Category Archives: Fundamental Analysis

Let’s work through a few options ideas for one to position for a big move in oil (something we see as an above average probability).

From the outset, we are rather bullishly positioned for a big move in oil, as we have been so for the last five years or more, so we probably don’t have to do too much extra in our portfolios.

Therefore, the ideas presented below are a few that folks could consider—a thought experiment, if you will.

Calls on Exxon

January 2027 options are now listed. Yup, two years from now could be considered a rather conservative time frame as it seems to us that if a big move up in oil is going to occur, it will likely centre around a „disturbance” in the force from the Middle East, which is building as we write. But experience tells us that whatever time frame you expect something to occur, more often than not it takes double that time to play out.

An out-of-the-money bull call spread — buying the $150 strike (at $9.0) and selling the $185 strike (at $2.5) against it for a total debit of $6.5 or $650 per contract/spread.

So, at $185, a 50% move in Exxon (NYSE:) would equate to about a 430% return. A 25% move in Exxon is required to break even, and a 30% move for a 100% return.

These returns seem acceptable. If the price of oil takes off, Exxon could easily make a 50% move.

The big reason why the payoff looks reasonable is that it doesn’t appear that options are being priced for any big move in Exxon.

Perhaps this is also a reflection of just how out of favour oil stocks are. Over the last month or so we have been highlighting how sentiment towards oil futures is the worst since 2011 (and that is only because we have been unable to get records going back any further). It also seems that this extreme negative sentiment is echoed in energy related stocks.

Sometimes just a few short paragraphs are all you need:

Goldman Sachs, as one of the biggest providers of lending and trading services to investors through its prime brokerage unit, is able to track hedge funds’ investment trends.

Overall, Goldman Sachs said hedge funds’ trading book was underweight energy stocks at levels approaching a May 2020 low. It added, hedge funds increased their short bets on U.S. energy stocks, besides oil, gas, consumable fuels and energy equipment and services.

And here’s a pictorial representation:

Can you hear that giant sucking noise? Right now, it’s all about tech, and nothing else matters (at least in the eyes of the majority of fund managers).

Seems to us that a perfect short-squeeze storm is brewing. If you don’t know what a short squeeze is, then we urge folks to watch the film Dumb Money.

From 2013 to 2020, Gamestop’s stock price fell by some 90%, and it was one of the most heavily shorted stocks in the world. Everyone was convinced that the stock was going to zero. In early 2020, 100% of the stock float of Gamestock (the float is how many shares are available for the general investing public to buy and sell and doesn’t include restricted stock held by insiders) was sold short, and then by late 2020 this blew out to 150%.

However, risking 1% of your capital, only to see it become a 20%, 30%, or 50% liability (pick a figure) is terminal.

If you want big returns, don’t short-sell (or have any position that creates leverage or a liability in your portfolio), even if it is just a small insignificant amount. We all underestimate volatility (or as Einstein put it, human stupidity). Rather, invest your money in a collection of beaten-up dogs like this one (Seatrium):

With asymmetry on your side, sooner or later the gods of luck will tap you on the shoulder.

Remember Dyna-Mac?

It was precisely what we’re looking for!

The Toxic Waste That Is Coal

Here we have more evidence of how tough it is for coal miners and coal-fired power stations to operate, let alone expand their business.

The Vales Point power station isn’t insignificant as it accounts for about 10% of NSW’s electricity capacity and 4% of Australia’s.

If it failed/shut down, there would almost certainly be blackouts as there isn’t much spare electricity generation capacity (of the base load variety) on the national grid. Yet, the banks are seemingly happy for this to happen. Talk about self destruction!

While we can’t jump to conclusions based on one news item, this does reinforce our thinking that people are dreaming if they believe coal faces an excess of supply.

Here’s New Hope Coal (OTC:), and we are happily collecting those dividends. That’s a 120% stock price return since 2019 but close to 350% if you had the wisdom to reinvest your dividends.

Here is a comparison between returns of New Hope Coal, the S&P 500 (), the Nasdaq (), and the ASX 200 (). A boring old coal miner with returns double the Nasdaq. Call us boring, but we will take the money over glam.

