On October 17th, the Governing Council of the European Central Bank decided to lower the three main interest rates by 25 basis points. Specifically, the main refinancing rate, the marginal lending rate, and the deposit facility rate were adjusted down to 3.4%, 3.65%, and 3.25%, respectively, effective from October 23rd. This marks the third rate cut by the ECB since June. The Council stated that the rate cut was based on "the latest assessment of the inflation outlook, underlying inflation dynamics, and the strength of monetary policy transmission." The Council noted that "the latest information on inflation indicates that the disinflationary process is proceeding smoothly. The inflation outlook is also affected by the unexpected downward movement in recent economic activity indicators. At the same time, financing conditions remain constrained." Additionally, the Council expects inflation to rise in the coming months before falling to the target level next year. The Council added that "domestic inflation remains high because wages are still rising rapidly. Meanwhile, labor cost pressures will continue to ease gradually, and profits will partially cushion their impact on inflation." Following the announcement, traders increased their bets on an ECB rate cut in December, with a 20% chance of a 50 basis point cut expected, and almost fully priced in a 25 basis point cut at each of the bank's meetings before April next year. Prior to this, traders only expected a 25 basis point cut in December and a further cut before March.
Additionally, on Thursday local time, the U.S. Department of Commerce released retail sales data for September that was slightly higher than expected, supporting the view that the economy maintained strong growth in the third quarter. The data showed that U.S. retail sales in September recorded a monthly rate of 0.4%, exceeding the expected 0.3% and the previous value of 0.1%; non-physical retailers (mainly e-commerce) continued to perform strongly, growing by 7.1% compared to last year; food services and beverages also performed well, with a year-on-year increase of 3.7%, which is a good sign of healthy consumption. Retail sales excluding automobiles, gasoline, building materials, and food services increased by 0.7% last month, with an unadjusted growth rate of 0.3% in August. This so-called core retail sales are most closely related to the consumer spending component of the Gross Domestic Product (GDP). Analysis suggests that the increase in U.S. retail sales in September indicates that the economy is still on track, which may not prevent the Federal Reserve from cutting rates next month, but the magnitude of the rate cut is expected to be reduced. According to CME's "FedWatch," the probability of the Federal Reserve cutting rates by 25 basis points in November is 86.2%, and the probability of maintaining the current interest rate is 13.8%.
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Data to watch today includes the UK's seasonally adjusted retail sales monthly rate for September, the initial value of the total annualized building permits for the U.S. in September, and the total annualized number of new housing starts for the U.S. in September.
U.S. Dollar Index
The U.S. Dollar Index fluctuated and moved higher yesterday, reaching an 11-week high, now trading near 103.70. In addition to the continued cooling of expectations for a significant rate cut by the Federal Reserve, which continues to provide strong support for the U.S. Dollar Index, the ECB's rate cut of 25 basis points as expected also provided some support for the index. Furthermore, a series of good economic data released by the U.S. during the session also provided some support for the exchange rate. Today, attention is on the resistance near 104.20, with support near 103.20.
Euro/U.S. Dollar
The Euro fluctuated and moved lower yesterday, reaching an 11-week low, now trading near 1.0830. In addition to the U.S. Dollar Index climbing continuously under the support of multiple favorable factors being the main reason for the Euro's weakness, the ECB's expected rate cut of 25 basis points during the session, and investors' expectations of another rate cut in December are the main reasons for the Euro's weakness. Additionally, the weak CPI data released by the Eurozone during the session also put some pressure on the exchange rate. Today, attention is on the resistance near 1.0900, with support near 1.0750.
Pound/U.S. Dollar
The Pound fluctuated and moved higher yesterday, closing slightly higher on the day, now trading near 1.3020. In addition to short covering providing some support for the exchange rate, expectations of a rate cut by the Federal Reserve this year also provided some support. However, the U.S. Dollar Index's continuous rebound under the support of multiple favorable factors and the rising expectations of a rate cut by the Bank of England limited the exchange rate's rebound. Today, attention is on the resistance near 1.3100, with support near 1.2950.
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