India Set to Account For 35% of Global Energy Demand Growth In Coming Decades

Indonesia's central bank delivered its first rate cut in more than three years on Wednesday, opting to move hours ahead of the widely expected start of the US Federal Reserve's (Fed) easing cycle in a bid to bolster growth in Southeast Asia's largest economy.

Bank Indonesia (BI) unexpectedly trimmed the benchmark rate by 25 basis points to 6.00%, its first rate cut since February 2021. Only three out of 33 economists polled by Reuters had predicted the move, while all the others expected rates to be held steady.

BI also cut the overnight deposit facility and lending facility rates by the same amount to 5.25% and 6.75%, respectively.

The decision is consistent with BI's expectation that inflation will remain low in 2024 and 2025, an expectation of a stable rupiah and the need to bolster economic growth, BI governor Perry Warjiyo said.

The rupiah had been under pressure earlier this year in response to changing risk appetite in global financial markets, but has since reversed those losses against the US dollar to be trading slightly firmer than last year's close.

The currency weakened slightly to 15,355 per dollar soon after BI's announcement, from 15,345 beforehand.

Inflation in Southeast Asia's largest economy returned to within BI's target range in mid-2023 and has remained there since. August's inflation rate of 2.12% was the lowest annual rate since February 2022.

Source: Theedgemarkets

EUR/USD steadies above 1.1100 in Wednesday’s European session ahead of the Federal Reserve’s (Fed) monetary policy announcement at 18:00 GMT. The major currency pair gains as the US Dollar (USD) remains under pressure as the Fed is poised to deliver its first interest rate cut in more than four years.

The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, struggles to hold its recovery to near 101.00, a rebound fuelled by better-than-expected United States (US) monthly Retail Sales data for August.

The confidence of market participants that the Fed will start the policy-easing cycle aggressively has increased as officials said they remain concerned over a slowdown in job growth. Also, they are confident that inflation is declining towards the bank’s target of 2%.

According to the CME FedWatch tool, 30-day Federal Funds Futures pricing data shows that the probability of the central bank cutting rates by 50 basis points (bps) to 4.75%-5.00% is at 65%, while the rest favors a 25-bps rate cut.

In addition to the Fed’s decision itself, the US Dollar will also be influenced by the Fed’s dot plot, economic projections, and the press conference of Fed Chair Jerome Powell, which will provide fresh guidance on interest rates. The Fed’s dot plot indicates where policymakers see the federal fund rate heading in the medium and long term.

Daily digest market movers: EUR/USD gains even though Euro struggles

EUR/USD remains firm at the US Dollar’s expense as the Euro (EUR) is underperforming against other major peers on Wednesday. The Euro faces pressure amid growing uncertainty over the European Central Bank’s (ECB) interest-rate path and the Eurozone’s economic performance.

ECB officials seem split over the interest rate-cut path due to diverging opinions over the inflation outlook. On Friday, the comments from ECB Governing Council member and Bank of France President, François Villeroy de Galhau indicated that more rate cuts are needed to avoid the risk of inflation coming in too low despite a dovish decision on Thursday. In Wednesday’s Asian session, Villeroy said the ECB “is likely to continue to cut rates.”

On the contrary, ECB Governing Council member Peter Kazimir said on Monday in a blog post: "We will almost surely need to wait until December for a clearer picture before making our next move," Reuters reported. Kazimir emphasized the need to be certain that price pressures continue to decline as projected, “otherwise policymakers might regret rushing to cut borrowing costs before inflation has been sustainably defeated”, he said.

Financial market participants expect that the ECB will deliver one more interest rate cut in one of its remaining meetings of the year, either in October or December. 

In the Eurozone calendar, Eurostat will publish at 09:00 GMT the final reading of the Harmonized Index of Consumer Prices (HICP) for August. Economists expect the figures to be aligned with the preliminary estimates, with annual headline inflation at 2.2% and core inflation at 2.8%. 

Technical Analysis: EUR/USD holds gains above 1.1100

EUR/USD steadies above 1.1100 in European trading hours. The major currency pair strengthened after retesting the breakout of the Rising Channel chart pattern formed on a daily time frame near the psychological support of 1.1000. The near-term outlook of the major currency pair has strengthened as the asset steadies above the 20-day Exponential Moving Average (EMA), which trades around 1.1060.

