Silver price (XAG/USD) continues its winning streak that began on September 9, trading around $29.90 per troy ounce during the Asian hours on Friday. The non-yielding assets like Silver received support after economic data from the United States (US) reinforced the possibility that the Federal Reserve (Fed) could lower interest rates by 50 basis points next week. Lower interest rates make non-yielding assets more attractive for investment returns.

According to the CME FedWatch Tool, markets are fully anticipating at least a 25 basis point (bps) rate cut by the Federal Reserve at its September meeting. The likelihood of a 50 bps rate cut has sharply increased to 41.0%, up from 14.0% a day ago.

The US Producer Price Index (PPI) rose to 0.2% month-on-month in August, exceeding the forecasted 0.1% increase and the previous 0.0%. Meanwhile, core PPI accelerated to 0.3% MoM, against the expected 0.2% rise and July’s 0.2% contraction. However, US Initial Jobless Claims rose slightly higher for the week ended September 6, increasing to the expected 230K from the prior 228K reading.

On Thursday, the European Central Bank (ECB) lowered the Main Refinancing Operations Rate to 4.0% by implementing a 25 basis-point rate cut. Additionally, the UK GDP showed no growth in July, following a stagnation in June, which reinforces expectations of a possible quarter-point rate cut by the Bank of England (BoE) in November. Some traders are also pricing in the possibility of an additional rate cut in December.

Markets are assessing demand prospects in China, the world's largest consumer, following mixed economic signals, while also considering the growth of the renewable energy sector, where Silver plays a key role in solar panel production.

Source: FXSTREET

The EUR/USD pair builds on the previous day's goodish recovery move from the 1.1000 psychological mark, or a nearly four-week low and attracts some follow-through buyers for the second straight day on Friday. The momentum lifts spot prices to the top end of the weekly range, around the 1.1090 area during the Asian session and is sponsored by broad-based US Dollar (USD) weakness.

The softer-than-expected US Producer Price Index (PPI) report released on Thursday lifted bets for a larger interest rate cut by the Federal Reserve (Fed) next week. This, along with a positive risk tone, drags the USD to over a one-week low and turns out to be a key factor acting as a tailwind for the EUR/USD pair. Meanwhile, the European Central Bank (ECB) refrained from providing a specific interest rate guidance, which underpins the shared currency and contributes to the bid tone surrounding the currency pair. 

From a technical perspective, spot prices currently trade near the top end of over a three-week-old descending trend channel. A sustained strength beyond will suggest that the recent corrective decline from the highest level since July 2023 touched last month, has run its course and pave the way for a further near-term appreciating move. The EUR/USD pair might then accelerate the positive move towards the next relevant hurdle near the 1.1155 area before making a fresh attempt to conquer the 1.1200 round-figure mark. 

On the flip side, the 1.1065-1.1060 horizontal zone now seems to protect the immediate downside ahead of the 1.1000 pivotal support. The latter is closely followed by the descending trend-channel support, currently near the 1.0975 area, which if broken decisively will be seen as a fresh trigger for bearish traders and prompt aggressive technical selling. The subsequent downfall has the potential to drag the EUR/USD pair towards testing sub-1.0900 levels, with some intermediate support near the 1.0950 region.

EUR/USD 4-hour chart

Source: FXSTREET

As expected, on 12 September, the ECB cut its policy rate, the deposit rate, by 25 basis points to 3.50%. Moreover, from 18 September, the ECB's new operational policy framework will take effect. Specifically, this means, among other things, that from then on the spread between the refinancing rate (MRO) and the deposit rate (DFR) will be 15 basis points. Between the marginal lending rate (MLF) and the refinancing rate, the spread remains 25 basis points. Specifically, following today's interest rate decision, the MRO rate will be lowered to 3.65%, and the MLF rate to 3.90% starting 18 September. 

The ECB also confirmed the implementation of quantitative policy decisions already taken. Thus, the ECB is shrinking its PEPP portfolio by an average of EUR 7.5 billion per month by not reinvesting all assets at maturity. As of 2025, these partial reinvestments will also be completely discontinued. The ECB also continues to evaluate the impact of banks' repayments of outstanding TLTROs on its monetary policy stance. After all, these repayments remove (excess) liquidity from the financial system.

The resumption of the rate easing cycle by the ECB in September was widely expected by financial markets and was also part of KBC Economics' interest rate scenario. The ECB's decision is consistent with recent macroeconomic indicators for the eurozone, in particular the drop in headline inflation to 2.2% in August. While that decline was driven largely by the temporary effect of a negative year-over-year change in energy prices, the overall disinflationary trend towards the ECB's 2% target remains broadly intact. 

ECB September projection with few surprises

 In their new September macroeconomic projections, ECB economists, as in the June projections, expect inflation to reach the 2% target in the second half of 2025. Annual average inflation expected by ECB economists remained unchanged at 2.5%, 2.2% and 1.9% in 2024, 2025 and 2026, respectively. Behind this is a slightly higher path for underlying core inflation (excluding food and energy) compared to June's projections. Nevertheless, even the annual average core inflation rate will fall to 2% in 2026, according to ECB economists. The slightly higher path for core inflation is offset by a more moderate price path of the energy and food components, according to the ECB economists, leading to an unchanged inflation path on balance as mentioned. In addition, ECB economists revised the GDP growth path slightly downward, in the context of recent weaker activity indicators, especially related to domestic demand.

ECB remains data-dependent and does not pre-commit

Against that backdrop, the ECB remained vague about the further timing and magnitude of the next steps in its easing cycle. It underlines that its further decisions remain fully data-dependent and are (re)considered from meeting to meeting.

