AUD/USD Flirts With 50-day SMA, Seems Vulnerable Near Multi-week Low ahead of FOMC Minutes

Source: Poundsterlinglive

In focus today

Tonight, FOMC will release the minutes from its September meeting. Markets will focus on any clues regarding the expected size of rate cuts aat the coming meetings.

Economic and market news

What happened overnight

The Reserve Bank of New Zealand (RBNZ) lowered interest rates by 50bp from 5.25% to 4.75%, which was nearly fully priced in the market. RBNZ still views monetary policy as being restrictive even though inflation has returned to the target rate. This message could signal potential further rate cuts going forward, which made NZD/USD drop around 0.7% from 0.613 at the announcement to around 0.609 this morning.

Chinese stocks fell on Wednesday in the onshore market ending a 10-day streak of positive returns. The Shanghai composite index is down over 5% this morning compared to Tuesday’s closing price The onshore market was closed for longer during the week-long holiday, though, and has mainly played catch-up with offshore stocks after opening again. Hence the big decline today mostly reflects the sharp 10% sell-off in offshore stocks on Tuesday. Today offshore stocks declined further but by a more moderate 1.5%. The sharp correction in Chinese stocks follows a press briefing yesterday from the National Development and Reform Commission, which disappointed by not providing any details on fiscal stimulus as widely anticipated after the strong stimulus package announced ahead of the holiday. NDRC said the Chinese government is fully confident that it will reach its economic and social development goals for this year (5% growth) and said that some of the 2025-budget will be issued this year to support projects. The anticipation in the market is that more details on stimulus will be given later this month, which we also expect.

What happened yesterday

In Sweden, the new flash CPI for September came in marginally higher than expected. CPIF grew 1.2% y/y and CPIF ex energy at 2.0% y/y. We expected CPIF at 1.14% y/y and CPIF ex energy at 1.94% y/y in line with consensus and one tenth above the Riksbank’s forecasts. Hence the print was higher than Riksbank forecast, so overall the print supports for our 25bp cut forecast at the next meeting.

In the Middle East, Israel’s military said that it had deployed a fourth army division into Lebanon, which signals an expansion of the ground offensive against Hezbollah. Prime minister Netanyahu further claimed that the Israeli military has “eliminated” the successor leader of the Hezbollah movement after Nasrallah who was killed only two weeks ago in another attack by Israel.

In the US, NFIB Small Business Optimism index moved slightly higher in September to 91.5 from 91.2 in August. Firms reported less trouble finding new workers and a slight increase in hiring plans. Declining share of firms also report sufficient quality of available labour as their most important problem (which is still inflation for the largest share of businesses). Outlook for expansion, credit conditions and price plans remained steady. General uncertainty index reached its all-time-high, but the level is still comparable to the months leading up to 2016 and 2020 elections (= not alarmingly high). Overall, NFIB supports the notion that US economy remains on a steady footing for now.

Fed’s Kugler (voting member), spoke about monetary policy, and said that she is ready to vote for further monetary policy easing if inflation continues to decrease.

In Germany, industrial production came in higher than expected at 2.9% m/m (consensus: 0.8% m/m, prior: -2.4% m/m) in August, on the back of especially higher production in the automotive industry.

ECB’s Nagel spoke about monetary policy and said that he is open to considering another interest rate cut. This is interesting since Nagel has traditionally been considered too be an inflation hawk. Nagel said that ECB is clearly on the way to the 2% inflation target.

Oil prices slipped back. Weak demand, a stronger USD and lack of retaliation so far from Israel against Iran are likely the main reasons. We think oil prices will stay range bound close to USD 80/bbl as a rising geopolitical premium offsets weaker demand and stronger USD.

Equities: Global equities were higher yesterday, driven by a lift in US markets. Performance, both absolute and relative between regions, turned more or less upside down versus Monday, tempting one to declare a status quo. However, that is not entirely the case. Indeed, yields halted their upward trajectory, but utilities and REITs were significant underperformers again yesterday, while banks and tech ensured that both value and growth sectors performed adequately yesterday. Despite the multitude of factors at play these days, when we summarise the developments over a few weeks, we observe a generally positive reaction to the robust labour market data, including what we see in relative sector and style performance. It may also be pertinent to mention the performance of energy stocks yesterday; a glance at the oil price provides insight into the significant underperformance in that sector.

In the US yesterday, the Dow closed up by +0.3%, the S&P 500 by +1.0%, Nasdaq by +1.5%, and the Russell 2000 by +0.1%. Chinese markets are in focus again this morning. However, today they are experiencing negative performance, with both Hong Kong and especially mainland markets down sharply. The rest of Asia is higher, following the positive session on Wall Street yesterday. US futures are marginally lower, while European markets are mixed despite the uptick late in the US cash session yesterday. With fading optimism in China, there is also a negative impact on European exporters, particularly affecting high-end consumer brands.

FI: There were modest movements in global bond yields yesterday. 2Y and 10Y US Treasuries was trading in a tight range around 4%. We saw a similar picture in European government bond yields where there were also movement in yields. The Schatz-spread once again tightened, and we expect it will continue to tighten like the Bund ASW-spread. We still expect that the Bund ASW-spread will go towards 20bp before year-end.

FX: EUR/SEK ended the day fairly stable with a slight topside surprise to Swedish flash inflation data failing to provide support for the SEK. EUR/USD traded in a tight range with focus shifting to the release of inflation data tomorrow.

