EUR/USD Rebounded from 1.0831

Markets

European yields Friday continued a gradual bull steepening in the aftermath of the ECB policy decision. In first post-meeting comments, policymakers evidently held to a data dependent approach. However, the analysis on inflation is turning softer. Several members including Bank de France governor Villeroy showed growing confidence that inflation, after a technical uptick in the coming months, might return target maybe already early next year. Markets consider a next back-to-back ECB rate cut in December as a done deal. Money markets even see a growing change of a 50 bps step (40%). German yields declined further between 3.8 bps (2-y) and 2.3 bps (30-y). In a session with only second tier eco data, US yields changed between -2.4 bps (2-y) and +0.4 bps. Contrary to a clear downtrend for European yields, US yields for now found a new short-term equilibrium holding a very tight sideways range at all tenors. Equity investors show confidence going in the key phase of the earnings season (Dow at record close). Despite a favourable economic and interest background, the dollar on Friday fell prey to profit taking on an almost uninterrupted ascent since end September. DXY closed near 103.5 (from 103.8). EUR/USD rebounded from 1.0831 to 1.0867. As such the 1.0835 support (62% retracement April-Sept rise) survived. Sterling initially was well bid after the release of better than expected UK retail sales even as this probably won’t prevent the BoE from scaling back policy restriction at the November meeting. EUR/GBP tested the 0.83 big figure, but rebounded later to close almost unchanged at 0.8327. Even so, the downside in this cross rate still looks vulnerable.

This morning, Asian equities are trading mixed to slightly higher. Chinese banks reduced lending rates after the PBOC recently took several measures to support growth. Today’s calendar in the US and EMU is thin. This week, the IMF and World Bank will hold its annual meeting in Washington. Regarding data, the October preliminary PMI’s (on Thursday) will be key to shape market expectations on the pace of further ECB easing. Tomorrow, the Hungarian central bank (MNB) will decide on its policy. Financial uncertainty (weak forint) recently caused vice governor Virag to call for a sustained period of interest rate stability. At Wednesday’s Bank of Canada meeting the odds are quite different. Analysts see a growing change of the BoC stepping up the pace of rate cuts from 25 bps to 50 bps.

News & Views

ESMA chair Verena Ross in an interview with the Financial Times called for more expanded powers to oversee major stock exchanges, clearing houses and settlement systems. Launched in 2011 in a bid to harmonize scattered national rules, ESMA currently supervises only relatively few entities while leaving most of the oversight to national authorities. Former ECB president Draghi in his report on European competitiveness said such a single common regulator (rather than the coordinator it is today) for all EU security markets is a “key pillar” for the integration of capital markets. Ross said there is a clear political appetite in the newly appointed European Commission. To allay concerns of mostly smaller countries wary of transferring some of their sovereignty, Ross proposed a step-by-step approach in areas “where it makes most sense at this point”. The idea of closer EU financial integration gained momentum in recent months but an attempt by France, backed by the Netherlands, Italy, Poland and Spain met with fierce opposition from a majority of the 27 member states. The latter country earlier this month proposed to move ahead with smaller coalitions of the willing where three or more EU countries could test ideas for co-operation.

Rating agency Fitch affirmed Italy’s rating at BBB – the lowest within the investment grade spectrum – but raised the outlook from stable to positive in its review last Friday. The decision reflects a stronger fiscal performance and commitment to EU fiscal rules, reducing risks stemming from Italy’s exceptionally high debt levels. A credible fiscal plan should narrow fiscal deficits from 3.7% this year to 3.2% and 2.7% in 2025 and 2026. The Superbonus tax credit legacy will push debt levels to 136.3% of GDP in 2026 before it starts to decline. Being more than twice the BBB-median (55%), debt remains Italy’s Achilles heel. But the country’s ongoing fiscal consolidation effort is being supported by a more stable political context and growth being above the Eurozone average (0.7% in 2024, 1.1% in 2025) and signs of increased potential. Fitch forecasts a widening of the current account surplus to 2.0% of GDP in 2025, on an improved energy balance and further strengthening demand for exports.