Source: Reuters

EUR/USD gathers strength, aiming to reclaim the key resistance of 1.1200 in Friday’s European session. The major currency pair strengthens as the Euro (EUR) performs strongly on growing speculation that the European Central Bank (ECB) will leave its Deposit Facility rate unchanged at 3.5% in its October monetary policy meeting.

A few ECB policymakers have voiced their willingness to follow a gradual policy-easing approach as they want to see more evidence pointing to a slowdown in inflationary pressures. This week, ECB policymakers such as Governing Council member Peter Kazimir, Executive Board Member Isabel Schnabel, and President of Deutsche Bundesbank Joachim Nagel said that price pressures are still higher than where the bank wants them. 

Specifically, ECB Isabel Schnabel said on Thursday that sticky services inflation is keeping headline inflation at an elevated level.

For fresh guidance on interest rates, investors will focus on ECB President Christine Lagarde’s speech, which is scheduled at 15:00 GMT. In her latest comments at ECB policy’s press conference on September 12, Lagarde refrained from proving a pre-defined interest rate cut path. 

"The interest rate decisions will be based on its assessment of inflation outlook in light of incoming economic and financial data, dynamics of underlying inflation, and strength of monetary policy transmission," she said.

Daily digest market movers: EUR/USD gains as market bets for ECB rate cuts in October wane

EUR/USD remains firm above the crucial support of 1.1150 in Friday’s European trading hours. Lately, the major currency pair has performed strongly due to weakness in the US Dollar (USD). The US Dollar Index (DXY), which gauges the Greenback’s value against six major peers, hovers above the year-to-date low of 100.21.

The Greenback has weakened following the Fed’s bumper interest rate cut decision and increasing market expectations that the US central bank will continue with an aggressive policy-easing cycle. The Fed reduced interest rates by 50 basis points (bps) as policymakers seem to focus on reviving labor market strength as inflation is declining to the bank’s target of 2%.

On the interest rate guidance, Fed policymakers see the federal fund rate heading to 4.4% by year-end, according to the latest dot plot. However, traders expect interest rates to decline further, by 75 bps to 4.00%-4.25%, according to the CME FedWatch tool.

The preliminary consumer confidence reading for the Eurozone will be published at 14:00 GMT. Expectations are for a slight improvement of the index, to -13 in September from -13.5 in August.

In Friday’s New York session, US investors will focus on Philadelphia Fed Bank President Patrick Harker’s speech at 18:00 GMT for fresh guidance on interest rates.

Technical Analysis: EUR/USD stays above 1.1150

EUR/USD holds trade above 1.1150 in European trading hours. The near-term outlook of the shared currency pair is upbeat on the upward-sloping 20-day Exponential Moving Average (EMA) near 1.1088.

The major currency pair remains firm as it has confidently recovered after retesting the breakout of the Rising Channel chart pattern formed on a daily time frame near the psychological support of 1.1000. 

The 14-day Relative Strength Index (RSI) moves higher above 60.00. A bullish momentum would trigger if it sustains above the aforementioned level.

Looking up, the round-level resistance of 1.1200 will act as a major barricade for the Euro bulls. A decisive break above the same would drive the asset toward 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

The central bank paused the easing cycle in August

The National Bank of Hungary (NBH) left its key interest rate at 6.75% in August. The decision was justified by both the incoming data and an unfavourable turn in market developments, as we discussed in our previous NBH review.

The main interest rates (%)

Source: NBH, ING

Both inflation and economic activity surprised on the downside

Headline inflation slowed by 0.7ppt to 3.4% year-on-year in August, providing a significant downside surprise compared to expectations. In contrast to the previous release, this time the incoming data hit the bull's eye of the central bank's June forecast range, showing virtually no systematic deterioration relative to the expected inflation path. More surprisingly, core inflation also slowed, although rounding helped a lot. Nevertheless, the recent decline in headline inflation has brightened Hungary's short-term inflation outlook, although services inflation remains a concern.

What also improves the overall inflation outlook is weak economic activity, which provides less of a pro-inflationary risk. July's high-frequency activity data from the retail, industrial and construction sectors are all worrying for the economy's performance in the third quarter. In addition, the monthly budget deficit in August brought us closer to a flashing red light for GDP growth. Behind the weak performance, we suspect a weak revenue side, either due to a high level of household savings and/or a significant increase in retail activity in extraterritorial webshops (e.g., Temu, AliExpress).

Headline and underlying inflation measures (% YoY)

Source: HCSO, NBH, ING

Changes in market sentiment not a factor this time

Since the last NBH rate-setting meeting (27 August), core rates have trended lower, with the US 2-year yield falling by almost 35bp by 19 September. The long end of the US yield curve also moved lower by around 10bp. The direction of the German yield curve was broadly similar, with less pronounced amplitudes. The spread between 10-year HUF and PLN government bond yields widened by only 5bp compared to the August rate-setting meeting – hardly a game changer.