And just a little more to support the assertion we made at the start of this blurb on coal — look at Indonesia’s big fall in production.

As we stated above, we don’t think investors in coal miners have to worry about an oversupply of coal this side of 2030 at the very least.

From this yesterday’s gross domestic product () release, we learned defense spending grew 15% annualized, the fastest since 2003. Quarters immediately following double-digit gains are often much weaker, so we shouldn’t expect this sector to materially contribute to growth next quarter. However, private consumption patterns appear to be sustainable.

Here are a few points to keep in mind:

• Real final sales to private-sector domestic purchasers rose 3.2% annualized, as middle- and upper-income consumers had the cash to spend.
• Technology spending boosted Q3 capital expenditures as the artificial intelligence (AI) craze continues.
• Investors should closely monitor upper-income households for any leading signs of emerging trends.
• According to this morning’s report, inflation eased considerably throughout Q3, which increases the odds the Federal Reserve (Fed) will cut at both of the upcoming meetings this year.

Bottom Line is looking ahead, we should not expect government spending to contribute to growth as much as it did in Q3. According to a separate report from the New York Fed, well-heeled millennials are driving consumer spending. As long as they have the appetite and ability to spend, business activity will remain stable.

Well-Heeled Millennials Drive Consumer Spending

Consumer spending contributed 2.5 percentage points to topline Q3 growth of 2.8% annualized. According to a separate report from the New York Fed, well-heeled millennials are driving consumer spending. The chart highlighted in this week’s Econ Market Minute gives a bit of the backstory on how upper-income millennials are supporting retail spending.

As long as they have the appetite and ability to spend, business activity will remain stable. Demand for both goods and services grew in Q3, but as the chart below reveals, goods spending often retreats after an outsized gain. Consider the first half of 2023 as an example.

Contributions to U.S. GDP Growth

Source: Source: LPL Research, U.S. Bureau of Economic Analysis, 10/30/24

Demand for services is a more stable driver of growth, and if consumers — especially the upper-income ones — remain healthy, we should expect services spending to contribute to growth in the coming quarters but goods spending to revert like it did in early 2023.

AI Boosted Technology Spending

Businesses invested in capital throughout the third quarter, especially in information processing equipment. This category within the GDP report grew almost 15% annualized in Q3 and up 9% from a year ago. We could expect this line item to continue to support overall growth, even when consumer spending starts to moderate. Investors should keep an eye on firms that could benefit from the build-out of the necessary infrastructure to support AI.

Conclusion

Not surprisingly, third-quarter business activity was strong, pushing third-quarter GDP growth up 2.8% annualized from the previous quarter. Looking ahead, we should not expect government spending to contribute to growth as much as it did in Q3.

According to a separate report from the New York Fed, well-heeled millennials are driving consumer spending. As long as they have the appetite and ability to spend, business activity will remain stable. According to this morning’s report, inflation eased considerably throughout Q3, which increases the odds the Fed will cut at both of the upcoming meetings this year.

LPL’s Strategic and Tactical Asset Allocation Committee (STAAC) maintains its tactical neutral stance on equities. High valuations introduce risk if earnings don’t come through, but market momentum remains strong and seems to be telling us earnings will deliver.

That said, the Committee acknowledges the potential for short-term weakness, especially with lingering geopolitical threats in the Middle East and as the U.S. presidential election quickly approaches.

Economic growth accelerated in the from 0.2% to 0.4%, in part driven by one-offs. Underlying growth remains sluggish, but there are no signs of the deterioration that the European Central Bank has been concerned about either. For the quarters ahead though, we think it’s fair to expect a slowdown in growth again as the outlook remains weak

PMIs have been indicating doom and gloom about the eurozone economy since May, but third-quarter GDP data has come in surprisingly strong. The acceleration from 0.2% to 0.4% growth quarter-on-quarter indicates that worries about an imminent recession are overdrawn. Still, don’t overestimate the strength of the eurozone economy on the basis of this better-than-expected growth reading either.