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

Looking up, the high of 1.1155 from September 6 and the round-level resistance of 1.1200 will act as major barricades for the Euro bulls. 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

Today’s main event will be the FOMC rate decision at 20:00 CET – we expect a 25bp cut of the Fed Funds Rate target (to 5.00-5.25%). This morning markets price in a 65% probability for an even bigger 50bp rate cut. Even though the Fed will now initiate its rate cutting cycle, we do not expect changes to the pace of QT. We expect the updated rate projections to signal a total of 3x25bp rate cuts in 2024 (prev. 1) followed by 6x25bp cuts in 2025 (prev. 4). See Research US – Fed preview: Dovish 25bp, 13 September.

In the euro area, we receive the final inflation data for August. The release will allow us to investigate the inflation drivers in August and we particularly look out for the ‘LIMI’ indicator of domestic inflation. Recently, domestic inflation has remained high and is a key reason we expect only a gradual cutting approach from the ECB.

From Sweden, August LFS is out this morning, expected to show a slight increase in seasonally adjusted unemployment to 8.5%. More interesting however is to gauge the developments in employment and hours worked as these give clues to household income growth and production activity. Both these factors surprisingly dropped in July, but we expect a bounce back now.

Economic and market news

What happened yesterday

In the US, retail sales increased by 0.1% (prior: 1.0%, consensus: -0.2%) in August, so a slight increase instead of a slight decrease. This signals that consumer spending remains stable. Industrial production came in stronger than expected at 0.8% (prior: -0.9%, consensus: 0.2%). We do not expect these numbers to affect the rate decision today, where our base case is a 25 bp rate cut, as stated above.

In Germany, the ZEW index declined more than expected in September. The expectations component plunged to the lowest level in a year while the assessment of the current situation component fell to the lowest level since Covid. The assessment of the current situation has been stuck at very low levels during the past year and the expectations component has now fallen in the past three months following a strong rebound in spring.

In Canada, consumer prices rose 2.0% y/y in August (prior: 2.5%, consensus: 2.1%), and fell by 0.2% m/m (prior: 0.4%, consensus: unchanged). The weaker than expected inflation print has led to some market speculation that the Bank of Canada (BoC) could be in for a 50bp rate cut at the October meeting. At the monetary policy announcement earlier this month BoC governor Macklem said that the central bank must increasingly gauge against the potential of inflation falling below target due to weak economic growth. Markets still price in biggest probability for a 25bp cut, but the probability of a 50bp rate cut rose from 46% to around 47.5% after the release.

Equities: Global equities were fractionally higher yesterday yet remained in a state of wait-and-see ahead of tonight’s highly anticipated FOMC meeting. Despite this, the sentiment leading up to the FOMC meeting has been positive, with the S&P 500 surpassing its mid-July peak. Yesterday also saw a decent cyclical outperformance, bolstered by a positive reception to a potential 50bp cut as small caps outshone others. In the US yesterday, Dow -0.04%, S&P 500 +0.03%, Nasdaq +0.2% and Russell 2000 +0.7%. Asian markets were mixed this morning, with Japan making up some of yesterday’s losses. US futures were marginally higher, while European futures edged lower.

FI: The main event today is the FOMC meeting tonight to see whether the Federal Reserve will cut by 25bp or 50bp as well as the comments regarding future monetary policy. The market is divided between a 25bp or 50bp rate cut, as there are pros and cons for both a 25bp or 50bp rate cut. We believe it will be a 25bp cut, but a positive market reaction depends on the comments after the meeting. If the Federal Reserve cuts “only” by 25p it is expected that they will strike a dovish tone afterwards.

FX: Yesterday’s session was generally muted, with no notable moves in the G10 space, as markets await the crucial FOMC meeting today. The USD strengthened slightly, with EUR/USD remaining just above 1.11, while USD/JPY drifted back above 142. Scandies were little changed, with EUR/NOK just below 11.80 and EUR/SEK just above 11.30. Markets are clearly waiting for the FOMC decision, which could potentially set the near-term tone for various crosses and overall risk sentiment.

UK inflation held at just above the Bank of England’s 2% target in August, cementing expectations that policymakers will cut interest rates again later this year.

Consumer prices rose 2.2% from a year earlier, the same pace as in July and below the BOE’s forecast, the Office for National Statistics said Wednesday. The reading was in line with the median expectation of economists surveyed by Bloomberg. Downward pressures from motor fuels, restaurants and hotels were offset by an upward push from air fares.

The figures are likely to keep the BOE on track for a further loosening in policy in coming months after it cut rates for the first time since the pandemic on Aug 1, citing easing underlying inflation. They will also be welcomed by the new Labour government, which is banking on lower inflation and borrowing costs to help fuel the growth it says is needed to fix ailing public services and boost living standards.

