Euro Gains Momentum Despite ECB Rate Cut Speculations

Euro is gaining broadly today, even though there is no major fundamental news driving its ascent. Market expectations are mounting that ECB may cut interest rates as early as October, with HSBC projecting 25bps cuts at every meeting from October through April 2025. This would bring the deposit rate to 2.25%, which is considered close to neutral. These predictions are arising even amid cautious remarks from ECB officials.

One factor behind Euro’s rise could be the market’s growing anticipation of aggressive rate cuts by Fed, , with futures markets pricing in nearly 60% chance of another 50bps cut in November. This suggests that, despite potential rate cuts by ECB in October, Fed’s moves could outpace those of ECB for 2024. Additionally, Euro is gaining against Swiss Franc, as speculation mounts that the SNB might deliver a 50bps rate cut in its upcoming meeting tomorrow. Meanwhile, Euro’s recovery appears to be driven more by technical factors, as it found support at a near-term fibonacci projection level.

In the broader forex market, the Yen so far is the worst performer this week, followed by Dollar and Swiss Franc, while Kiwi leads gains, followed by Aussie and Loonie. Sterling and Euro sit in the middle, reflecting a typical risk-on sentiment in the market.

Technically, while EUR/GBP recovered after hitting 61.8% projection of 0.8624 to 0.8399 from 0.8463 at 0.8324, outlook will stay bearish as long as 0.8399 support turned resistance holds. Break of 0.8316 will extend the larger down trend to 100% projection at 0.8237 next.

In Europe, at the time of writing, FTSE is up 0.08%. DAX is down -0.24%. CAC is down -0.23%. UK 10-year yield is up 0.0201 at 3.962. Germany 10-year yield is up 0.029 at 2.177. Earlier in Asia, Nikkei fell -0.19%. Hong Kong HSI rose 0.68%. China Shanghai SSE rose 1.16%. Singapore Strait Times fell -1.09%. Japan 10-year JGB yield rose 0.0018 to 0.813.

OECD sees 3.2% global growth in 2024 and 2025

In the Economic Outlook Interim Report, OECD raised its global GDP growth forecast for 2024 by 0.1% to 3.2%, while keeping the 2025 projection steady at 3.2%.

In the US, growth forecasts remain unchanged at 2.6% for 2024 but have been downgraded by 0.2% to 1.6% for 2025. Eurozone’s GDP growth forecast is unchanged at 0.7% for 2024 and revised down by 0.2% to 1.3% for 2025. Japan faces a significant downgrade for 2024, with growth reduced by -0.6% to -0.1%, but 2025 forecast is upgraded by 0.3% to 1.4%.

The UK sees a notable upward revision, with growth forecasts increased by 0.7% to 1.1% in 2024 and by 0.2% to 1.2% in 2025. Canada’s GDP growth is slightly upgraded by 0.1% to 1.1% in 2024, remaining unchanged at 1.8% in 2025. Australia faces a sharp downgrade, with 2024 growth reduced by -0.4% to 1.1% and 2025 growth also cut by -0.4% to 1.8%.

As inflation trends toward central bank targets, OECD projects that Fed’s main interest rate could ease to 3.5% by the end of 2025 from the current range of 4.75%-5%. Similarly, ECB is expected to reduce its rate to 2.25% from 3.5% now. In contrast, Japan may see “further mild increases in policy interest rates,” with gradual withdrawal of policy accommodation, provided inflation stabilizes at the 2%.

BoE’s Greene warns of higher neutral Rate, supports measured easing approach

BoE MPC member Megan Greene emphasized the need for a “gradual approach” to easing monetary policy in her speech today. She highlighted that her recent vote to hold the Bank Rate at 5% in September, following a 25bpps cut in August, aligns with this stance.

Greene outlined three key economic scenarios influencing inflation and policy decisions.

In the first scenario, global shocks fade, allowing inflation pressures to ease with “less restrictive” policy. In the second, some “economic slack” is needed to bring inflation back to the target sustainably. In the third, structural changes affecting wage and price-setting could require monetary policy to remain “tighter for longer”.

Greene sees the second scenario as the most likely, where slack in the economy will be needed to tame inflation. However, she warned that there is a “higher risk” of the third scenario playing out, suggesting that the neutral interest rate could be higher than previously thought, meaning that current policy may not be as restrictive as anticipated. Greene noted, “I believe the risks to activity are to the upside,” which could require maintaining higher rates for longer.

She will monitor data to confirm whether the third scenario risk is decreasing and the second is becoming more likely. Until then, “steady-as-she goes approach to monetary policy easing is appropriate,” she added.

Australia’s monthly CPI falls to 2.7%, lowest since 2021

Australia’s monthly CPI slowed from 3.5% yoy to 2.7% yoy in August, marking the lowest reading since August 2021. Core inflation measures also eased, with CPI excluding volatile items and holiday travel declining to 3.0% yoy from 3.7% yoy, and the annual trimmed mean falling to 3.4% yoy from 3.8% yoy. Both underlying inflation indicators are now at their lowest levels in two and a half years.

Significant price increases were observed in Housing (+2.6%), Food and non-alcoholic beverages (+3.4%), and Alcohol and tobacco (+6.6%). These gains were “partly offset” by a -1.1% decrease in Transport costs.

Notably, electricity prices plummeted by -17.9% over the 12 months to August—the largest annual fall since the early 1980s—driven by Commonwealth and State Government rebates that led to a -14.6% drop in August following a -6.4% decline in July. Excluding these rebates, electricity prices would have risen 0.1% in August and 0.9% in July.

EUR/USD Mid-Day Outlook

Daily Pivots: (S1) 1.1128; (P) 1.1155; (R1) 1.1206; More….

EUR/USD’s rise from 1.0665 resumed by breaking 1.1200. Intraday bias is now on the upside to retest 1.1274 high. Firm break there will resume larger up trend. Next near term target will be 100% projection of 1.0776 to 1.1200 from 1.1001 at 1.1425. On the downside, below 1.1020 minor support will turn intraday bias neutral first.

In the bigger picture, corrective pattern from 1.1274 should have completed at 1.0665 already. Decisive break of 1.1274 (2023 high) will confirm resumption of 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 1.1001 support holds.

Economic Indicators Update