European markets hit their best levels in over a week yesterday as financial markets settled down into a more measured overview of recent geopolitical events, while mulling over the prospect of a China stimulus plan as well as a modest change in tone from Fed policymakers when it comes to the next move on interest rates.
This change in tone also translated into US markets which finished higher for the 3rd day in succession, helped by the sharp fall in yields after several Fed policymakers suggested that the rise in yields since the last Fed meeting meant that the central bank might well get away with doing less when it comes to rate hikes.
In the last few days, we’ve heard from Fed vice chair Philip Jefferson, Dallas Fed President Lori Logan, who were followed yesterday by Atlanta Fed President Raphael Bostic, as well as Minneapolis Fed President Neel Kashkari who all acknowledged that monetary policy could be restrictive enough and that rising yields could mean the Fed might have to do less, and not hike again in November.
While this may be true, this week’s inflation numbers could prompt some repricing of that expectation if they come in hotter than expected, starting with today’s PPI numbers for September, and tomorrow’s CPI report.
While headline CPI has edged higher in the last couple of months, we’ve also seen a similar trend in headline PPI, although the same can’t be said for core prices. Today’s headline PPI for September is expected to come in unchanged at 1.6%, while core PPI is expected to edge higher to 2.3%, from 2.2%.
After today’s PPI numbers we get to look over the latest Fed minutes in the wake of the decision to keep rates on hold, and the surprise shift towards higher for longer, but the prospect that we could see higher rates for longer. This change in the dot plots saw a sharp rise in yields as well as the US dollar over the past few weeks, although we have seen a few Fed officials dial back some of the recent hawkish narrative in the last few days.
This scaling back of rate cut expectations for 2024 from 4.6% to 5.1% was significant along with keeping its guidance for 2023 unchanged at 5.6%, while 2025 rate guidance was also revised higher.
The Fed also revised its guidance for 2023 GDP higher, to 2.1% as well as revising its unemployment guidance lower to 3.8%.
It's important to remember that the Fed continued to make the case that it remained data dependent when it comes to further rate rises, however the resilience of the US economy isn’t doing the markets any favours keeping alive the prospect that the Fed remains far from done.
Today’s minutes while dated, are expected to offer indications as to how concerned Fed officials were at the time when it came to the risk of overtightening, although the language has softened since then.
It was notable that Powell emphasised that the Fed was going to be careful when it came to further policy moves, which suggests a good deal of uncertainty about the risks of doing too much on rates.
One other thing the dot plots told us about 2024 was that Fed officials were much less dovish about where rates were likely to go over the next 12-18 months, with the Friday payrolls report justifying the Fed’s decision to up its 2024 rate guidance.
EUR/USD – looking to test resistance at the 1.0620 level, with a break targeting the 1.0740 area. The main support remains at last week’s lows at 1.0450, as well as the 1.0400 area which is 50% retracement of the 0.9535/1.1275 up move.
GBP/USD – looking to test the 1.2300 area with a break targeting a potential move back to the 1.2430 area and 200-day SMA. A move below 1.2000 targets the 1.1835 area which equates to a 50% retracement of the move from the record lows at 1.0330 to the recent peaks at 1.3145.
EUR/GBP – looks to be testing support at the 0.8620 area, along with the 50 and 200-day SMA. Resistance at the 200-day SMA at 0.8720 area.
USD/JPY – currently range trading above last week’s lows with the main resistance at last week’s highs at 150.16. Below 147.30 signals the top is in and a possible move towards 145.00.