Services inflation, a key gauge that has worried the BOE, rose to 5.6% in August from 5.2% in July. However, a pickup had been widely anticipated and is expected to prove temporary. Both services inflation and the headline rate are running below levels forecast by the BOE in August of 5.8% and 2.4%, respectively.

While policymakers are expected to leave rates unchanged at 5% at their decision on Thursday, market expectations of further easing have been mounting. Traders are pricing in cuts for both November and December with five more to follow in 2025.

The pound gained 0.2% to US$1.3183 after the data was released, with investors focusing on still-high services inflation as stymieing the outlook for aggressive monetary easing. Traders marginally pared bets on BOE rate cuts over the remainder of 2024, seeing 48 basis points versus 50 basis points on Tuesday.

“The pick-up in services inflation was the standout feature of August’s CPI report but it’s unlikely to worry the Bank of England. The rise was driven by volatile airfares and the gauge continues to track below the central bank’s August forecast. Despite that, we still think the chances of the BOE unveiling a rate cut on Thursday are low. The next move down will likely come in November,” said Bloomberg economists.

The BOE decision this week will be announced a day after the Federal Reserve is expected to kick off its own easing cycle amid fears about the health of the US economy.

There are also concerns the UK economy is losing steam, with figures last week showing GDP flatlined for a second month in July after outpacing all of its Group of Seven peers in the first half.

Monetary policy remains restrictive and energy bills are set to rise from October, putting upward pressures on headline inflation. Meanwhile, Chancellor Rachel Reeves is expected to announce tax hikes in her Oct 30 budget to fill what she claims is a hole in the public finances left by the previous government.

The ONS said that the 22% monthly rise in air fares was the second-largest in the category since records began in 2001, driven by flights to European destinations. Prices for flights typically climb between July and August but fell last year, meaning it helped to push up the annual rate of headline inflation this year.

There were fewer signs that the return of Taylor Swift’s tour to London fueled price pressures, as it did in June. While hotel price-inflation cooled, annual price growth in the cinemas, theaters and concerts category still jumped from 4.4% to 9.2%.

“While the Bank’s Monetary Policy Committee will be reassured by today’s data, they’re likely to remain wary of loosening policy too quickly,” said Martin Sartorius, principal economist at the Confederation of British Industry. “Inflation is expected to pick up later this year and domestic price pressures, such as wage growth, still pose an upside risk to the outlook.”

There was further evidence that pipeline inflation pressures are receding. Factory gate prices that are paid by retailers rose by just 0.2% in August on last year — below forecasts for a 0.5% increase.

Input prices, paid by manufacturers, fell 1.2% on the back of a sharp decline in oil and fuel costs. Markets had expected a drop of 0.8%. Food input prices rose, partly as a result of a poor potato yield, the ONS said.

BOE governor Andrew Bailey has advocated a cautious approach to reversing the most aggressive policy tightening in decades. However, he has also signalled growing confidence that the central bank is beginning to contain stubbornly high price pressures from the services sector and jobs market.

He said last month that second-round inflation effects have been “smaller than we expected,” though he stressed that the “job is not completed.”

“Inflation completes a set of major September economic data a little softer than rate-setters expected, but pretty close to their expectations,” said Rob Wood, chief UK economist at Pantheon Macroeconomics. “We expect headline inflation to fall to 2% in September, as a strong September 2023 services price gain depresses the year-over-year inflation rate this year and airfares unwind some of their August gain.”

Source: Theedgemarkets

The Mexican Peso (MXN) notes a modest weakness in its most heavily-traded pairs during the European session on Wednesday, falling in particular against the Pound Sterling (GBP), which broadly appreciates after the release of UK inflation data. 

Mexican Peso down against the Pound 

The Mexican Peso is currently down by over a third of a percent against the Pound Sterling after the release of higher-than-expected UK services and core inflation data for August, which wiped out any hopes of the Bank of England (BoE) cutting interest rates on Thursday. A rate cut had been speculated, which would have put a lid on GBP strength since lower interest rates generally attract less foreign capital inflows. Given that it is now highly unlikely, Sterling is appreciating. 

UK headline Consumer Price Index (CPI) in August met expectations of 2.2% year-over-year (YoY) and remained unchanged from the previous month, whilst core CPI rose 3.6% YoY when 3.5% had been expected from 3.3% in July. A rise in Services inflation, which has been a key issue for the BoE, was the final nail in the coffin for hopes of a rate cut. 

“..but the rise in services inflation 5.2% to 5.6% suggests the Bank of England will almost certainly press the pause button on interest rate cuts on Thursday. We continue to expect the next 25 basis point rate cut to take place in November," said Ruth Gregory, Deputy Chief UK Economist at Capital Economics. 

