Article by: ETO Markets
The currency market has been influenced by several factors this week, including Fed policy moves, U.S. economic data, and geopolitical risks. The minutes of the Fed's September FOMC meeting indicated that most members supported a 50 basis point rate cut because they believed inflation was edging closer to the 2 per cent target. However, some members wanted a cut of only 25 basis points, believing that the current economic momentum and low unemployment remained solid. This divergence of views suggests that the future path of policy is uncertain, with market expectations for a 25 basis point rate cut in November rising, as well as a more than 20 per cent chance that the Fed could opt to keep rates on hold.
The diversification of views within the Fed helped strengthen the dollar, pushing the dollar index (DXY) to a near two-month high. This was also supported by US economic data, such as the yield on the highly rate-sensitive two-year Treasury note rising to its highest level since August 19, and the benchmark 10-year note yield remaining relatively high. However, the market remains cautious about the future path of rate cuts, as it will depend on upcoming key data releases, especially this week's US consumer price Index (CPI).
In terms of geopolitics, the situation in the Middle East became the focus of market attention. Tensions between Israel and Iran have escalated, with Israeli Defense Minister Yoav Gallant warning of a "lethal, precise and unexpected" strike against an Iranian attack. This tension has increased risk aversion in the market, driving some support for safe haven assets such as gold (XAU/USD). While a stronger dollar weighed on gold prices, repositioning trades by investors ahead of the release of the US CPI data provided short-term support for gold.
The yen (USD/JPY) is under pressure and has fallen near a two-month low against the dollar, largely due to uncertainty over the future path of interest rate rises by the Bank of Japan. While Japan's September producer price index (PPI) data came in better than expected, indicating that inflationary pressures may be returning slightly, investors' focus remains on US inflation data, including the upcoming consumer price index (CPI), which will have an important impact on the Fed's rate cut prospects. In addition, market expectations for a 25 basis point rate cut by the Federal Reserve at its November meeting continued to build, providing strong support to the dollar and weighing on the yen.
On the geopolitical front, rising tensions in the Middle East provided some support to the safe-haven yen. However, yen bulls have reacted coolly to recent Japanese economic data, with falling real wages and slowing household spending further reducing the yen's appeal. In addition, the Fed's September meeting minutes showed that while most members supported a 50 basis point rate cut, it did not rule out the possibility of a smaller rate cut in the future, which also supported the dollar's strength.
From a technical point of view, USD/JPY remains above the … mark, which coincides with the 38.2% Fibonacci retracement of the July-September decline and is the current key support area. The oscillating indicators on the daily chart show positive momentum away from overbought territory, which provides a basis for further gains in USD/JPY. If the pair can break the psychological level of …, it may further rise to the 50% retracement level, targeting the …/… area.
Conversely, if USD/JPY breaks below …, the …-… area will serve as near-term support and may attract buying. If this area is lost, USD/JPY could come under more pressure, with downside targets pointing to the round … mark and further declines to around … and ….
The Australian dollar (AUD) rebounded slightly during the Asian session on Thursday, snapping a five-day losing streak. Nevertheless, the strength of the US dollar (USD) may limit the upside of the Australian dollar in the near term, as expectations for a 25 basis point interest rate cut by the US Federal Reserve (Fed) in November are rising. In addition, China's failure to deliver additional economic stimulus has disappointed markets and also weighed on the Australian dollar. China is an important trading partner for Australia, and the prospect of slower growth there could pose downside risks for the Australian dollar.
Investors are keeping an eye on the upcoming U.S. consumer price index (CPI) data, which could be a key driver of the market's short-term movement. A lower-than-expected September CPI reading could push the Federal Reserve to cut interest rates more aggressively, thereby pressuring the dollar, which would also help limit downward pressure on the AUD/USD pair. However, if the CPI data is in line with or above expectations, it could further cement the relatively dovish policy stance of the Federal Reserve, thereby supporting the US dollar and suppressing the Australian dollar's gains.
From a technical point of view, AUD/USD currently looks vulnerable around key support levels. On the downside, … is an important support level for AUD/USD, which combines the lower bound of the trend channel, the 100-day EMA and the psychological level. If this level is breached, the pair could fall further towards the September 11 low of ….
Conversely, on the upside, the September 6 high of … is the initial resistance level for AUD/USD. If the pair breaks this resistance, the next target will be … (August 29 high), and further upside could challenge … (September 30 high). Overall, there is still an opportunity for Aussie bulls to try to rally before key support levels are effectively broken.