That pragmatic data-dependence remains a sensible strategy against the backdrop of still stubborn core inflation (mainly driven by the services component), which reached 2.8% year-on-year in August. However, as also expected by the ECB, core inflation is likely to cool further in the relatively short term. Three factors are likely to play a role in this. The current wage agreements to a large extent reflect a one-off catch-up in real wages relative to the inflation surge of the recent past. Consequently, they are unlikely to be repeated to the same extent in 2025. In addition, declining corporate profit margins play a role of buffer that absorbs part of the higher labour costs. That part is then no longer passed on to final consumer prices. Finally, labour productivity, which is currently quite low in the euro area due to ‘labour hoarding’ during the crisis period, will increase again for cyclical reasons during the expected recovery. Together with the expected moderation of wage increases from 2025 onwards, this is likely to bring the expected development of unit labour costs back in line with the inflation target of 2%.

Keeping an eye on the Fed

The ECB's self-proclaimed data dependence is also largely related to the fact that ECB policy is not independent of the Fed. Indeed, if the ECB were to ease substantially less that the Fed, it would likely lead to a further appreciation of the euro against the dollar. The ECB will want to avoid that negative impact on European growth (via net exports) as well as the additional disinflationary effect. Ultimately, this means that ECB policy will be partly indirectly dependent on US economic data, especially the US labour market, since they help determine Fed policy. The task for the ECB is further complicated by the fact that, as now in September, the ECB has to make its next two interest rate decisions just before the Fed's policy meetings. Hence the ECB's emphasis on its data dependence.   

Outlook

Against the background of the continuation of the disinflationary trend, weaker activity indicators, the upcoming start of the easing cycle by the Fed and the strengthened exchange rate of the euro against the dollar, we expect the ECB to cut its interest rates one more time in December 2024. Whether that will be by 25 basis points (our base case, i.e. to 3.25% by the end of 2024) or by 50 basis points will depend crucially on how sharply the Fed implements its easing cycle starting next week. 

In the first half of 2025, the ECB will cut its deposit rate further, which will bottom out in this interest rate cycle. Again, the ECB reaction will depend heavily on the Fed's interest rate path. The more severe the Fed's easing cycle, the more likely it is that the ECB deposit rate in this cycle will also show a substantial undershooting relative to the fundamental neutral rate. 

Financial markets are currently unsure whether the remaining ECB rate cut in 2024 will be 25 basis points (to 3.25%) or 50 basis points (to 3%). The implicitly priced in financial market probabilities are about 50%-50%, with the balance shifting slightly to 25 basis points during ECB President Lagarde's press conference. That move was also consistent with a net slight increase in the German 10-year yield by a few basis points.

Source: KBCBANK

The USD/CAD pair reverses a modest Asian session dip and currently trades around the 1.3575 region, nearly unchanged for the day, though any meaningful appreciating move still seems elusive. 

The US Dollar (USD) sinks to over a one-week low amid growing expectations for an oversized interest rate cut by the Federal Reserve (Fed) next week, bolstered by signs of easing inflationary pressures in the US. In fact, data published on Thursday showed that the annual headline Producer Price Index (PPI) decelerated to 1.7% from the previous month's downwardly revised reading of 2.1%. Adding to this, the core PPI, which excludes volatile food and energy prices, missed consensus estimates and came in 2.4% YoY during the reported month. 

The markets were quick to react and are now pricing in over 40% chance that the US central bank will lower borrowing costs by 50 basis points at its policy meeting on September 17-18. This keeps the US Treasury bond yields depressed near the 2024 low, which, along with a positive risk tone, weighs on the USD and acts as a headwind for the USD/CAD pair. Furthermore, this week's goodish recovery in Crude Oil prices, from the lowest level since June 2023, should underpin the commodity-linked Loonie and contribute to capping spot prices. 

Market participants now look forward to Friday's economic docket – featuring the release of the Preliminary Michigan US Consumer Sentiment Index and second-tier data from Canada. Apart from this, the US bond yields and the broader risk sentiment might influence the USD demand, which, along with Oil price dynamics, could allow traders to grab short-term opportunities around the USD/CAD pair. Nevertheless, spot prices seem poised to register modest weekly gains, though bulls need to wait for acceptance above the 1.3600 mark before placing fresh bets.

Source: FXSTREET

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August inflation in Romania brings a mixed bag of data to the table. While nothing seemed particularly out of order, we did raise an eyebrow seeing food inflation advancing by 0.3% versus the previous month, with some items such as vegetables and potatoes posting price increases against what would have normally been pretty steep seasonal price drops. In annual terms, food prices accelerated to 4.2% in August, from July’s low of 1.7%.

Nevertheless, the higher food prices have been largely offset by lower-than-expected non-food prices. That said, the 0.03% contraction in non-food prices versus the previous month has been driven largely by cheaper fuel and a lower-than-expected electricity price increase. Benefiting from a large base effect, the annual acceleration of non-food prices slowed to 4.3%, from 6.9% in July.

What does this mean for the National Bank of Romania?

The inflation data is unlikely to have a meaningful impact on the NBR’s policy decisions. Despite some hiccups and mildly disturbing details, the general disinflationary trend is largely on track.  We maintain our year-end estimate at 4.2%, versus the NBR’s 4.0%. What could have a more meaningful impact on the central bank's policy decisions, however, is the latest weak GDP data which could tilt the balance of risks towards a more dovish approach from the central bank. While at this point our base case for the interest rates path remains one of stability for the rest of the year, the chances of seeing one more rate cut at either the October or November NBR policy meeting are clearly material. If a 25bp key rate cut is to materialise, it would come on top of our forecast of 75bp cumulated rate cuts in 2025.