Federal Reserve Bank of St Louis president Alberto Musalem said on Monday that he supports more interest rate cuts, as the economy moves forward on a healthy path, while noting that it is appropriate for the central bank to be cautious and not overdo easing monetary policy.

"Further gradual reductions in the policy rate will likely be appropriate over time," the official said at a meeting of the Money Marketeers of New York University, noting that "patience" has served the Fed well. "I will not prejudge the size or timing of future adjustments to policy."

Musalem, who took office earlier this year and who does not hold a vote on the rate-setting Federal Open Market Committee (FOMC), spoke as the interest rate outlook has once again been upended.

On last Friday, the government reported data showing unexpected and very vigorous strength in the job market, which called into question widespread concerns that the labour sector was weakening. Last month, the Fed cut its interest rate target by half a percentage point to between 4.75% and 5%, because inflation pressures have waned considerably amid ample signs that the job market was growing softer.

The Fed had also penciled in half a percentage point's worth of cuts into the close of the year. But the strength of hiring in September has now called into question how aggressive the Fed will need to be with rate cuts.

Musalem noted that he supported the Fed's latest rate decision and said his outlook for monetary policy is "slightly above the median" projected by his colleagues. Fed officials see the federal funds rate around 4.4% by year end, and at 3.4% by the end of 2025, based on forecasts released at the September policy meeting.

Musalem argued for a cautious pace of rate cuts, even as he noted that he expects inflation to move back to 2% on a 12-month basis over the next few quarters, and sees the current state of the job market as consistent with a strong economy.

"Given where the economy is today, I view the costs of easing too much too soon as greater than the costs of easing too little too late," Musalem said. "That is because sticky or higher inflation would pose a threat to the Fed's credibility, and to future employment and economic activity," he said.

The official also said the September jobs data that rattled expectations was strong, while noting "the path I penciled in" for monetary policy at the most recent Fed policy meeting is "probably still appropriate".

"I believe the risks that inflation becomes stuck above 2%, or rises from here, have diminished," he added.

Musalem also noted financial conditions generally remain supportive of economic activity. He said he expects the expansion to continue but noted that uncertainty about the outcome of the Nov 5 US elections was causing some firms to hold back until they had more clarity.

Based on feedback from his district, Musalem said "I've heard enough 'survive until 2025' comments from business people and others, to believe that resolving some uncertainty about the path for interest rates or the election could provide a meaningful boost to investment and spending".

Musalem also said he saw no conflict between the Fed cutting rates and pressing forward with ongoing efforts to shrink the size of its balance sheet, a process known as quantitative tightening, or QT.

Musalem brushed aside worries about turbulence at the end of the third quarter in short-term markets that some investors saw. He argued for a near-term end to QT, noting that the Fed retains firm control over its interest rate target. As of July, market participants in a survey expected a spring end to QT, based on New York Fed data.

Source: The edge markets

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The Indian Rupee (INR) weakens on Tuesday amid the selling pressure from foreign funds and weak tone in the domestic markets. Additionally, the rise in crude oil prices and escalating geopolitical tensions between Israel and Iran contribute to the INR’s downside.

Traders will keep an eye on the speeches from the US Federal Reserve’s (Fed) Raphael Bostic, Phillip Jefferson and Susan Collins on Tuesday. Any dovish comments from the Fed officials could weigh on the Greenback and cap the downside for the local currency. On Wednesday, the Reserve Bank of India (RBI) interest rate decision will take center stage. 

Daily Digest Market Movers: Indian Rupee looks fragile amid global challenges

"We expect the rupee to trade with a negative bias on selling pressure from foreign funds and a weak tone in the domestic markets. Escalating tensions between Israel and Iran may further pressurize the rupee," said Anuj Choudhary, Research Analyst at Sharekhan by BNP Paribas.

India's foreign exchange reserves rose $12.588 billion to a new all-time high of $704.885 billion for the week ended September 27, the Reserve Bank of India said on Friday. 

India's Trade Minister Piyush Goyal said on Monday it is time for the INR to appreciate on the back of inflows in debt and equity markets.

Federal Reserve Bank of St. Louis President Alberto Musalem stated on Monday that he supports more interest rate cuts as the economy moves forward on a healthy path. However, he emphasized that it is appropriate for the Fed to be cautious and not overdo easing monetary policy, per Reuters.

Minneapolis Fed President Neel Kashkari said on Monday that the Fed welcomed the strong September jobs report, which indicates the firm economy. Kashkari added that the balance of risks shifted from "high inflation towards maybe higher unemployment.

Technical Analysis: USD/INR’s constructive outlook prevails 

The Indian Rupee trades weaker on the day. The positive picture of the USD/INR pair remains intact, with the pair holding above the key 100-day Exponential Moving Average (EMA) on the daily timeframe. The further upside looks favorable as the 14-day Relative Strength Index (RSI) is located above the midline near 60.70.  