First of all, notoriously volatile growth (significantly influenced by multinational accounting activity) contributed positively to today’s reading; without Ireland, eurozone GDP would have grown 0.3%. Besides that, the growth figure of 0.4% is likely to have been boosted by the Olympics this summer. So looking through the one-offs, the eurozone economy is showing modest growth at the moment.

Still, also performed better than expected and avoided recession by posting a 0.2% growth print. And continued with its fast growth at 0.8%, in part boosted by the EU recovery fund investments. remains a negative outlier as it experienced 0% growth, decelerating from 0.2% in the second quarter.

For the ECB, this provides a bit of a reality check on economic activity. The central bank had shown significant concerns around growth developments, indicating that all indicators were heading in the same downward direction. Clearly, even though one-offs played a role, today’s data should calm the ECB about growth developments.

At the IMF meeting last week, discussions about a 25bp or 50bp cut from the had opened up, but today’s GDP data provides a hawkish argument to the debate ahead of the December meeting.

The question remains as to whether or not today’s GDP data is not a dead cat bounce. We remain cautious about the outlook for the months ahead as the consumer continues to save, making a consumption recovery on the back of stronger real wage growth relatively muted.

The investment will see some boost from lower rates, but the impact is set to be limited given the low capacity utilization in the industry and that the export environment is sluggish. So, don’t see this as the kick-off to a vibrant recovery – the eurozone economy remains sluggish for the moment, and GDP growth in the fourth quarter is likely to come in lower than the surprisingly strong third-quarter reading.

Disclaimer: This publication has been prepared by ING solely for information purposes irrespective of a particular user’s means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Read more

Original Post

The backup in Treasury yields may be a warning sign that the odds are slipping that the will cut interest rates again at the next policy meeting on Nov. 7.

The policy-sensitive closed at 4.15% on Monday (Oct. 28), the highest since Aug. 1. The pushback is that the recent rise in yields is still moderate following a sharp slide in September.

One reason for cautious optimism for expecting more easing: the 2-year rate, which is widely seen as a proxy for policy expectations, continues to trade well below the current Fed funds effective rate range of 4.75%-5.0%. The lower 2-year rate is widely viewed as a sign that the market is still anticipating a rate cut.

Nonetheless, the recent rise in the 2-year yield has dramatically narrowed the spread relative to Fed funds. At one point in mid-September, the 2-year yield was nearly 180 basis points below the Fed funds rate – a sign that the market is confident about the outlook for rate cuts. As of yesterday’s close, by contrast, the spread narrowed to a negative 71 basis points. The market is still betting on a rate cut, in other words, but confidence has waned.

Fed funds futures, by contrast, have barely wavered in the outlook for easing. As of early trading this morning, this market is still pricing in an implied 90% probability that the Fed will cut its target rate by 25 basis points next month.

The hope is that the mixed signals from markets may be resolved after this week’s economic reports. The highlights: Thursday’s release of and data for September and the government’s initial estimate of . On Friday, markets will focus on the Labor Department’s for October.

The glitch is that October labor market data could be distorted by temporary factors.

“After two hurricanes, a strike, and rolling furloughs, we anticipate a lot of noise in Friday’s October employment report,” RBC Capital Markets’ Michael Reid wrote in a note to clients last week.

The economics team at Jefferies agrees:

“The distortions to this data make the report difficult to rely on, and we doubt that the Fed will be motivated to change tack on policy based on the tone of the data. Similarly, the drag in October will likely be reversed in November, so we doubt we will have a clean look at the payroll data for the next few months.”

Gold Holds Steady as the US Dollar Strengthens

Gold () traded sideways last week, fluctuating between $2,720 and $2,750. Robust US economic data strengthened the (USD) and Treasury yields, limiting XAU/USD gains.

The  (DXY) has surged by 3.6% towards 104.49 in October—the biggest monthly gain since April 2022. This rise follows a rally in Treasury yields fueled by indicators of a resilient US economy and growing bets on Donald Trump winning the presidential election on 5 November. Also, the market expects the Federal Reserve (Fed) to proceed with a more cautious path for rate cuts, likely favouring smaller 25-basis-point (bps) reductions. Politically, market odds increasingly favour Trump returning to the White House, driving the US dollar and Treasury yields higher due to anticipated inflationary policies like higher tariffs and lower taxes.

