Source: Reuters

British business confidence ebbed slightly this month after reaching an eight-year high in July and August, as concerns about the broader economic outlook rose to a six-month high, a survey from Lloyds Bank showed on Monday.

Lloyds' overall business barometer - which represents the difference between the percentage of firms with positive and negative views - fell by 3 percentage points to a three-month low of +47%. Businesses had a brighter view of their own prospects than those of the wider economy.

"The more mixed picture for economic optimism points to some businesses maintaining a degree of caution. While we still expect economic expansion, it may occur at a slower rate than the first half of 2024," Lloyds economist Hann-Ju Ho said.

However, earlier this month the Bank of England trimmed its growth forecast for the third quarter and predicted a quarterly expansion of 0.3%, around Britain's long-term growth rate.

An S&P Global survey of purchasing managers last week showed a bigger-than-expected slowdown in growth for September, although the index remained well above levels for the euro zone.

S&P said some businesses were putting investment and hiring plans on hold until there is clarity about the new Labour government's tax policy and employment law changes.

Labour has said taxes are likely to have to go up by more than it had planned before July's election, and it is also due to set out legislation to give greater employment protection to staff with less than two years' service.

The Lloyds survey's employment balance fell by 1 point to +36% in September.

The Lloyds survey was based on responses from 1,200 British companies with annual sales of more than 250,000 pounds ($334,325) and was was carried out between Sept. 2 and Sept. 16.

Source: The edge markets

Silver price (XAG/USD) falls sharply to near $31.50 in Monday’s European session. The white metal weakens even though the US Dollar (USD) has dropped to near its yearly lows ahead of Federal Reserve (Fed) Chair Jerome Powell’s speech, which is scheduled at 17:00 GMT.

The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, appears as vulnerable near 100.20. 10-year US Treasury yields climb to near 3.77%. Higher yields on interest-bearing assets increase the opportunity cost of holding an investment in non-yielding assets, such as Silver.

Investors will pay close attention to Fed Powell’s speech as he is expected to provide fresh interest rate guidance. Market participants want to know whether the Fed will reduce interest rates again by a larger-than-usual cut of 50 basis points (bps) in the November meeting.

According to the CME FedWatch tool, traders are almost equally split for a 25 or 50 bps interest rate cut in November. The tool also shows that the Fed will reduce interest rates collectively by 75 bps in the remainder of the year.

This week, investors will focus on a slew of the United States (US) economic data, such as JOLTS Job Openings for August and the ADP Employment Change and Nonfarm Payrolls (NFP) data for September.

Silver technical analysis:

Silver price struggles to extend its upside above the horizontal resistance plotted from the May 21 high of $32.50 on a daily timeframe. The near-term outlook of the white metal remains firm as the 20-day Exponential Moving Average (EMA) at $30.55 is sloping higher.

The 14-day Relative Strength Index (RSI) oscillates in the bullish range of 60.00-80.00, suggesting that a bullish momentum is intact.

Silver daily chart

Source: FXSTREET

EUR/USD moves higher to near 1.1200 in Monday’s European trading session. The major currency pair rises despite the flash annual Consumer Price Index (CPI) data of six German states showing that price pressures have decelerated further in September. The month-on-month inflation rose at a faster pace than what market participants saw in August but was within the 0.2% bracket.

On Friday, the flash French Consumer Price Index (EU Norm) and the Spanish Harmonized Index of Consumer Prices (HICP) data also showed that price pressures grew at a slower-than-expected pace in September.

A further slowdown in inflationary pressures has prompted market expectations of the European Central Bank (ECB) to cut interest rates again in the October meeting. Investors raised their bets on Friday on another rate cut on October 17 and have now priced in about a 75% chance of a move compared with only about a 25% chance seen last week, Reuters reported. The ECB also reduced its Rate on Deposit Facility by 25 basis points (bps) to 3.5% in its policy meeting on September 12.

Going forward, the Euro (EUR) is expected to remain highly volatile as investors await the preliminary HICP data of Germany and the Eurozone for September, which will be published on Monday and Tuesday, respectively.

