EUR/GBP recovers intraday losses, trading around 0.8430 during the early European hours on Friday. However, the EUR/GBP cross faced challenges following the European Central Bank’s (ECB) interest rate decision on Thursday.

The ECB reduced the Main Refinancing Operations Rate to 3.65% with a 60 basis points (bps) rate cut, exceeding the market expectations of a 25 bps cut. Additionally, in an interview with Deutschlandfunk early Friday, ECB policymaker and Bundesbank President Joachim Nagel mentioned that "core inflation is also moving in the right direction." Nagel expects the inflation goal to be achieved at the end of next year.

ECB Governing Council member Bostjan Vasle stated on Friday that "we are not committed to any predetermined rate path." Vasle also mentioned that inflation will largely be driven by core inflation and services. Meanwhile, ECB policymaker Olli Rehn emphasized that future policy decisions will continue to be based on an assessment of the inflation outlook, with current uncertainties highlighting the importance of relying on fresh economic data.

Traders are anticipating additional interest rate cuts by the Bank of England (BoE), particularly after this week's data indicated a slowdown in UK wage growth and a flat GDP print for the second consecutive month in July. These economic signals have reinforced expectations of more easing measures by the BoE.

Friday’s Eurozone Industrial Production is anticipated to decrease by 0.3% MoM in July, following a previous 0.1% decline. Meanwhile, the annual data is expected to show a 2.7% decline, an improvement from the previous 3.9% drop. On the UK front, Consumer Inflation Expectations will be eyed.

Source: FXSTREET

The Pound Sterling (GBP) extends its recovery to nearly 1.3150 against the US Dollar (USD) in Friday’s London session. The GBP/USD pair gains as the US Dollar (USD) falls sharply after the United States (US) Producer Price Index (PPI) data for August prompted market expectations for the Federal Reserve (Fed) to begin reducing interest rates next week aggressively. 

The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, slides further to near 101.00. 

The PPI report showed that the annual headline producer inflation rose by 1.7%, slower than the estimates of 1.8% and July’s print of 2.1%. In the same period, the core PPI – which excludes volatile food and energy prices – grew steadily by 2.4%. Investors expected the core PPI to have accelerated to 2.5%. Meanwhile, the monthly headline and core PPI rose at a faster pace of 0.2% and 0.3%, respectively.

According to the CME FedWatch tool, the probability of the Fed reducing interest rates by 50 basis points (bps) to 4.75%-5.00% in September has increased sharply to 43% from the 14% before the US PPI data release. 

In Friday’s session, investors will focus on the preliminary Michigan Consumer Sentiment Index data for September. The sentiment data is estimated to have remained almost steady at 68.0 from the prior release of 67.9.

Daily digest market movers: Pound Sterling outperforms US Dollar

The Pound Sterling exhibits a strong performance against its major peers on Friday. The British currency strengthens on multiple tailwinds. Growing speculation for the Fed to reduce interest rates aggressively has improved market sentiment. In addition, firm expectations for the Bank of England (BoE) to follow a shallow policy-easing cycle have also strengthened the Pound Sterling.

Historically, the scenario of the Fed pivoting to policy-normalization aggressively improves the appeal of risky assets. S&P 500 futures have posted nominal gains in the Asian session after a bullish Thursday, suggesting an improvement in investors’ risk appetite.

According to a Reuters poll, the BoE is unlikely to cut interest rates in its next policy meeting, scheduled for next week. All 65 economists in a Reuters poll said the BoE would likely hold rates at 5.0% on Thursday after cutting from a 16-year high of 5.25% in August.

Meanwhile, the next major trigger for the Pound Sterling will be the United Kingdom (UK) Consumer Price Index (CPI) data for August, which will be published on Wednesday. The latest BoE forecast showed that the UK annual headline inflation will remain above 2% by the year-end.

Technical Analysis: Pound Sterling bounces back from 1.3000

The Pound Sterling recovers sharply to near 1.3150 against the US Dollar. The GBP/USD pair bounced back strongly after discovering strong buying interest near the trendline plotted from the December 28, 2023, high of 1.2828, from where it delivered a sharp upside move after a breakout on August 21. Also, the 20-day Exponential Moving Average (EMA) near 1.3080 has acted as major support for the Pound Sterling’s appeal.

The 14-day Relative Strength Index (RSI) remains inside the 40.00-60.00 range. A fresh bullish impulse would occur if the momentum oscillator breaks above 60.00.

Looking up, the Cable will face resistance near the round-level resistance of 1.3200 and the psychological level of 1.3500. On the downside, the psychological level of 1.3000 emerges as crucial support for the Pound Sterling bulls. 

Source: FXSTREET

Markets

The ECB cut its deposit rate by 25 bps to 3.5% while narrowing the gap between the deposit rate and the main refinancing rate from 50 bps to 15 bps as flagged in March.

New growth and inflation forecasts barely changed from June. The ECB plots the same 2.5%-2.2%-1.9% average inflation path for the 2024-2026 period while marginally downwardly revising the now 0.8%-1.3%-1.5% growth trajectory for the same period.

ECB Lagarde offered no guidance for the remaining two policy meetings, but a simple copy-paste from Q3 suggests skipping the October meeting to reduce key rates by 25 bps again when new growth/inflation forecasts are available. The short, 5-week, intermeeting period to October 17 provides the ECB with only one additional PMI survey and CPI report. The

ECB president also acknowledged that inflation dynamics would accelerate going into year-end because of energy-related base effects (huge drops in energy prices in Q4 2023).

