October 10th Financial News

The Bureau of Labor Statistics (BLS) will publish the highly anticipated Consumer Price Index (CPI) inflation data from the United States (US) for September on Thursday at 12:30 GMT.

The US Dollar (USD) braces for intense volatility, as any surprises from the US inflation report could significantly impact the market’s pricing of the Federal Reserve (Fed) interest rate outlook for the rest of the year.

What to expect in the next CPI data report?

Inflation in the US, as measured by the CPI, is expected to increase at an annual rate of 2.3% in September, down from the 2.5% rise reported in August. The core CPI inflation, which excludes volatile food and energy prices, is forecast to stay unchanged at 3.2% in the same period.

Meanwhile, the CPI and the core CPI are anticipated to rise 0.1% and 0.2% on a monthly basis, respectively.

Previewing the September inflation report, “our forecasts for the September CPI report suggest core inflation lost modest momentum, registering a 0.24% m/m gain after advancing a slightly stronger 0.28% in August,” said TD Securities analysts in a weekly report, and added:

“Headline inflation likely lost meaningful momentum, as the energy component will again provide major relief. The details should show that core goods prices added to inflation for the first time in seven months, while housing inflation likely cooled modestly dragging core services inflation lower.”

Speaking on the Fed’s policy outlook recently, Fed Governor Adriana Kugler said that she will support an additional rate cut if the progress on inflation continues as expected. On a cautious note, St. Louis Fed President Alberto Musalem argued that the costs of easing the policy too much too soon were greater than the costs of easing too little too late. “That is because sticky or higher inflation would pose a threat to the Fed's credibility and to future employment and economic activity,” he further argued.

How could the US Consumer Price Index report affect EUR/USD?

Following the Fed’s decision to lower the policy rate by 50 basis points (bps) at the September meeting, investors expect the US central bank to dial down the degree of easing by opting for a 25 bps cut at the next meeting. According to the CME FedWatch Tool, the probability of a 50 bps rate reduction in November is completely ruled out for now. 

The upbeat employment data for September eased fears over a cooldown in the labor market, causing investors to refrain from pricing in a large rate cut. The US Bureau of Labor Statistics reported that Nonfarm Payrolls (NFP) rose by 254,000 in September, surpassing the market expectation of 140,000 by a wide margin. Additionally, the Unemployment Rate retreated to 4.1% from 4.2% in the same period, while the annual wage inflation, as measured by the change in the Average Hourly Earnings, edged higher to 4% from 3.9% in August. 

It will take a significant miss in the inflation data for investors to reconsider a large rate reduction at the next policy meeting. In case the monthly core CPI comes in at 0% or in negative territory, the immediate reaction could revive expectations for a 50 bps cut and trigger a US Dollar (USD) selloff. On the other hand, a reading at or above the market expectation of 0.2% should reaffirm a 25 bps cut. However, the market positioning suggests that the USD doesn’t have a lot of room on the upside. 

Eren Sengezer, European Session Lead Analyst at FXStreet, offers a brief technical outlook for EUR/USD and explains: “EUR/USD’s near-term technical picture highlights a lack of buyer interest, with the Relative Strength Index (RSI) indicator on the daily chart staying well below 50.”

“EUR/USD could face first support at 1.0930, where the Fibonacci 50% retracement of the June-August uptrend meets the 100-period Simple Moving Average (SMA). If this support fails, 1.0870 (Fibonacci 61.8% retracement, 200-day SMA) could be seen as the next bearish target before 1.0800 (Fibonacci 78.6% retracement). On the other side, interim resistance aligns at 1.1000 (Fibonacci 38.2% retracement). Once the pair flips this level into support, it could extend its recovery toward 1.1050-1.1070 (50-day SMA, Fibonacci 23.6% retracement) and 1.1100 (20-day SMA).”

Source: FXSTREET

Federal Reserve officials were divided over how much to lower interest rates in September, minutes from their last meeting showed, although most officials favoured the large half-point rate cut that central bankers ultimately made.

“Noting that inflation was still somewhat elevated while economic growth remained solid and unemployment remained low, some participants observed that they would have preferred” a quarter-point reduction, according to the minutes from the Sept. 17 and 18 gathering released Oct 9. And “a few others indicated that they could have supported such a decision.”

