Headlines

* US CPI cooled down hopes for an aggressive Fed rate cut

* ECB expected to cut rates as economic concerns come to the fore

* Trump suggest he’s unlikely to do another debate, after coming losing on points

* Nasdaq bounced over 25 as Wall Street bounces back from inflation report

FX: USD traded flat after choppy trading through the whole trading day. The Presidential TV debate saw Harris come out on top which sparked some initial dollar selling. Prices then rebounded from a low of 101.26 on the hotter than expected core CPI data. However, the pick-up in those prices was driven by components with a small weight in the core PCE deflator. That saw the odds of a 25bps rate cut next week rise to 85% from 65% before the release.  

EUR also traded flat after similar (opposite) price action to the dollar. All eyes are on the ECB meeting with another quarter point rate cut fully priced in.

GBP was hindered by soft data after the UK registered zero growth in July versus an expected print of 0.2%. Output data was also soft across the board. Cable returned to a 1.30 handle, and tested the figure to the downside, after topping out at 1.3111.

USD/JPY sunk after BoJ policymaker Nakagawa stated that the central bank will proceed with its rate hikes if inflation aligns with forecasts, indicating that last month’s market turmoil has not altered their plans. This follows comments from policy board member Hajime Takata, who last week emphasized the need to stay on course with rate hikes while treading carefully to avoid volatile markets harming businesses.  But prices bounced, close to huge support at 149.48, after the CPI release.

AUD dipped down near to the 200-day SMA at 0.6616 before paring losses. The 50-day SMA is above at 0.6669 and a major Fib level at 0.6671. USD/CAD traded back to the 200-day SMA at 1.3589.  Slumping oil prices and poor risk sentiment are typically a headwind for the loonie.

US Stocks: Stocks were strong after initially selling off on the hotter inflation figures.  The S&P 500 gained 1.07% to settle at 5,554. The tech-dominated Nasdaq 100 added 2.17% to finish at 19,237. The Dow closed 0.31% higher at 40,861. Strength in megacap tech helped the indices as consumer staples and energy lagged. It was a choppy day after the initial selling due to VP Harris being seen to win the TV debate. Nvidia soared nearly 9% on reports that the US government is considering allowing the tech giant to export advanced chips to Saudi Arabia.

Asian stocks: Futures are in the green. Asian stocks traded cautiously after a mixed handover form Wall Street, ahead of US CPI. The ASX 200 saw gains in commodity stocks trumped by softness in tech and financials. The Nikkei 225 was lower on yen strength and BoJ hints of more policy normalisation and rate hikes. The Hang Seng and the Shanghai Composite were lower, the former below 17,000 as energy stocks dragged.

Gold printed a doji candle as it still couldn’t break higher to fresh all-time highs. Stronger than expected CPI saw yields and the dollar find a bid.

Day Ahead –ECB Meeting

The European Central Bank is expected to deliver the second rate cut of this cycle along with changes to its operational framework that were announced in March. The deposit facility rate will be cut by 25bps from 3.75% to 3.50%. The key question is what happens next into the end of the year, with two more meetings scheduled. Currently, markets give a 40% chance of another 25bp move in October, with this more than fully priced for December. Rates are seen around 2% to 2.25% by the middle of next year.

The issue is that growth has been stagnant for some time, while some price pressures remain. Headline inflation is falling close to target, but this is driven by base effects and lower energy prices. However, core and services inflation is elevated and still sticky. Wage growth has slowed but the unemployment rate is stuck near record lows. We also get updated quarterly staff economic projections with the focus on 2025 inflation forecasts.

Chart of the Day – EUR/USD loses support

For the euro, any major downward revisions to growth or inflation would increase the likelihood of a more rapid pace of rate cuts. On the flip side, upward revisions would motivate the hawks to slow down further rate cuts and support EUR. Otherwise, President Lagarde is expected to say the ECB is heavily data dependent with a meeting-by-meeting stance. Any hints on policy clues around forward guidance will be seized upon.

Gains have stalled in the major around the mid-1.11s where the December 2023 top is, with major resistance around 1.12. Short-term trend momentum signals are still reading bearish for the currency. Gains through 1.1062/70 would give the major a little more intraday momentum. Key short-term support is 1.0974 with the 50-day SMA at 1.0966.