The EUR/HUF exchange rate also failed to surprise over the past month. The range between 393 and 397 provides some stability. We expect that HUF will be anchored around 395 unless there is a significant idiosyncratic market shock. Expectations for rate cuts have remained virtually unchanged, as based on the FRA curve, and investors still see the terminal rate at around 6.00% by the end of the year – although the central bank's forward guidance, which is still valid, refers to the 6.25-6.50% range as a realistic target.

Performance of CEE FX versus EUR (end-2023 = 100%)

Source: NBH, ING

Hungary’s central bank gets a helping hand from Fed’s jumbo cut

As if market stability (for a stability-oriented central bank) and an improving inflation outlook weren't enough, the Federal Reserve's 50bp rate cut and Chair Jerome Powell's statement that the US economy remains in good shape is definitely a mood booster for the Monetary Council. The Fed's unusual (though not unprecedented) flying start to the easing cycle is clearly reshaping monetary policy realities, especially for emerging market central bankers.

The recent jumbo cut provides an opportunity to ease pressure on vulnerable currencies such as the Hungarian forint and, accordingly, gives a bit more room for those willing to cut rates. And this is where the National Bank of Hungary enters the stage.

Our call

All in all, we believe that the National Bank of Hungary will cut the key rate by 25bp to 6.50% on 24 September, which is a high conviction call. We also expect the Monetary Council to cut both ends of the interest rate corridor by the same 25bp, leaving the width of the band at a symmetrical 200bp.

New staff projections could pave way for slight dovish tilt

The National Bank of Hungary will publish its latest set of macroeconomic projections for the main measures (GDP and inflation) alongside the interest rate decision, while the detailed September Inflation Report is due on 26 September.

Given the downside surprise in second-quarter GDP growth and the weaker-than-expected start to the third quarter, we expect a significant downward revision to the GDP forecast. After a 1.0ppt cut, we see the central bank's forecast range for economic activity this year at 1.0-2.0%. The lack of domestic demand is worrying enough to prompt a 0.5ppt downgrade in 2025 GDP growth to a range of 3.0-4.0%.

On the inflation front, actual headline data since the June forecast release has been more or less in line with the projected path. However, as we approach the end of the year, we expect the NBH to narrow the forecast range from 3.0-4.5% to 3.5-4.5%, as the lower end of the previous forecast has become statistically unlikely to be reached. While we see average inflation next year above but close to 4%, we don't think the central bank is ready to pull the trigger on a forecast change just yet. In turn, the NBH's inflation forecast for 2025-2026 will remain at 2.5-3.5%, in our view.

We see a chance for a slight dovish shift in the forward guidance

Our baseline scenario for the terminal rate in 2024 remains at 6.25%, implying another rate cut in the fourth quarter of this year. However, we would like to cautiously draw attention to downside risks and the possibility of a dovish shift.

With the GDP outlook for 2024 and 2025 expected to be revised sharply downwards, the potentially more muted pro-inflationary risk may warrant a shift in the risk map. In June, the central bank presented three main alternative scenarios, two of which were pro-inflationary. It may be that the majority of the main alternative scenarios presented this time around will favour downside risks to inflation.

Moreover, the Fed's willingness to deviate from the standard size of a rate cuts raises the possibility of another jumbo cut. Our baseline scenario for the Fed's rate cuts sees a total of 75bp of easing over the rest of the year, and market pricing tends to agree. In this case, we could see EUR/USD reach 1.12 before the US elections, which would be a boost for EM currencies. In such a supportive environment, the National Bank of Hungary might be inclined to cut not once, but twice in the remaining three rate-setting meetings after September.

To pave the way for such a turn of events, this could be the perfect opportunity for the Monetary Council to present a new, slightly more dovish forward guidance. The cautious, patient and stability-oriented approach will remain in place, even in a super-data-driven mode, only raising the possibility of a 6.00-6.25% range for the year-end terminal rate (fully in line with market pricing).

However, monetary policy in the next one to two quarters may depend on changes in global risk sentiment following the outcome of the US election. We therefore refrain from taking a firm view on the 2025 rate path at this stage and leave our baseline forecast unchanged, expecting a total of 100bp of easing next year, in line with the expected easing by the Fed and the European Central Bank.

Our market views

In the FX market, the HUF may see very favourable conditions into the NBH meeting next week. On the global front, EUR/USD is moving up to 1.120 after the Fed's decision, in our view adding support to the entire CEE region. At the same time, HUF market rates have bounced up from their lows this year, improving the rate differential and somehow pointing to levels in the range of 392-393 EUR/HUF – which may be the level for Tuesday's NBH meeting, providing confidence in a dovish tone from the central bank.