While one Fed governor, Michelle Bowman, did vote against the Fed’s big rate cut in favour of a smaller move, the fresh minutes showed that she was not alone in her misgivings. They suggested that the merits of a smaller move were debated.

“A few participants” thought that a smaller move “could signal a more predictable path of economic normalisation,” the minutes showed.

The revelation that there was a spirited discussion about how much to cut rates at the Fed’s last meeting underscores what an uncertain juncture the central bank is facing. Officials are trying to calibrate policy so that it is cooling the economy enough to wrangle inflation fully, without slowing it so much that it plunges America into a recession. But that is an inexact science.

The Fed’s ultimate decision – to start off its rate-cutting campaign with a big reduction – came in response to a few economic trends. Inflation has been cooling substantially, job gains had slowed, and the unemployment rate had recently moved up. Those factors suggested that it might be time to remove the Fed’s foot from the economic brakes by lowering rates decisively.

Now, though, it looks increasingly unlikely that Fed officials will make another large rate cut in 2024.

Hiring picked up in September, data released last week showed, and the unemployment rate ticked back down. When that is combined with recent evidence of solid consumer spending and healthy household balance sheets, risks of a big economic pullback now seem less pronounced.

Given the progress, Fed officials have been signalling that the economic projections that they released after their September meeting are probably a good guide for the rest of 2024. Those suggested that policymakers will cut rates at both their November and December meetings, but by only a quarter point each time.

The next big question facing the Fed is when it will stop shrinking its balance sheet of bond holdings. Policymakers bought bonds in massive sums during the early part of the 2020 pandemic, swelling their holdings. They have been shrinking their balance sheet steadily by allowing securities to expire without reinvesting them.

Officials appear inclined to stick with that plan, at least for now, based on the minutes.

“Several participants discussed the importance of communicating that the ongoing reduction in the Federal Reserve’s balance sheet could continue for some time even as the Committee reduced its target range for the federal funds rate,” the minutes showed. 

Source: Straitstimes

Korea's fiscal deficit grew markedly during the first eight months of 2024 amid weak corporate performances, the finance ministry said Thursday.

The managed fiscal balance, a key gauge of fiscal health calculated on stricter terms, posted a deficit of 84.2 trillion won ($62.44 billion) in the January-August period, larger than the shortfall of 65.8 trillion won a year earlier, according to the finance ministry.

This year's tally was the third-largest figure ever for any cited period. The shortfall hit an all-time high of 98.1 trillion won in 2020 due to the government's cash handouts for people hit by the COVID-19 pandemic.

Total revenue went up by 2.3 trillion won on-year to 396.7 trillion won during the cited period this year, led by an increase in nontax income.

But tax revenue fell 9.4 trillion won to 232.2 trillion won due to the sharp decrease in the government's collection of corporate taxes on their weak performances.

Total expenditure went up by 21.3 trillion won on-year to 447 trillion won as the government spent more on various welfare programs, according to the ministry.

The government's debt had reached 1,167.3 trillion won as of end-August, up 8 trillion won from a month earlier, the data showed. 

Source: Koreatimes

The Japanese Yen (JPY) weakened across the board on Wednesday amid the uncertainty over the Bank of Japan's (BoJ) plans for additional interest rate hikes. Apart from this, the risk-on impulse undermined demand for the safe-haven JPY, which, along with a fresh wave of the US Dollar (USD) buying, pushed the USD/JPY pair to the 149.35 region, or its highest level since mid-August. 

Meanwhile, data published earlier this Thursday showed that the Producer Price Index (PPI) in Japan remained unchanged in September and the yearly rate rose more than anticipated during the reported month. This, in turn, offers support to the JPY and caps the USD/JPY pair. Furthermore, traders opt to move to the sidelines ahead of the release of the US consumer inflation figures. 

Daily Digest Market Movers: Japanese Yen seems vulnerable amid fading hopes for more BoJ rate hikes, bullish USD

Data published on Tuesday showed that Japan’s real wages fell in August after two months of gains and a decline in household spending, raising doubts about the strength of private consumption and a sustained economic recovery. 

