Eurozone Inflation Prints In Spotlight

Eurozone’s inflation prints in the spotlight

• Today, the key data release will likely be Eurozone’s preliminary CPIs for September. The forecast is for the headline rate to tick up, but for the core rate to decline slightly. We share the view for an uptick in the headline rate, given a similar move in Germany’s CPI rate for the month, while we see the risks surrounding the core forecast as being tilted to the upside, perhaps for an unchanged rate. We base our view on the bloc’s preliminary composite PMI for September, which showed selling price inflation reaching its highest rate since April. A positive surprise in the core print could heighten speculation that the ECB may unveil a timeline for ending its asset purchases as early as at the October meeting and thereby, bring EUR under renewed buying interest.
• EUR/USD traded higher yesterday, after it hit support near 1.1720 (S1). Nevertheless, the rebound was stopped close to the 1.1790 (R1) line. Today, Eurozone’s CPIs may be the catalyst for another positive leg, but as long as any recovery remains limited below the important resistance of 1.1830 (R2), we would consider the short-term outlook to still be cautiously negative. If the bears are willing to take charge near 1.1830 (R2), then we may see them driving the battle back below 1.1790 (R1). Such a dip may open the way for another test near 1.1720 (S1).
• The bigger picture supports further our choice to treat any recovery on the CPIs as a corrective rebound. The dip below 1.1830 (R2) came after the rate broke the prior medium-term uptrend line taken from back at the low of the 17th of April and also confirmed the negative divergence between both our daily oscillators and the price action. What’s more, even if the rate trades north for a bit more, the likelihood for a lower peak is high we believe, given that the prior peak on the daily chart is much higher than where the pair is currently trading.

WTI spikes lower

• Oil prices spiked lower during the European afternoon yesterday, with no clear fundamental trigger behind the move. A potential explanation is an announcement by the US National Hurricane Center at that time that Hurricane Maria will move away from the US, which may have lowered the likelihood of US supply coming offline.
• Despite this tumble, we still think that the near-term outlook for the precious liquid remains somewhat positive. The intensifying tensions between Turkey and the Iraqi Kurds increase the risk of supply disruptions, while there is also an OPEC meeting on the horizon. Although that is still eight weeks away, speculation around a potential market-friendly action could begin as early as in the coming weeks.
• WTI tumbled yesterday after it hit resistance near the 53.00 (R2) barrier and the return line drawn from the peak of the 25th of August. The slide was halted by the 51.50 (S1) key support. The price structure on the 4-hour chart continues to suggest a short-term uptrend and thus, we are not ruling out a rebound in the next few days. Nevertheless, we have to repeat for the umpteenth time that even if WTI rebounds and trades north for a while, we remain skeptical on whether a healthy long-term uptrend can be established. The price continues to trade within the longer-term sideways range, between 51.50 (S1) and 55.30, where we believe US shale producers may be attracted to increase production. This could put a lid on any significant future gains.

As for the rest of today’s highlights:

• From the US, we get personal income and spending, as well as the core PCE price index, all for August. Getting the ball rolling with income and spending, both of these rates are forecast to have declined from the previous month. The income forecast is supported by the slowdown in the nation’s average hourly earnings for the month, while the decline in retail sales suggests that the spending rate may even turn negative. Turning to the core PCE index, in the absence of a forecast, we see the case for the rate to have remained unchanged. We base our view on the core CPI rate for the month, which held steady at +1.7% yoy. Bearing all these in mind, we see the case for a negative reaction in USD at these releases.
• We have two speakers on the agenda: BoE MPC member Jon Cunliffe and Philadelphia Fed President Patrick Harker. Markets may pay close attention to Cunliffe, as the probability for a BoE rate hike by year-end is now almost 100%. Meanwhile, the probability for such action at the November meeting is roughly 70%. In our view, any near-term hike is far more likely to occur in November, as that gathering includes an Inflation Report and a press conference. As such, any potential hawkish comments from Cunliffe today, or other BoE officials in the next weeks, could push the probability for a November hike higher and thus bring GBP under renewed buying interest.

EUR/USD

• Support: 1.1720 (S1), 1.1660 (S2), 1.1615 (S3)
• Resistance: 1.1790 (R1), 1.1830 (R2), 1.1870 (R3)

WTI

• Support: 51.50 (S1), 51.00 (S2), 50.40 (S3)
• Resistance: 52.00 (R1), 53.00 (R2), 54.00 (R3)