The upper boundary of the rectangle and psychological mark near 84.00 act as a key resistance level for USD/INR. Any follow-through buying above this level could attract some buyers to the all-time high of 84.15, followed by 84.50.

On the downside, the first downside target to watch is 83.80, the low of October 1. Sustained bearish momentum could pave the way to the 100-day EMA at 83.66. The next contention level is seen at 83.00, representing the round mark and the low of May 24. 

Source: FXSTREET

The NZD/USD pair attracts some sellers following an Asian session uptick to the 0.6145 region and drifts into negative territory for the sixth successive day on Tuesday. Spot prices drop to a one-month low in the last hour, with bears awaiting a sustained break below the technically significant 200-day Simple Moving Average (SMA), around the 0.6100 mark, before placing fresh bets. 

The National Development and Reform Commission (NDRC), China’s state planner, said this Tuesday that the downward pressure on China's economy is increasing. This offsets the recent optimism led by China's stimulus bonanza and turns out to be a key factor behind the latest leg of a sudden fall witnessed in the last hour. Apart from this, expectations for a jumbo interest rate cut by the Reserve Bank of New Zealand (RBNZ) contribute to the offered tone surrounding the NZD/USD pair. 

The US Dollar (USD), on the other hand, remains on the defensive below a seven-week top touched on Friday, though it lacks any meaningful selling amid diminishing odds for a more aggressive policy easing by the Federal Reserve (Fed). Furthermore, escalating geopolitical tensions in the Middle East might continue to offer support to the safe-haven buck and drive flows away from the risk-sensitive Kiwi, suggesting that the path of least resistance for the NZD/USD pair remains to the downside. 

Source: FXSTREET

The Japanese Yen (JPY) remains on the front foot against its American counterpart for the second successive day on Tuesday and drags the USD/JPY pair away from its highest level since August 16 touched the previous day. The overnight comments by Japanese officials revived intervention fears and turned out to be a key factor underpinning the JPY. This, along with the risk of a further escalation of geopolitical tensions in the Middle East, drives some haven flows towards the JPY. 

That said, diminishing odds for another interest rate hike by the Bank of Japan (BoJ) in 2024 might hold back the JPY bulls from placing aggressive bets. Meanwhile, Friday's upbeat US jobs report forced investors to scale back bets for another oversized interest rate cut by the Federal Reserve (Fed) in November, which allows the US Dollar (USD) to stand tall near a seven-week top. This, in turn, might continue to offer some support to the USD/JPY pair and limit any further slide. 

Daily Digest Market Movers: Japanese Yen bulls might refrain from placing aggressive bets amid BoJ rate-hike uncertainty

Japan's Vice Finance Minister for International Affairs Atsushi Mimura warned against speculative moves in the FX market, fueling speculations that the government may intervene to support the Japanese Yen. 

Adding to this, Japan's newly appointed Finance Minister Katsunobu Kato said the government would monitor how rapid currency moves could potentially impact the economy and would take action if necessary.

Furthermore, fears that Middle East tensions could turn into a wider conflict, which drives haven flows towards the JPY and drags the USD/JPY pair away from its highest level since August 16 touched on Monday. 

In the latest developments, Lebanon’s Hezbollah fired rockets at Israel's port city of Haifa and a military base near the central city of Tel Aviv, while Israel bombed a couple of buildings in the southern suburbs of Beirut.

The recent comments by Japan's Prime Minister Shigeru Ishiba, saying that the country is not in an environment for more rate increases, raised doubts over the Bank of Japan's ability to tighten further in the coming months. 

This, along with the uncertainty over the Japanese general elections on October 27, might act as a headwind for the JPY and offer support to the USD/JPY pair amid a short-term bullish tone around the US Dollar. 

Against the backdrop of Federal Reserve Chair Jerome Powell's hawkish remarks, the upbeat US jobs report dashed hopes for a more aggressive policy easing and kept the USD bulls elevated near a multi-week top. 

Traders now look forward to the release of the FOMC minutes on Wednesday and the key US inflation data – the consumer inflation figures and the Producer Price Index (PPI) on Thursday and Friday, respectively. 

Technical Outlook: USD/JPY setup favors bulls and supports prospects for the emergence of dip-buying at lower levels

From a technical perspective, last week's break above the 50-day Simple Moving Average (SMA), for the first time since mid-July, and the subsequent move beyond the 38.2% Fibonacci retracement level of the July-September downfall were seen as fresh triggers for bulls. Moreover, oscillators on the daily chart have been gaining positive traction and suggest that the path of least resistance for the USD/JPY pair is to the upside. Hence, any further slide might still be seen as a buying opportunity and is more likely to remain cushioned near the 147.00 mark, which should now act as a key pivotal point.

On the flip side, a sustained move back above the 148.00 mark might prompt some technical buying and lift the USD/JPY pair to the 148.70 resistance zone en route to the 149.00 round figure. Some follow-through buying beyond the weekly top, around the 149.10-149.15 region, will reaffirm the positive outlook and allow bulls to reclaim the 150.00 psychological mark.

Source: FXSTREET