In today’s session, investors will also pay close attention to ECB President Christine Lagarde’s speech at 13:00 GMT, in which she is expected to provide cues about the likely interest rate cut path for the remainder of the year. 

Daily digest market movers: EUR/USD moves higher despite inflation in six states of Germany decelerating further

EUR/USD edges higher on Monday as the US Dollar (USD) remains under pressure ahead of the Federal Reserve (Fed) Chair Jerome Powell’s speech, which is scheduled at 17:00 GMT. Investors expect Powell to provide fresh cues about the likely interest rate cut size by the Fed in the November monetary policy meeting.

According to the CME FedWatch tool, the probability of the Fed reducing interest rates by 50 basis points (bps) in the November meeting to the range of 4.25%-4.50% is 41.6% at the time of writing. The likelihood has decreased from nearly 53.0% on Friday after the release of the United States (US) Personal Consumption Expenditures Price Index (PCE) report for August.

The PCE price index report showed on Friday that the annual inflation decelerated at a faster pace to 2.2% from the estimates of 2.3% and July’s reading of 2.5%. This was the lowest reading since February 2021. However, its impact appeared to be offset by the annual core PCE inflation – which excludes volatile food and energy prices – that accelerated to 2.7% from the former release of 2.6%, as expected, diminishing the odds of a double-dose rate cut in the next meeting.

Lately, Fed policymakers have become more focused on preventing job losses and an economic slowdown, with growing confidence that inflation will return to the bank’s target of 2%. To get fresh insights about the current status of the labor market health, investors will focus on a string of economic data such as JOLTS Job Openings for August, and the ADP Employment Change and Nonfarm Payrolls (NFP) data for September, which will be published this week.

Technical Analysis: EUR/USD is poised to reclaim 1.1200

EUR/USD gathers strength to recapture 1.1200 in European trading hours on Monday. The major currency pair remains firm as it holds the breakout of the Rising Channel chart pattern formed on a daily time frame near the psychological level of 1.1000. 

The upward-sloping 20-day Exponential Moving Average (EMA) near 1.1110 suggests that the near-term trend is bullish.

The 14-day Relative Strength Index (RSI) hovers near 60.00. A bullish momentum would trigger if the oscillator remains above this level.

Looking up, a decisive break above the round-level resistance of 1.1200 will result in further appreciation toward the July 2023 high of 1.1276. On the downside, the psychological level of 1.1000 and the July 17 high near 1.0950 will be major support zones.

Source: FXSTREET

In focus today

Focus is on the German inflation data for September. Last week both the French and the Spanish inflation prints came in lower than expected and it will be very interesting to see if this is echoed in the German data.

Focus for the remainder of the week will primarily be on the euro area inflation data for September on Tuesday and the US September Jobs Report on Friday. Ahead of the labour market report, September ISM manufacturing and services indices together with August JOLTs data will also be due for release. The Polish Central Bank announces its base rate on Wednesday. Moreover, in China the National Day holiday starts on Tuesday and lasts for seven days.

Economic and market news

What happened overnight

In China, the private sector Caixin PMI indices declined in September, with the manufacturing gauge falling to 49.3 (August: 50.4), and the services leg edging down to 50.3 (August: 51.6). The official PMIs from NBS were also released, with the manufacturing PMI improving slightly in September to 49.8 (August: 49.1) – the highest print in five months. The non-manufacturing index dropped to 50.0 from 50.3 in August, while the composite measure increased to 50.4 from 50.1. While the readings were generally to the soft side, indicating a challenged economy, we see upside risks to our growth estimate of 4.8% this year and next, given the massive stimulus measures announced last week.

What happened since Friday

In the US, the PCE price index in August stood at 2.2% y/y (0.1% m/m SA), while the core measure was to the soft side at 0.1% m/m SA (cons: 0.2% m/m). The seasonally adjusted monthly core services PCE inflation remained steady and close to June-July pace (0.23% m/m, from 0.24%). On an annual basis, core services inflation picked up slightly to 3.8% (from 3.7%), which is still somewhat above average pre-pandemic pace (circa 2.5%). The downside surprise was mostly driven by the core goods component (-0.17% m/m SA), where deflation has been observed for quite a while now. Overall, a non-dramatic reading, with a muted market reaction as well.

