EUR/USD rebounded from its critical support level of 1.10 by 0.6% to 1.1074 after the European Central Bank meeting. As expected, the ECB lowered the deposit facility rate by 25 bps to 3.50%. In maintaining its stance on deciding rates meeting by meeting based on data, the ECB did not signal another cut at the October 17 meeting. Although the ECB lowered its forecasts for the Eurozone economy to 0.8% from 0.9% for 2024 and to 1.3% from 1.4% for 2025, it expected inflation to rise again in 4Q24 after another low reading In September, in anticipation of negotiated wage growth staying high for the rest of 2024. In line with past guidance, the ECB lowered the main refi and marginal lending facility rates by a larger 60 bps to 3.65% and 3.90%, respectively. This technical adjustment to narrow the gaps between the three policy rates should help rekindle lending between banks and support the economy amid higher inflation in the final quarter. Hence, the ECB will likely defer any decision to lower rates again to the year’s final meeting on December 12. Meanwhile, EUR/USD should keep recovering within its three-week range from markets turning its attention to the first Fed cut expected at next week’s FOMC meeting on September 18.
The DXY Index should continue to retreat from the top of its three-week range between 100.5 and 101.9. The futures market will likely be wrong in anticipating a larger 50 bps cut, reading too much into Fed Chair Jerome Powell’s remark at Jackson Hole that the Fed do everything it could to support a strong labour market as it made progress towards price stability. The S&P 500 Index has recovered to 5596, near its lifetime high of 5670, after its near-10% plunge over July 16-August 5 on fears that higher US joblessness heralded a US recession. The Fed has never described the labour market as weak; Powell reckoned it was time to lower rates to avert a further cooling in the labour market. The US unemployment rate eased to 4.2% in August from 4.3%, while CPI inflation excluding food and energy rose to 0.3% MoM from 0.2% over the same period. Yesterday, PPI core inflation also rose to 0.3% MoM from -0.2%. Today, the University of Michigan consumer survey will likely show 1Y inflation expectations staying unchanged at 2.8% in September after three months of declines. Hence, we expect the Fed to deliver a 25 bps cut to 5.25-5.50% next week. However, through its Summary of Economic Projections, the Fed should be more explicit than its counterparts regarding its multiple rate cut trajectory over 2025-2026 amid a soft landing, keeping the pressure on the greenback.
Quote of the day
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September 13 in history
In 1997, a funeral was held in Calcutta, India, for Nobel peace laureate Mother Teresa.
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