EUR/USD has been depreciating towards 1.10 over the past four sessions into the interest rate cuts expected at today’s European Central Bank governing council meeting. Apart from the deposit facility rate declining a second time by 25 bps to 3.50%, there are also expectations for the main refi and marginal lending facility rates to fall by a larger 35 bps to 3.65% and 3.90%, respectively. However, this does not imply that ECB President Christine Lagarde is about to ditch the data-dependent path of lowering rates. ECB Chief Economist Philip Lane said a fortnight ago at Jackson Hole that the goal to return to the 2% target was not yet secure, pending the projections for wage growth to slow significantly in 2025 and 2026. Echoing Lane’s caution against complacency regarding price stability, Bundesbank Joachim Nagel wants to avoid cutting rates too quickly. Nagel’s recent comments about the “great wave of inflation” being over should be viewed against his call on the coalition government to push ahead with measures to support the weak German economy. Lagarde’s guidance will be important in deciding if the EUR holds or falls below the psychological 1.10 level.
The DXY Index initially fell to 101.27 from 101.68 during the US Presidential debate. Vice President Kamala Harris beat former President Donald Trump and won the endorsement of Taylor Swift. However, a higher-than-expected US CPI core inflation, which rose by 0.3% MoM in August instead of staying unchanged at July’s pace of 0.2%, lifted the DXY Index from 101.40 to 101.80. During this period, the greenback became a haven on a sell-off in US equities from the futures market pulling back their bets for a 50 bps cut at the FOMC meeting on September 18.
Following a 1.6% drop to 5407, the S&P 500 staged a steady recovery and ended Wednesday 1% higher at 5554, keeping the DXY in the 101.65-101.75 range for the rest of the session. The US Treasury 2Y yield rose 4.7 bps to 3.64%, while the 10Y yield edged up by 1.1 bps to 3.65%. Despite expectations for today’s PPI core inflation to rise 0.2% MoM in August from 0% in July, mirroring its CPI counterpart, they do not change our long-held expectations for the Fed to lower rates by 25 bps next week. The Fed will also release its Summary of Economic Projections, which will provide insights on how concerned it is about averting a further cooling in the labour market. DXY is still keeping to its three-week range of 100.5-101.9.
Quote of the day
”Don’t go through life, grow through life.”
Eric Butterworth
September 12 in history
In 1992, Mae C. Jemison became the first African American woman who went into space.
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