In the medium term, we see pressure on HUF. While global conditions should be supportive for EM currencies at least until the US election, continued rate cuts from the central bank and weaker economic growth will pressure a weaker HUF. At the same time, we see that the market may be sensitive to fiscal policy discussions and the state budget (expected to be presented in November) preparation headlines. Still, the range of 392-400 EUR/HUF should be a framework until the end of the year,  with levels more in the upper part of the range.

The rates market is rebounding from this year's lows, but the IRS curve remains the steepest in the CEE region. We don't believe this will change in the near term. In the short end, the terminal rate has stabilised at roughly 4.75% if we assume the BUBOR premium is to return to positive territory, which is not far from our economists' forecast.

On the other hand, if the NBH delivers rate cuts coupled with a dovish tone, we can assume the market will be open to moving the terminal rate even lower, as we saw earlier this year (e.g., below 4.50% in early August). The curve may in turn steepen further – however the belly and long end, in our view, also offer decent value with 5y5y at 6.40%, too high above the discussed terminal rate. The entire curve should therefore continue to move lower for the rest of the year unless the global story direction turns, while domestic risks are more on the dovish side at the moment.

Having said that, our positive view on the rates market is also projected into Hungarian government bonds (HGBs). On the supply side, HGBs auctions continue to show the highest demand among CEE peers and the funding picture looks bright.

According to our calculations, the debt agency has covered roughly 93% of the planned HGBs issuance, assuming a government deficit of 4.5% of GDP. Even with our economists' view of the risk of a slippage to 5.0%, we don't believe the picture will change much. Debt agencies will likely focus on next year's pre-funding, which will see higher redemptions compared to this year, but we could still see some supply reduction in the coming months. HGBs offer a 30-45bps premium over the IRS curve and the belly and long end look attractive to us at current levels.

Silver (XAG/USD) attracts buyers for the second straight day on Friday and sticks to its gains above the $31.00 mark, near a two-month peak through the first half of the European session. 

From a technical perspective, the recent breakout through a short-term descending trend-line resistance, around the $29.35 area, which coincided with the 100-day Simple Moving Average (SMA), was seen as a fresh trigger for bullish traders. Adding to this, the emergence of some dip-buying on Thursday, along with positive oscillators on the daily chart, suggest that the path of least resistance for the XAG/USD is to the upside. 

The positive outlook is validated by the fact that the white metal now seems to have found acceptance above the $31.00 mark. Hence, a subsequent move up beyond the $31.45 intermediate hurdle, en route to the July swing high around the $31.75 zone and the $32.00 mark, looks like a distinct possibility. The momentum could extend further and allow the XAG/USD to challenge a one-decade high, around mid-$32.00s touched in May. 

On the flip side, weakness below the $31.00 mark now seems to find decent support near the $30.70 horizontal zone. Any further decline might still be seen as a buying opportunity and remain limited near the $30.00 psychological mark. Some follow-through selling could expose the $29.35 confluence resistance breakpoint, now turned support, which should now act as a strong near-term and a key pivotal point for the commodity.

A convincing break below could accelerate the downfall and drag the XAG/USD below the $29.00 mark, towards testing the next relevant support near the $28.20-$28.15 zone. This is followed by the $28.00 mark and strong horizontal support near the $27.70 area, or the monthly low, which if broken might shift the near-term bias back in favor of bearish traders.

Silver daily chart

Source: FXSTREET

Source: TheGuardian

USD/CAD formed a Hanging Man candlestick reversal pattern (blue rectangle on chart below) on Wednesday which suggests more downside is likely for the pair in the near-term. The pattern gained confirmation after Thursday ended as a long, red, down day. 

USD/CAD Daily Chart 

The Hanging Man forms when price rises to a new higher high, pulls back down during the same day, then recovers again and closes the day close to where it opened. If it is followed by a red down day – as was the case with USD/CAD – a short-term bearish reversal is heralded. 

USD/CAD’s move down from the range high looks like it is conforming to an ABC pattern, or “Measured Move” (see labels on chart above). Such patterns are like large zig-zags. The wave C usually reaches a similar length to wave A or at a minimum is a Fibonacci 61.8% of A.

If USD/CAD is really forming an ABC pattern then wave C is probably about to unfold and go substantially lower. Such a down leg would probably fall to the zone of the range lows (orange shaded rectangle on chart above). The 61.8% target, meanwhile, lies at 1.3326. 

It is still a little early to be sure that USD/CAD has reversed and will fall further. A break below 1.3533 (September 19 low) would provide added bearish confirmation, and a break below 1.3466 (September 6) even more solid confirmation.

Source: FXSTREET