EMU money markets currently attach a 50 bps probability to an October rate cut which we don’t expect to unfold. German Bunds underperformed US Treasuries yesterday as the ECB stuck to its very gradual approach. German yields rose by 3 bps (30-yr) to 7.3 bps (2-yr) while US yield changes ranged between -0.1 bp (2-yr) and +2.3 bps (30-yr). Relative short term interest rate dynamics lifted EUR/USD away from the psychologic 1.10 barrier to a close at 1.1075.

US Treasuries rally  with the front end of the curve outperforming. Placed  articles on the FT and the WSJ reignite the debate which seemed to have been settled in favour of a 25 bps rate cut after this week’s upward core CPI surprise. US money markets are again completely split between 25 bps and 50 bps with US yields slipping 2.5 bps (30-yr) to 6.1 bps (2-yr) this morning.

While the content of the articles shows arguments for both cases, it’s the timing that matters (in blackout period with markets positioned at 25 bps). We still favour a 50-50-50 scenario for the September-November-December meetings. USD loses more ground this morning with the trade-weighted dollar at risk of slipping below 101 and testing important support around 100.50.

News & Views

The UK’s Office for Budget Responsibility (OBR) yesterday issued its annually updated Fiscal Risks and Sustainability Report. It painted a dire long-term future for the country’s public finances, warning that debt will nearly triple from below 100% (relative to GDP) this year to over 270% in 50 years in a situation of no policy changes.

The OBR said that higher spending on healthcare, pensions, the climate transition and interest costs combined with falling revenue from fuel duties will drive borrowing substantially higher. In the first decades of the 50 year forecasts, its especially the ageing population that drives up spending, with spiraling costs causing a snowball effect on debt interest.

The fiscal watchdog estimates that this would result in a 19 ppt increase in the budget deficit between 2028-29 and 2073-74, with some 8.5 ppts of that rise attributed to higher interest costs.

Health and pensioner spending add another 9.9 ppts. The gloomy report also dived into the matter of productivity growth. The OBR admitted in November last year that it has consistently been overoptimistic on potential productivity, producing economic and fiscal forecast errors.

The baseline scenario assumes 1.5% productivity growth in the long term. But in an alternative scenario debt to GDP could rise to +/- 650% if productivity would only rise by 0.5%, slightly below the post-GFC 2010-2019 average.

The Indian central bank governor Shaktikanta Das signaled he’s in no rush to lower interest rates even as inflation has re-entered the 2-6% target range since September of last year. Das this morning said while that is the case, their target is 4%. Inflation over the past two months have dipped below that figure.

August CPI released yesterday came in at 3.65% but that was largely due to statistical reasons. Das said that the central bank should not get carried away by these dips in inflation and warned against premature cuts given worries over food costs, even as last quarter’s growth dip to 6.7% raised the pressure somewhat.

The RBI has been keeping rates steady for more than 18 months straight now. The weak Indian rupee is another reason to be cautious with the easing cycle. While strengthening a tad against the USD (USD/INR 83.93) this morning, the currency still trades just inches away from the record lows.

Graphs

GE 10y yield

The ECB cut policy rates by 25 bps in June and in September. Stubborn inflation (core, services) make follow-up moves less evident. We expect the central bank to stick with the quarterly reduction pace. Disappointing US and unconvincing EMU activity data dragged 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. The pivot weakened the technical picture in US yields. A string of weak eco data and a risk-off market climate pushed and kept the 10-yr sub 4%. We think we could be up to three 50 bps rate cuts this year.

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 rate cuts trumped traditional safe haven flows into USD. EUR/USD 1.1276 (2023 top) serves as next technical references.

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.

Source: ACTIONFOREX

Following the bullish action seen in the first half of the week, the US Dollar (USD) Index turned south on Thursday and erased all of its weekly gains. The index struggles to gain traction early Friday and edges lower toward 101.00. Eurostat will release Industrial Production data for July and the US economic docket will feature August Export Price Index and Import Price Index data, alongside the University of Michigan's Consumer Sentiment Survey for September.

Soft producer inflation data from the US revived expectations for a large Federal Reserve (Fed) rate cut at the policy meeting next week, causing the USD to weaken against its major rivals. On a yearly basis, the Producer Price Index (PPI) rose 1.7% in August, down from 2.1% in July and below the market expectation of 1.8%. Additionally, the improving risk mood put additional weight on the USD's shoulders. Early Friday, US stock index futures trade flat and the 10-year US Treasury bond yield stays in negative territory at around 3.65%.

The European Central Bank (ECB) announced on Thursday that it lowered the deposit facility rate, also known as the benchmark interest rate, by 25 basis points (bps) to 3.5% as expected. In the post-meeting press conference, ECB President Christine Lagarde refrained from hinting on whether they are planning to ease policy further in the near term. EUR/USD gathered bullish momentum in the second half of the day on Thursday and rose more than 0.5%, snapping a four-day losing streak.

GBP/USD benefited from improving risk mood and the renewed USD weakness on Thursday and gained over 0.6%. The pair stays relatively quiet and trades in a tight channel above 1.3100 in the European morning.

Fitch Ratings said in its latest report that they expect the Bank of Japan’s (BoJ) to hike rates to 0.5% by the end of 2024, 0.75% in 2025 and 1% by end-2026. After closing the day marginally lower on Thursday, USD/JPY continues to stretch lower in the European morning and was last seen losing 0.5% on the day at 141.10.

Gold surged higher in the second half of the day on Thursday and reached a new record-high of $2,570 during the Asian trading hours on Friday. Although XAU/USD retreated slightly, it holds above $2,560 and remains on track to post strong weekly gains.

Source: FXSTREET

September Monetary Policy Decisions