This comes on top of blunt comments on monetary policy by Japan's Prime Minister Shigeru Ishiba and fuels uncertainty over the Bank of Japan's rate hike plans, which weighed on the Japanese Yen and pushed the USD/JPY pair higher. 

The US Dollar shot to its highest level since August 16 after minutes from the September FOMC meeting revealed that a majority supported the 50 basis point rate cut as the committee was confident of inflation moving toward the 2% goal.

Some participants, however, indicated that they would have preferred only a 25 bps rate reduction, citing that inflation was still somewhat elevated while economic growth remained solid and unemployment remained low. 

Furthermore, there was a broader agreement that the outsized rate cut would not lock the Federal Reserve into any specific pace for future interest rate cuts and should not be seen as a sign of a more negative economic outlook.

Dallas Fed President Lorie Logan argued on Wednesday that she favored smaller reductions going forward as there were still real upside risks to inflation and pointed to meaningful uncertainties surrounding the economic outlook.

Separately, Boston Fed President Susan Collins stressed that policy is not on a pre-set path and will remain carefully data-dependent and added that it will be important to preserve the currently healthy labor market conditions.

Furthermore, San Francisco Fed President Mary Daly said that the size of the September rate cut does not say anything about the size of the next cuts and that one or two more rate cuts this year are likely if the economy evolves as she expects.

According to the CME Group's FedWatch Tool, market participants are now pricing in a greater chance that the Fed will lower borrowing costs by 25 bps in November and over a 20% probability that it will keep interest rates on hold. 

The yield on the rate-sensitive two-year US government bond rose to its highest yield since August 19, while the benchmark 10-year Treasury yield climbed for the sixth straight day on Wednesday, to its highest level since July 31.

A BoJ report showed on Thursday that the Producer Price Index (PPI) in Japan remained unchanged in September against a 0.3% decline anticipated, while the yearly rate unexpectedly inched up from 2.6% in August to 2.8%. 

Investors now await the US Consumer Price Index (CPI), due later today, which, along with the US Producer Price Index on Friday, might influence market expectations about the Fed's rate-cut path and drive the USD/JPY pair. 

Technical Outlook: USD/JPY seems poised to appreciate further, bulls might aim to reclaim the 150.00 psychological mark

From a technical perspective, the overnight sustained close above the 38.2% Fibonacci retracement level of the July-September downfall and the 149.00 mark could be seen as a fresh trigger for bullish traders. Moreover, oscillators on the daily chart have been gaining positive traction and are away from being in the overbought territory, suggesting that the path of least resistance for the USD/JPY pair is to the upside. Hence, a further appreciation towards the 150.00 psychological mark en route to the 50% retracement level, around the 150.75-150.80 region, looks like a distinct possibility. 

On the flip side, any meaningful slide below the 149.00 mark now seems to attract some buyers near the 148.70-148.65 region. This, in turn, should help limit the downside for the USD/JPY pair near the 148.00 round figure. The latter should act as a key pivotal point, which if broken might prompt some technical selling and drag spot prices to the 147.35 intermediate support en route to the 147.00 mark and the 146.50 area.

Source: FXSTREET

US Federal Reserve (Fed) chair Jerome Powell is unlikely to win another big interest-rate cut from his policy committee so long as the labour market holds up.

Powell described the move as a recalibration aimed at making sure the labour market remained strong at his press conference after officials reduced the benchmark lending rate by a half percentage point to a range of 4.75% to 5%.  

The move broke with the gradualism typical of Fed interest-rate changes. Some officials described their support of the move as arising from recent inflation data that convinced them the rate of price changes was headed towards their 2% target.

Nevertheless, minutes of the meeting showed there was a preference among some officials to cut rates at a more gradual pace, possibly because the economy remains remarkably resilient even in the face of what Fed officials call “restrictive” policy.

“Some participants observed that they would have preferred a 25-basis-point reduction of the target range at this meeting, and a few others indicated that they could have supported such a decision,” the minutes said. 

“The tone of the hawks is, ‘If this is what you want, we will give you this one,’” said Derek Tang, an economist at LH Meyer/Monetary Policy Analytics in Washington. “A lot of them went into the meeting wanting” a 25-basis-point cut, he said.

