession risks and bets on fast and large (50 bps) rate cuts trumped traditional safe haven flows into USD. EUR/USD 1 1.1276 (2023 top) serves as next technical reference.

EUR/GBP

The BoE delivered a hawkish cut in August. Policy restrictiveness will be further unwound gradually on a pace determined by a broad range of data. The strategy similar to the ECB’s balances out EUR/GBP in a monetary perspective. Recent better UK activity data and a cautious assessment of BoE’s Bailey at Jackson Hole are pushing EUR/GBP lower in the 0.84/0.086 range.