XAU/USD losses remain limited due to safe-haven demand fueled by ongoing Middle East tensions and uncertainties surrounding the upcoming US election. However, on Saturday, Iran signalled it would refrain from retaliating against Israeli strikes on its military targets if a ceasefire agreement is reached in the Gaza Strip and Lebanon. If countries agree on a ceasefire, XAU/USD may face reduced safe-haven demand and increased downward pressure.

XAU/USD fell during the Asian trading hours. Today’s trading session will likely be quiet as the economic calendar features no major news releases. The key levels to watch are $2,720 and $2,750.

Euro Drops to a Three-Month Low Amid Diverging Central Banks’ Policies

The euro () lost 0.41% against the US dollar (USD) on Friday after a series of better-than-expected US macroeconomic reports pushed the greenback higher.

In September, the US Commerce Department reported a 0.5% increase in non-defense capital goods orders (excluding aircraft). This key indicator of business investment exceeded economists’ expectations of a 0.1% rise. Additionally, the University of Michigan’s Consumer Sentiment Index climbed to 70.5 in October, surpassing the forecast of 69. Notably, consumer expectations for inflation over the next year decreased to 2.7%, aligning with September’s final reading. EUR/USD has now been falling for four consecutive weeks as positive US economic data has lowered expectations about the size and speed of the Federal Reserve’s (Fed) rate cuts and lifted US Treasury yields.

„We had a massive recalibration in economic expectations for the US, and that process seems to have largely run its course; the Fed’s policy trajectory looks much more reasonable, and interest rate differentials between the US and other major economies are stabilizing here”, said Karl Schamotta, chief market strategist at Corpay in Toronto.

Meanwhile, the eurozone economy continues to struggle with producer prices falling amid low consumer confidence and weak demand. Last week, the European Central Bank (ECB) cut interest rates for the third time this year, and four sources close to the decision told Reuters that a fourth cut would likely be in December unless data turned around in the coming weeks. Although some ECB officials tried to ease speculation about rate cuts, investors see a 40% chance that its next move in December will be a 50-basis-point (bps) reduction, twice the size of previous cuts.

EUR/USD was falling during the Asian and early European trading sessions. Today’s macroeconomic calendar doesn’t feature prominent events, so the established bearish trend might continue. Bears are now targeting 1.07760 and 1.07600.

Traders Await Economic Data to Define the Pound Trend

On Friday, the British pound () declined by 0.12%, losing 0.7% over the week as the US economic data released last week strengthened the US dollar (USD).

The Department of Commerce announced that orders for non-defence capital goods—a closely monitored indicator of business spending plans— increased by 0.5% in the previous month, following a 0.3% increase in August. This figure exceeded the forecast of economists surveyed by Reuters, who had anticipated a rise of 0.1%. Meanwhile, the University of Michigan report revealed that consumer sentiment in October rose from 70.1 towards 70.5, surpassing the expected 69. Additionally, the one-year inflation outlook decreased towards 2.7% from the preliminary reading of 2.9%, aligning with the final result for September.

This week, investors will focus on Thursday’s US PCE Price Index and Friday’s US nonfarm payroll data.

„Clearly, payroll data is a crucial variable, and it remains an open question whether September’s figure was an unusual move or a statistical anomaly. The next week’s report will help clarify this, but in reality, we should take it with a grain of salt,” said Karl Schamotta, Chief Market Strategist at Corpay, based in Toronto.

GBP/USD moves sideways during Asian and early European trading hours. Today, no major events can influence the pair, so it may continue moving within the established trend.

The Federal Reserve’s surprise decision in September to cut rates by a larger-than-expected 50-basis-points seems like a distant memory now, as policymakers are once again sending out hawkish soundbites.

US economic indicators since the September meeting have been on the strong side, including the CPI report, with Fed officials cautioning that another 50-bps cut is unlikely in the near term. The sudden switch in the narrative from ‘hard landing’ to ‘soft landing’, or possibly even a ‘no landing’, has spurred a sharp reversal in Treasury yields, which in turn has pushed the US dollar higher.