Here is what you need to know on Wednesday, October 9:

The action in financial markets remain choppy midweek, with investors' search for the next catalyst continues. The US economic calendar will feature Wholesale Inventories data for August. Later in the day, the US Treasury will hold a 10-year note auction and the Federal Reserve (Fed) will publish the minutes of the September policy meeting.

The US Dollar (USD) Index, which tracks the USD's valuation against a basket of six major currencies, closed the second consecutive day virtually unchanged on Tuesday. The index edges slightly higher and stays above 102.50 in the European morning on Wednesday. The risk-averse market environment seems to be helping the USD hold its ground. At the time of press, US stock index futures were down between 0.2% and 0.4% on the day. Meanwhile, China's Shanghai Composite Index fell nearly 7% and Hong Kong's Hang Seng Index lost over 1% after Reuters reported that China’s Finance Ministry is set to roll out a 2 trillion Yuan fiscal stimulus package on October 12. 

Following its October policy meeting, the Reserve Bank of New Zealand (RBNZ) decided to lower the policy rate by 50 basis points (bps) to 4.75% from 5.25%. In its policy statement, "the New Zealand economy is now in a position of excess capacity, encouraging price- and wage-setting to adjust to a low-inflation economy," the RBNZ noted. NZD/USD came under heavy bearish pressure in the Asian trading hours and was last seen trading at its lowest level since Mid-August below 0.6100.

Following Tuesday's recovery attempt, EUR/USD stays on the back foot early Wednesday and retreats toward 1.0950.

GBP/USD registered small gains on Tuesday but failed to stabilize above 1.3100. The pair was last seen trading modestly lower on the day near 1.3080.

USD/JPY closed the day flat on Tuesday but started to stretch higher in the Asian session on Wednesday. As of writing, the pair was up 0.3% on the day at 148.60.

Following a bearish start to the week, Gold extended its slide and touched its lowest level in over two weeks near $2,600 on Tuesday. Although XAU/USD erased a small portion of its daily losses later in the American session, it failed to gather recovery momentum. In the European morning, Gold trades in the red at around $2,610.

Source: FXSTREET

Inflation Dynamics and Economic Growth

Household Spending and Consumption Trends

Labour Market Conditions

Global Economic Environment

Financial Market Conditions

Financial Stability Risks

Policy Implications and Outlook

EUR/USD skates on thin ice near the eight-week low of 1.0950 in Wednesday’s European session. The major currency pair stays under pressure as the US Dollar (USD) gathers strength to extend its previous week’s rally further, with the US Dollar Index (DXY) hovering near a seven-week high around 102.60.

The appeal of the US Dollar has strengthened as traders have priced out expectations for the Federal Reserve (Fed) to reduce interest rates again by 50 basis points (bps) in November. Traders were forced to unwind Fed large rate cut bets as the upbeat United States (US) Nonfarm Payrolls (NFP) report for September diminished downside risks to economic growth and consumer spending. Also, dismal market sentiment due to Middle East tensions has improved the Greenback’s appeal as a safe haven.

Financial market participants expect the Fed to cut interest rates by 25 bps in the remaining two policy meetings this year at the time of writing, according to the CME FedWatch tool.

In Wednesday’s session, investors will pay close attention to the Federal Open Market Committee (FOMC) Minutes of the September meeting, which will be released at 18:00 GMT. The FOMC Minutes will convey the views of all officials on the interest rate and the economic outlook. In the September meeting, all members unanimously voted to start the policy-easing cycle with a 50-bps rate cut, except Fed Governor Michelle Bowman who favored a smaller reduction of 25 bps.

Going forward, the major trigger for the US Dollar will be the US Consumer Price Index (CPI) and the Producer Price Index (PPI) data for September, which will be published on Thursday and Friday, respectively. 

Daily digest market movers: EUR/USD sees more downside amid firm US Dollar

The Euro (EUR) faces selling pressure as traders have priced in more rate cuts by the European Central Bank (ECB). The ECB is expected to cut its Deposit Facility Rate further by 50 bps to 3% by the year-end, suggesting that there will be a rate cut of 25 bps in each of the two policy meetings scheduled for next week and in December.

The ECB has already reduced its key borrowing rates by 50 bps this year as officials have remained confident that inflation will return to the bank’s target of 2% in 2025. Market expectations for the ECB to cut interest rates further have been prompted by the declining trend in price pressures and the economic vulnerability in the Eurozone.

ECB policymaker and Governor of the Greek Central Bank Yannis Stournaras has also backed two more rate cuts in each of the remaining meetings this year and emphasized the need to reduce them further in 2025 as inflation continues to decelerate, in his comments in an interview with Financial Times published on Wednesday. His comments also indicated that price pressures are declining faster than what the ECB forecasted in September.

Technical Analysis: EUR/USD remains below 1.1000

EUR/USD struggles to gain ground near the immediate support of 1.0950. The major currency pair stays on the backfoot as it has delivered a breakdown of the Double Top chart pattern formation on a daily timeframe. The above-mentioned chart pattern was triggered after the shared currency pair broke below the September 11 low of 1.1000.

The 14-day Relative Strength Index (RSI) settles inside the bearish range of 20.00-40.00, suggesting more weakness ahead for EUR/USD.

Looking down, the pair is expected to find support near the 200-day EMA around 1.0900. On the upside, the 20-day EMA at 1.1090 and the September high around 1.1200 will be major resistance zones.

Source: FXSTREET