Ella 
This week’s opening moves are easy to categorize. Risk sentiment improved after taking a hit last week, with major European and U.S. stock markets gaining just under/over 1%. But this is not enough to reverse the decline, as technical graphics are still signaling a correction. The trade-weighted USD (DXY) tested first support levels near 100.50/60 on Friday following the release of non-farm data. The US dollar avoided losses and continued to move higher building on yesterday’s technical corrective momentum (101.55 close). A break above 102 would be the first technical signal that the dollar’s sell-off since July is turning into a more neutral short-term trend. EURUSD 1.10 is more or less a similar pivot point. Core bonds initially fell, but the path of least resistance remains higher ahead of this week’s European Central Bank meeting and especially next week’s FOMC meeting. U.S. bond yields of all maturities remain at/near this year’s lows. The US and EMU agendas are light today, suggesting more expected action ahead of tomorrow’s US August CPI report and Thursday’s ECB meeting. The pound was slightly firmer following the release of labor market data this morning. In the three months to July, annual wage growth slowed as expected to 5.1%, while employment rose more than expected in the same period (365,003/3m). However, monthly payrolls for August show 59,000 job cuts (+25,000 expected).
The European Central Bank is expected to cut its deposit rate by 25 basis points for the second time this year, to 3.50%. As announced in March, they will also reduce the spread between the main refinancing rate and the deposit rate from the current 50 basis points to just 15 basis points, which means that the refinancing rate will be cut by 60 basis points, from 4.25 % dropped to 3.65%. We will pay close attention to the latest GDP and CPI forecasts to provide clues on the future trajectory of monetary policy. However, other than some minor downward revisions to this year’s GDP and headline CPI numbers, we don’t expect big changes. Recall that the economic growth path set by the European Central Bank staff in June for 2024-2026 is 0.9%-1.4%-1.6%, and the inflation path is 2.5%-2.2%-1.9%. While maintaining an accommodative bias, we do not expect the central bank to pre-commit to specific actions at future meetings. The short break between meetings between September 12 and October 17 suggests that, barring any major surprises, the central bank may prefer not to attend the October meeting and stick to its current plan for quarterly interest rate cuts, which would not come until December. The next 25 basis point rate cut. Unlike the Fed, the ECB has fewer options to reduce policy restrictions in the current stubborn (core) inflation environment, as there is limited room to move towards neutral territory.