Revised data from the University of Michigan showed consumer sentiment rising to 70.1 in September from 67.9 in August. Inflation expectations were slightly mixed, with the 1-year outlook ticking down to 2.7% in September (August: 2.8%) and the 5-year gauge increasing to 3.1% (August: 3.0%).

In the euro area, both French and Spanish inflation data for September were weaker than expected. French HICP inflation fell to 1.5% y/y from 2.2% y/y in August (cons: 2.0%), driven by lower energy prices due to base effects and monthly declines. Momentum in French services inflation is softening somewhat, though the decline relates to the high prices increases in August due to the Olympics. Spanish HICP inflation declined to 1.7% y/y from 2.4% y/y in August (cons: 1.9%). The soft country readings support the ECB’s confidence in inflation returning to target.

In Norway, the seasonally adjusted NAV-unemployment rate rose to 2.1% in September, indicating that the labour market remains relatively tight despite some recent weakness in employment and unfilled vacancies. Retail sales for August grew 0.1% m/m but seem to be trending moderately downward after extreme summer volatility and a pick-up in real wage growth. We still expect private consumption to pick up going forward, but the figures at least show moderate risk of an immediate boom in consumption.

In Japan, Shigeru Ishiba won the LDP leadership election on his fifth attempt and will become Japan’s next prime minister. Some of his pledges include of cleaning up the ruling party, revitalising the economy and addressing security threats from powerful neighbours. On Sunday, Ishiba said that “monetary policy must remain accommodative as a trend given current economic conditions”, while noting that rate decisions rest with the Bank of Japan (BoJ), with which the government will cooperate. Ishiba has previously criticized the BoJ’s aggressive monetary easing.

In Middle East, Israel’s killing of Hezbollah leader Nasrallah marks a significant escalation in the ongoing conflict. For now, we think all the signals coming from Iran point towards them still being reluctant to escalate and we think that will be the case.

Equities: Global equities were higher on Friday, buoyed by a rally in Chinese stocks, while the US markets ended lower. Last week, global equities overall saw gains, with the Chinese markets experiencing their best week since 2008; a story in its own right. It was particularly interesting to see materials and consumer discretionary sectors outperforming, while defensives and minimum volatility categories struggled. The massive shift in focus last week from the US, services, AI, lower inflation, and softer monetary policy to a resurgence driven by the traditional Chinese property market growth inverted the familiar equity leadership we have observed for a couple of years.

As discussed last week, when markets become very stretched and oversold, and key fundamentals are changing, reversals can occur dramatically. This was evident last week and has continued this morning as policy measures are overshadowing the weak service and manufacturing Caixin PMI data. Chinese stocks are surging, with increases of 3-5%, continuing their ascent. Conversely, the rest of Asia is mostly lower, with Japanese stocks declining almost 5% following the surprising election of Shigeru Ishiba as new prime minister. US and European futures are very close to unchanged. However, it is clear that Europe is benefiting far more from the uplifted sentiment in China than the US.

FI: EUR rates fell across the curve on Friday morning, as French/Spanish inflation figures came out markedly softer than expected. Part of the initial move faded through the session, but EUR swap rates were nevertheless 5-6bp lower across tenors by the close. Markets now price in 20bp ahead of the October meeting, and we agree that the recent data (inflation/PMIs) have moved the balance of risk in favour of another 25bp. Hence, we have changed our ECB call, now expecting the ECB to cut in October and December, before resuming to quarterly cuts in 2025. Our new profile also includes a rate cut in December 2025, thus bringing the deposit rate to 2% then.

FX: Last week marked the 4th consecutive week of a weaker USD, although the second half of Friday’s session saw some support to the USD which closed the day unchanged. The yen had a strong session with USD/JPY declining four figures as Ishiba’s unexpected LDP presidency win is seen as hawkish for BoJ prospects. The NOK was as one of last week’s underperformers whereas the SEK found support broadly, with EUR/SEK trading below 11.30 and USD/SEK briefly touching new YTD lows below 10.05.