Euro Recovers Ground as ECB Cuts Rates; Gold Surges to Record High

Euro made a modest recovery following ECB’s decision to cut deposit rate by 25bps, a move widely anticipated by the markets. The rate cut, decided unanimously, brings the deposit rate to 3.75%. During her post-meeting press conference, ECB President Christine Lagarde provided no surprise, reiterating the central bank’s commitment to a “data-dependent” and “meeting-by-meeting” approach. Lagarde stressed that policymakers would not rely on any single data point but instead assess a wide range of indicators. Importantly, she noted that ECB is not pre-committing to any specific future rate path, leaving the door open for adjustments depending on evolving economic conditions.

In the broader currency market, Yen emerged as the strongest performer for the day so far. Euro followed closely behind, buoyed by post-ECB relief, while Sterling also saw modest gains. On the weaker side, Swiss Franc and Canadian dollar lagged, with Dollar underperforming too. Meanwhile, Australian and New Zealand Dollars traded in middle positions.

Technically, Gold finally surges to new record high today. Near term outlook will now stay bullish as long as 2510.93 support holds. Next target is 61.8% projection of 2364.18 to 2531.52 from 2471.76 at 2575.17.

In Europe, at the time of writing, FTSE is up 0.65%. DAX Is up 0.79%. CAC is up 0.61%. UK 10-year yield is down -0.0086 at 3.763. Germany 10-year yield is up 0.0076 at 2.123. Earlier in Asia, Nikkei rose 3.41%. Hong Kong HSI rose 0.77%. China Shanghai SSE fell -0.17%. Singapore Strait Times rose 0.72%. Japan 10-year JGB yield rose 0.0124 to 0.866.

US PPI up 0.2% mom, 1.7% yoy in Aug

US PPI rose 0.2% mom in August, matched expectations. PPI services rose 0.4% mom while PPI goods was unchanged. PPI less foods, energy, and trade services rose 0.3% mom.

For the 12 month period, PPI advanced 1.7% yoy, slowed from 2.1% yoy. PPI less foods, energy and trade services moved up 3.3% yoy.

US initial jobless claims rises slightly to 230k

US initial jobless claims rose 2k to 230k in the week ending September 7, slightly below expectation of 231k. Four-week moving average of initial claims rose 500 to 231k.

Continuing claims rose 5k to 1850k in the week ending August 31. Four-week moving average of continuing claims fell -2k to 1853k.

ECB cuts deposit rate by 25bps to 3.75%

ECB followed expectations by lowering the deposit rate by 25 bps to 3.75%. The main refinancing rate was adjusted to 3.65%, as the spread between the two rates is now set at 15 bps. Moving forward, the ECB emphasized its commitment to a “data-dependent” and “meeting-by-meeting” approach, avoiding any pre-commitment to a specific rate path.

In its accompanying statement, ECB highlighted that recent inflation data had been largely in line with projections. Inflation is expected to rise again towards the end of the year, primarily due to the base effect from last year’s sharp energy price falls. The central bank anticipates inflation will decline closer to its target in the second half of 2025.

Updated inflation forecasts show headline inflation averaging 2.5% in 2024, 2.2% in 2025, and hitting 1.9% by 2026. Core inflation is projected to fall from 2.9% in 2024 to 2.3% in 2025, and eventually reach 2.0% in 2026.

On the growth front, there was a slight downward adjustment in the outlook. The Eurozone economy is now expected to expand by 0.8% in 2024, with growth improving to 1.3% in 2025 and 1.5% in 2026.

Japan’s wholesale price growth slows sharply to 2.5% yoy in Aug as Yen rebounds

Japan’s corporate goods price index decelerated to 2.5% yoy in August, falling below market expectations of 2.8% yoy, marking the first slowdown in eight months. The data reflects a cooling in price pressures, which has been reinforced by a significant 7.4% appreciation in Yen during the month.

The stronger Yen drove a steep slowdown in Yen-based import prices, with the annual growth rate dropping sharply from 10.8% yoy in July to just 2.6% yoy in August. This marks a considerable easing in import costs, offering some relief to Japanese businesses relying on foreign goods.

On a month-to-month basis, CGPI fell by -0.2% mom, while import prices measured in yen contracted significantly by -6.1% mom. The sharp fall in import costs suggests that the stronger yen is playing a key role in softening inflationary pressures, especially in the context of global commodity prices.

BoJ’s Tamura advocates for gradual rate increase to 1% neutral mark

BoJ board member Naoki Tamura indicated in a speech today that the likelihood of achieving 2% inflation target sustainably is improving. As a result, the central bank needs to gradually raise interest rates to neutral levels.

Tamura estimated Japan’s neutral interest rate, or the rate that neither stimulates nor slows down economic activity, to be at least around 1%.

He added, “As such, it’s necessary to push up our short-term policy rate at least to around 1% by the latter half of the fiscal year ending March 2026 to sustainably achieve the BoJ’s price goal.”

In light of growing labor shortages and rising wage pressures, Tamura warned that inflation risks were increasing. Companies are responding to tight labor market conditions by raising wages and passing on higher costs through price hikes.

Tamura underscored the need to “raise interest rates at an appropriate timing, and in several stages,” in order to keep inflation under control.

This marked the first time a BoJ policymaker had publicly specified a target level for raising short-term interest rates.

EUR/USD Mid-Day Outlook

Daily Pivots: (S1) 1.0991; (P) 1.1023; (R1) 1.1044; More….

Intraday bias in EUR/USD stays neutral despite current mild recovery. Focus stays on 38.2% retracement of 1.0665 to 1.1200 at 1.0996. Strong rebound from there will retain near term bullishness. Break of 1.1153 will indicate that larger rally is resuming through 1.1200 resistance to 1.1274 high. However, sustained break of 1.0996 will indicate reversal and turn bias to the downside for 1.0947 resistance turned support next.

In the bigger picture, prior break of 1.1138 resistance indicates that corrective pattern from 1.1274 might have completed at 1.0665 already. Decisive break of 1.1274 (2023 high) will confirm whole up trend from 0.9534 (2022 low). Next target will be 61.8% projection of 0.9534 to 1.1274 from 1.0665 at 1.1740. This will now be the favored case as long as 1.0947 resistance turned support holds.

Economic Indicators Update