With the Fed’s November policy decision fast approaching, next week’s data will serve as a timely update on the strength of the US economy as well as on inflation.

Slowdown, what slowdown?

Kicking things off are the October consumer confidence index and the JOLTS job openings for September on Tuesday. But the top-tier releases do not start until Wednesday when the first estimate of third quarter GDP is due.

The US economy is expected to have expanded by an annualized rate of 3.0% in Q3, the same pace as in Q2. Not only is this above average growth but an upside surprise is more likely than a downside one as the Atlanta Fed’s GDPNow model puts the estimate at 3.4%.

Other data on Wednesday will include the ADP private employment report, which will provide an early glimpse into the labour market, and pending home sales.

Spotlight on PCE inflation after mixed CPI

Both the CPI and PCE measures of inflation show a divergence between the headline and core readings. The core PCE price index, which the Fed puts the most weight on in its decision making, ticked up to 2.7% y/y in August even as headline PCE eased to 2.2%. It’s likely that both prints stayed unchanged in September or fell slightly. Hence, the inflation numbers may not be particularly helpful for the Fed or investors.

Still, the personal income and consumption figures due the same day will offer additional clues for policymakers, while October Challenger Layoffs and the quarterly employment cost will be watched too.

NFP report may hold the cards

Finally on Friday, the week’s highlight – the October nonfarm payrolls report – will come to the fore. After a solid 254k rise in September, it’s projected that the US labour market created 140k new jobs in October, signalling a marked slowdown. Nevertheless, the unemployment rate is expected to have held at 4.1%, while average hourly earnings are forecast to have moderated slightly from 0.4% to 0.3% m/m.

Also important will be the ISM manufacturing PMI, which is expected to improve from 47.2 to 47.6 in October. With the Fed now more worried about the jobs market than inflation, soft payrolls could set the tone back to a more dovish one. 

Can the US dollar extend its rebound?

Moreover, any signs that the American economy is cooling is likely to push up market bets of back-to-back rate cuts for the next few meetings. However, if growth remains robust and more significantly, PCE inflation points to some stickiness, rate cut bets will probably suffer a further blow.

At the moment, only one additional 25-bps reduction is fully priced in for 2024. If a rate cut in November starts to come into doubt, the US dollar could climb to fresh highs but stocks on Wall Street would probably come under selling pressure.

For the latter, however, a busy earnings week might keep the positive momentum going if results from Microsoft (NASDAQ:), Apple (NASDAQ:) and Amazon.com (NASDAQ:) don’t disappoint.

Bank of Japan expected to stand pat

Twenty twenty-four was a turning point for the Bank of Japan’s decades-long fight against deflation. The BoJ abandoned its yield-curve control policy, halved its bond purchases, and raised borrowing costs twice, ending its policy of negative interest rates.

However, despite policymakers’ clear intention to continue the normalization of monetary policy and raise rates even higher, inflation appears to be settling around the BoJ’s 2.0% target, lessening the need for further tightening. The most recent commentary from Governor Ueda and other board members suggests a rate hike is not forthcoming on Thursday when the Bank announces its October decision.

But the updated outlook report with a fresh set of projections on inflation and growth should be quite insightful on the likelihood of a rate hike in December or during the first few months of 2025.  

In the absence of any hints about a rate hike anytime soon, the yen will probably continue to struggle against the US dollar. Yet, a renewed weakness in the yen will only incentivize policymakers to hike sooner rather than later and this is a risk investors may be overlooking.

Also on the Japanese schedule are preliminary industrial output figures and retail sales figures for September, both due on Thursday.

Euro awaits flash GDP and CPI

The euro’s double top pattern against the greenback did not let down technical analysis enthusiasts and the pair recently brushed 16-week lows, falling below $1.08. Next week’s releases are unlikely to be of much help to the bulls.

The flash estimate of GDP out on Wednesday is expected to show that the Eurozone economy eked out growth of just 0.2% q/q in the third quarter. On Thursday, attention will turn to the flash CPI readings. The headline rate probably edged up from 1.7% to 1.9% y/y in October, but the ECB is already forecasting a pickup in the coming months.

