Will the ECB meeting become a “buy the rumour, sell the fact” scenario for the EUR?
EUR priced in ECB rate cut.
Group Research - Econs, Philip Wee16 Oct 2024
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EUR/USD depreciated 0.2% to 1.0893 overnight before tomorrow’s European Central Bank meeting. Following the drop in the Eurozone’s CPI inflation to 1.8% YoY in September, the ECB will likely lower the deposit facility rate by 25 bps to 3.25%. However, this month’s short EUR/USD strategy risks running into a classic “buy the rumour, sell the fact” scenario. This month’s 2.2% depreciation has exceeded all monthly losses this year. Since November 2023, the 100-week moving average (currently around 1.0825) has significantly supported the EUR. Assuming this back-to-back cut materialises, the ECB may not pivot for another cut in December amid expectations for two Fed cuts in November and December. Eurozone’s core inflation, at 2.7% YoY in September, remained above the ECB’s 2% target. Economic pessimism also eased after the ZEW survey expectations improved to a six-month high of 20.1 in October, following three months of declines.

The DXY Index failed thrice over the past two days to trade above the significant resistance of around 103.30. The greenback was caught between two forces. On the one hand, the greenback reprised its haven role from a sell-off in semiconductor counters that pummelled the major US stock indices from record highs. On the other hand, the dollar’s haven appeal was offset by US bond yields accompanying the decline in equities. The US Treasury 10Y yield tumbled to 4.03% after it held a 4.06-4.12% range in the previous two sessions. San Francisco Fed President Mary Daly played down the recent better-than-expected US nonfarm payrolls and CPI inflation data. As the Fed’s renowned labour economist, Daly believed the US job market was no longer a major source of inflation pressures, adding that firms found it difficult to pass on price increases. Despite last month’s 50 bps cut, interest rates were still restrictive and a long way from neutral, working to lower inflation to its 2% target.

Meanwhile, Brent crude oil prices fell a third day by 3.8% to USD74.52 per barrel, its lowest level since October 2. OPEC and the International Energy Agency lowered their forecasts for global oil demand in 2024, citing oversupply amid weak demand from China. Fears of a broader conflict in the Middle East eased after Israeli Prime Minister Benjamin Netanyahu assured US President Joe Biden that it would strike military and not target oil or nuclear sites in Iran. On October 13, US Secretary of State Antony Blinken and Defense Secretary Lloyd Austin sent a signed warning letter to Israel to address, over the next 30 days, the significant drop in humanitarian aid into Gaza or risk a cut in arms sales. Although the deadline comes after the US Presidential Elections on November 5, the new President will only take over the White House in January 2025.

Against this background, the commodity-led currencies – AUD, NZD, and CAD – appear vulnerable, with the JPY viewed as a possible alternative haven to the greenback. Markets are hesitant to take USD/JPY above 150 for the rest of the month. The Bank of Japan is expected to affirm its rate hiking framework at its meeting on October 31, after Japan’s snap election on October 27. Polls indicate a victory for the ruling Liberal Democrat Party with a reduced majority.


Quote of the Day
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     Walt Disney

October 16 in history
The Walt Disney Company was founded in 1923.

 





Philip Wee

Senior FX Strategist - G3 & Asia
[email protected]


 

 
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