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EU GDP expected to stall in Q3 , BOJ tweaks YCC

European markets managed to get off to a positive start to the week yesterday, helped in no small part by the limited and incremental nature of the Israeli incursions into Gaza which appears to be helping assuage concerns that the escalations might prompt another front opening on Israel’s northern border with Lebanon and Hezbollah.

US markets also got off to a strong start with the Dow posting its biggest one-day gain since July, while the Nasdaq 100 and S&P500 both rose by more than 1%, while oil prices closed at their lowest level in over 2 weeks. While yesterday’s rebound was welcome it isn’t likely to change the fact that US stocks look set to close their 3rd successive monthly decline.

Yesterday the Japanese yen pushed higher on a report from Nikkei that the Bank of Japan was set to move the bands when it comes to its yield curve control policy. This morning we found out how true that story was when the Bank of Japan, while keeping rates unchanged, did just that, pushing the upper boundary to 1% which was less hawkish than markets had been expecting, given they had already been targeting that level when it came to their bond buying operations.

In moving the band, they have merely removed the discrepancy between the YCC rate and their bond buying levels, disappointing the markets who had been expecting something a little more radical, like pushing the band beyond 1%. In not being more hawkish the Japanese yen tumbled and slid back through the 150.00 level. At the same time, the BoJ raised their inflation forecasts for 2023 to 2.8, and for 2024 to 2.8%.

Despite yesterday’s strong US session markets here in Europe look set to open slightly lower as we head into the final trading day of October and look ahead to tomorrow’s Federal Reserve rate meeting as well as a tsunami of US economic data this week, we’ll also be getting an insight into how the economy in Europe has fared over the last 3 months.

Yesterday we found out that the German economy contracted by -0.1% in Q3, while also slipping into disinflation in October, raising the question as to how far behind the rest of Europe might be in that regard.

The French economy is expected to have slowed from 0.5% in Q2 to 0.1% in Q3, with a similar slowdown expected to be seen in the Italian economy, which is also expected to have slowed to 0.1%.

On the wider EU measure the economy is expected to have slowed to 0% in Q3 from 0.1%, meaning that over the last 4 quarters we’ve seen little to no growth at all.

Inflation is also expected to have slowed sharply with French CPI for October expected to have slowed to 4.5% from 5.7% on an annualised basis. EU flash CPI is expected to have similarly slowed from 4.3% to 3.1%, with core prices forecast to remain a little stickier at 4.2%, down from 4.5%.

Given the weakness seen in these figures there is rising concern that the ECB may have erred when it raised rates by another 25bps in September. They certainly ought to offer some pause for thought to the German hawks on the governing council who probably still feel that more needs to be done, when it comes to further rate hikes.

In the US we have the latest Chicago PMI as well as October consumer confidence, neither of which are expected to show much in the way of resilience.

Consumer confidence is expected to slow to 100.5 from 103, while Chicago PMI is forecast to edge higher to 45, from 44.1.           

EUR/USD – continues to rally off the 1.0520 lows of last week, with the next support at the recent lows at 1.0450. Resistance at the 1.0700 area and 50-day SMA. 

GBP/USD – continues to rally off the lows of last week at the 1.2070 area last week. Major support remains at the October lows just above 1.2030. Below 1.2000 targets the 1.1800 area. Resistance at 1.2300.

EUR/GBP – retested the 0.8740 area yesterday, before slipping back. We need to see a break above 0.8750 to target the 0.8800 area. A move below 0.8680 and the 200-day SMA targets the 0.8620 area.

USD/JPY – retreated from the 150.78 area at the end of last week, slipping back to the 148.75 area and the lows from 2-weeks ago. Below 148.70 targets the 147.30 area. Still on course for a potential move towards 152.20, while above the 148.75 area.


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