Nevertheless, stronger-than-expected data could provide the euro with some short-term relief following four consecutive weeks of losses. Alternatively, if the numbers disappoint, investors are sure to ramp up their bets of a 50-bps cut by the ECB in December.

• Strong US data is not welcomed by equities
• Busy calendar today but markets are already focusing on next week
• Japan holds election on Sunday; the outcome could surprise
• BoJ and yen could suffer from a hung parliament

Data Reconfirm the Strength of the US Economy

Yesterday’s PMI survey release was a stark reminder that the US presidential election is not the sole market-moving factor. The next Fed meeting will be held two days after the election date and, assuming an eventless election process occurs, Chairman Powell et al will evaluate the progress made since the September aggressive rate cut.

The message from yesterday’s preliminary PMI surveys, the jobless claims figures and the new home sales data was that the US economy is still growing at a respectable rate, far above the growth achieved by most developed countries.

The Fed hawks are not 100% on board for another rate cut, but the market will have to wait for November 7 for further comments on monetary policy, as Fedspeak will gradually diminish due to the usual blackout period that occurs before FOMC meetings, commencing shortly.

The market, though, remains confident that a 25bps rate cut will be announced in a fortnight. Today’s durable goods report could prove the main event of the session, ahead of next week’s very busy calendar.

The combination of the October jobs report and the first release of the third quarter GDP has the potential to further increase divisions in the Fed ranks and dent the US dollar’s recent strength.

Data Releases Confuse Equity Investors

In the meantime, US equity indices are caught up in the middle. Investors are trying to navigate through this pre-election period, as the rhetoric is gradually becoming more aggressive, US economic data is producing further surprises, and third-quarter earnings are picking up speed.

US indices remain in the red this week, with the suffering from yesterday’s weak earnings result from IBM (NYSE:).

The is doing slightly better but that might change dramatically if next week’s barrage of earnings from Alphabet (NASDAQ:), Microsoft (NASDAQ:), Meta (NASDAQ:) and Amazon (NASDAQ:) fail to appease investors.

Japanese Elections on October 27

Following a weak set of inflation figures from Tokyo, which are usually a very strong predictor of national CPI, the market is preparing for Sunday’s general election in Japan. The LDP party is expected to earn the highest number of votes, but the latest polls increase the possibility of the LDP failing to achieve the necessary majority in the lower house, even with the help of its junior partner. In that case, the leading party would have to look elsewhere for the necessary support to form a new coalition, making generous compromises.

In the meantime, the remains under pressure, having quickly lost almost 60% of its July-September outperformance against the . The BoJ is meeting next week, but the market has turned its focus to the December gathering. Political uncertainty along with weaker data prints could potentially force Governor Ueda et al to postpone any December decisions and thus remove the strongest tailwind for the yen.

Gold Retreats from Record Highs on Surging US Dollar and Bond Yields

Gold () fell by 1.24% on Wednesday as market participants took profit on long positions, triggering a technical pullback. Gold retreated from record highs, losing over 1% in the previous session due to several factors.

On Wednesday, the (USD) and Treasury bond yields surged to their highest levels in three months, prompting an intraday profit-taking pullback in gold. Strong US macroeconomic data indicated the economy remains resilient, diminishing expectations for aggressive easing by the Federal Reserve (Fed).

Additionally, recent remarks from key Fed officials suggest the central bank will move forward with modest interest rate cuts in the coming year. According to the CME FedWatch Tool, traders are now pricing in a 90% probability of a 25-basis-point (bps) rate cut by the Fed in November.

The BRICS summit, which concludes today, 24 October 2024, is significantly impacting XAU/USD due to discussions on de-dollarisation and the introduction of a gold-backed currency. Key topics at the summit include a roadmap for creating a multicurrency payment platform and plans to reduce reliance on the US dollar in global trade. A major proposal discussed is a potential currency backed by gold and the national currencies of BRICS countries, which would increase gold’s role in international finance.