The minutes said “a substantial majority” supported the 50-basis-point move. Tang called that a “rare term”, and added, “What they can’t say is almost all supported it.”

Powell nodded to the committee’s preference for gradualism in comments at the National Association for Business Economics meeting in Nashville on Sept 30.

“This is not a committee that feels like it’s in a hurry to cut rates quickly,” Powell said. “It’s a committee that wants to be guided, ultimately we will be guided by the incoming data.”

Labor market data for September showed a hefty bounceback from a slowdown in hiring over the previous three months. Payrolls rose by 254,000 and the unemployment rate declined to 4.1%.

The Atlanta Fed’s gross domestic product tracker now estimates the economy grew at an annualised rate of 3.2% in the third quarter. Some Fed officials are already noting that their preference is to move more slowly for now.

“Given where the economy is today, I view the costs of easing too much too soon as greater than the costs of easing too little too late,” St Louis Fed president Alberto Musalem said on Monday in remarks prepared for an event organized by the Money Marketeers of New York University Inc. 

Musalem will be a voting member of the Federal Open Market Committee in 2025.

San Francisco Fed president Mary Daly, who votes on policy decisions this year, said in a moderated discussion on Wednesday that “two more cuts this year, or one more cut this year, really spans the range of what is likely in my mind, given my projection for the economy”.

Source: Theedgemarkets

The Indian Rupee (INR) trades on a weaker note on Thursday. A muted trend in the domestic market and a stronger US Dollar (USD) weigh on the local currency. However, robust Indian macroeconomic fundamentals and the inclusion of government bonds in global indices would attract foreign investors and lift the INR. 

The release of the key US Consumer Price Index (CPI) inflation data will be the highlight on Thursday. The US Initial Jobless Claims will be released on the same day, and the Federal Reserve’s (Fed) Lisa Cook and John Williams are scheduled to speak. 

Daily Digest Market Movers: Indian Rupee remains weak ahead of key US inflation data

FTSE Russell said on Tuesday that Indian sovereign bonds will be added to its Emerging Markets Government Bond Index (EMGBI), following a similar move by JP Morgan and Bloomberg Index Services.

The Reserve Bank of India’s (RBI) Monetary Policy Committee (MPC) decided to keep the repo rate unchanged at 6.5% for the tenth consecutive meeting but changed the policy stance to neutral from withdrawal of accommodation.

The Indian central bank kept the CPI inflation estimate for FY25 unchanged at 4.5% while maintaining the Gross Domestic Product (GDP) growth estimates for FY25 at 7.2%.

According to minutes released Wednesday, the Federal Open Market Committee (FOMC) members agreed to cut interest rates in September but were unsure how aggressively to go, ultimately deciding on a half-percentage point move in an effort to balance inflation concerns with labor market worries.

Fed Boston President Susan Collins said on Wednesday that it was “prudent” for officials to cut rates by a half percentage point last month as inflation eases and the economy becomes more vulnerable to shocks.

San Francisco Fed President Mary Daly noted on Wednesday that she "fully" supported the Fed’s half-of-a-percentage-point interest-rate cut in the September meeting. Daly added that one or two more rate cuts this year are likely if the economy evolves as she expects. 

Dallas Fed President Lorie Logan argued on Wednesday that she supported last month's substantial interest-rate cut but favored smaller reductions going forward as there were "still real" upside risks to inflation. 

Technical Analysis: USD/INR’s bullish view remains intact in the longer term

The Indian Rupee edges lower on the day. The USD/INR pair maintains a constructive view on the daily chart, with the price holding above the descending trend line and the key 100-day Exponential Moving Average (EMA). The 14-day Relative Strength Index (RSI) is located above the midline near 58.60, suggesting the support level is likely to hold rather than break.

 The 84.00 psychological level appears to be a tough nut to crack for USD/INR bulls. Sustained bullish momentum above this level could see a rally to the all-time high of 84.15, en route to 84.50. 

On the flip side, the first downside target is seen near the resistance-turned-support level at 83.90. Any follow-through selling could expose the 100-day EMA at 83.67. The key contention level emerges at 83.00, representing the round mark and the low of May 24. 

Source: FXSTREET