Big day for the US Dollar as Fed set to announce rate cut

The hot topic for markets is still whether the Federal Reserve (Fed) will cut interest rates by a bigger 50 basis points (0.50%) at the conclusion of its meeting on Wednesday or opt for a standard 25 basis point (bps) cut – 0.25% in percentage terms. 

The outcome is likely to cause volatility in the US Dollar (USD) and its pairs, US stocks, and broader global financial markets. A larger rate cut will weaken the USD, leading to a fall in USD/MXN. A smaller cut is probably already priced in. 

The Fed’s accompanying Statement of Economic Projections (SEP), with its projected path for interest rates in the future based on officials’ views, as well as growth and inflation forecasts, could also impact markets and FX. 

Dalio weighs in on 25-or-50 debate

In an interview with Bloomberg News on Wednesday, Ray Dalio, CIO of Bridgewater Associates, said that the Fed would be looking to balance the needs of creditors to earn a real yield (the gain from debt interest after inflation) with the desire to lower interest repayments for debtors.  

“25 pbs would be the right thing to do if you are looking at the whole picture. If you are looking at the mortgage situation, which is worse – and affects more people – then it’s probably 50 bps,” Dalio said. Based on the economic data alone, he said the “(US) economy is very close to an equilibrium level, except for the debt situation.” “Significant socio-economic and political factors, including polarization in both, were further variables to consider,” added Dalio.

The probability of a larger 0.50% cut stands at 61%, as implied by 30-day Fed Funds futures prices according to the CME FedWatch tool, whilst the probability of a smaller 0.25% cut stands at 39%.

Technical Analysis: USD/MXN nears bottom of channel

USD/MXN has declined within a broad rising channel, forming a Three Black Crows Japanese candlestick pattern on the way down (shaded rectangle) last week. The pattern indicates the probability that prices will fall even lower in the short term. That said, they are already nearing key support at the base of the channel. 

USD/MXN Daily Chart 

Although USD/MXN has fallen quite far already, the odds favor more weakness to the next downside target and support level at 19.01 (August 23 low), followed perhaps by further weakness to the 50-day Simple Moving Average (SMA) at 18.99 and then the lower trendline of the larger channel a few pips below. At that level, the price will likely find firm support to stabilize and perhaps recover in line with the broader medium and long-term trend. 

A decisive break below the lower channel line would indicate a reversal in the medium-term trend. This is a possibility given the risk of volatility on the horizon from the Fed’s announcement and the speed and steepness of the decline so far. 

A decisive break would be one accompanied by a long red candle that pierced well below the channel line and closed near its low, or three down days in a row that broke clearly below the line.

Source: FXSTREET

The Philippine central bank is looking to cut banks’ reserve requirement ratio significantly before yearend, according to governor Eli Remolona, a move that’s expected to unleash billions of pesos into the financial system.

“We will reduce the reserve requirement substantially this year, and then there may be further reductions by next year,” Remolona said at a media briefing in Manila on Wednesday. He didn’t specify the extent of cuts in the RRR, currently at 9.5% of deposits that bigger banks must set aside in reserve.

The governor’s comments come a month after the Bangko Sentral ng Pilipinas kicked off a rate cut cycle to lower the benchmark interest rate from a 17-year high. While the BSP had long stressed that the reserve requirement isn’t a monetary policy tool, it held off from triple R cuts during Remolona’s term so as not to cause confusion.

Banks have long sought lower RRR from the BSP to trim their costs and free up billions of pesos of funds required by the authorities to be locked in their vaults. Bank of the Philippine Islands, one of the country’s largest lenders, had even proposed a conditional, instead of a uniform reserve requirement cut, according to a GMA News report last month.

“There’s a funny dynamic going on: the banks want a reduction in reserve requirement, and they’re saying that if you do reduce it, we will do this other thing for you, reduce transactions cost for payments, for example,” the governor said. “So we are trying to manage that.”

As for its next interest rate move, the BSP will focus on the country’s data, instead of the action of the Federal Reserve, which markets expect to start lowering interest rates this week for the first time in over four years.

“What the Fed will do is one data point for us. It’s not most of the data,” Remolona said. The BSP’s next policy meeting is set for Oct 17. Earlier this year, the governor said that he wants to slash the triple R to 5% by the end of his term in 2029.

The BSP last lowered the triple R in June 2023, when Remolona’s predecessor, Felipe Medalla, cut the ratio by 2.5 percentage points to 9.5%. That move was estimated to have released 325 billion pesos (US$5.8 billion or RM24.6 billion) into the financial system.

Source: Theedgemarkets