XAU/USD rose during the Asian trading hours. Today, traders should focus on the release of a series of Manufacturing and Services Purchasing Managers’ Indices (PMIs). The US PMIs will be published at 1:45 p.m. UTC. Higher-than-expected figures will have a bearish impact on XAU/USD as they weaken the case for more rate cuts. Conversely, lower-than-expected numbers may push XAU/USD higher.

PMI Reports Will Test USD Strength Against EUR

The euro () lost 0.15% against the US dollar (USD) on Wednesday as the greenback continued to strengthen on expectations of wider divergence in monetary policies between the European Central Bank (ECB) and the Federal Reserve (Fed).

EUR/USD has been declining since the end of September, with investors selling short-term rallies and rebounds. This decrease was caused by a run of positive US economic data, which has dampened expectations about the size and speed of rate cuts by the Fed. EUR/USD has now reached a three-month low partly due to rising prospects of Donald Trump’s Presidency, which is expected to support the US dollar. Still, traders are beginning to doubt that the rally in the US dollar can continue much further from the current levels. ‘The bias for a stronger dollar in the short term probably from here is going to be more of potential Trump hedges rather than the rate story, which arguably is overblown’, said George Vessey, lead FX strategist at Convera.

At the same time, positive eurozone economic news is largely absent. Figures released yesterday showed that consumer confidence remained essentially unchanged in October with no signs of improvement. Meanwhile, ECB policymaker Robert Holzmann confirmed in an interview with Bloomberg yesterday that the ECB will almost certainly cut interest rates by 25 basis points (bps) in December.

EUR/USD was rising slightly during the Asian and early European trading sessions. Today, S&P Global Market Intelligence will release its highly anticipated Purchasing Managers’ Indices (PMIs). PMIs will be published for several key economies—Germany, France, the U.K., the US, and the eurozone. The most important report is the US Composite PMI, due at 1:45 p.m. UTC. If figures are lower than expected, EUR/USD may rebound slightly but will probably remain below the 1.08280 level. Otherwise, EUR/USD will likely continue to decline, targeting 1.07600.

Yen Grows on Political Uncertainty and DXY Strength

The Japanese yen () gained 1.11% yesterday. The pair reached its 3-month high due to political uncertainty leading up to the country’s general election later this weekend.

The coalition government of Japan, led by Prime Minister Shigeru Ishiba, faces the risk of losing its majority in upcoming elections on Sunday, as indicated by recent polls. This potential change in the political landscape may further complicate the Bank of Japan’s (BOJ) plans for monetary policy normalisation.

Kazuo Ueda, Governor of the BOJ, has stated that it remains necessary to take the time required to achieve the 2% inflation target in a sustainable manner. He has emphasised that interest rate hikes should be implemented cautiously and gradually while warning against moving too slowly, as this could lead to speculation and a further depreciation of the Japanese yen (JPY). At the same time, investors are reviewing data showing that private sector activity in Japan decreased for the first time in four months during October, with both the manufacturing and services sectors declining.

Kazuhiko Aoki, Deputy Chief Cabinet Secretary of Japan, has stated that the government is closely monitoring currency fluctuations as the yen has lost more than half of its gains since the government intervention in July. Internationally, the Japanese yen continues to be pressured by a stronger US dollar.

The greenback is driven by expectations for a more cautious approach by the Federal Reserve (Fed) to interest rate reductions and the possibility of Trump’s victory in the upcoming elections. Shoki Omori, senior strategist with Mizuho Securities, said that given the expectation of the Fed maintaining higher interest rates than anticipated and the prospect of a Trump win, the US dollar will likely continue to dominate the market. This could result in USD/JPY reaching the 160.000 mark.

USD/JPY has been experiencing a slight correction towards 152.000  during the Asian and early European trading sessions. Today, the US Jobless Claims report at 12:30 p.m. UTC and US Manufacturing and Services reports at 13:45 p.m. UTC could increase volatility in the pair. Additionally, the Tokyo CPI report will be published at 11:30 p.m. UTC. A higher-than-expected figure could push USD/JPY higher, while softer data could give the pair a bullish momentum.