USD Holds Strong Despite Market Pullback: Insights into Currencies, Gold, and Oil Movements

This week saw significant movements across the financial markets, with the US Dollar easing after a strong rally earlier in the month. As central bank policies and economic data come into focus, other major currencies like the Euro, British Pound, and Japanese Yen are navigating shifts tied to rate cut expectations and regional economic developments. Meanwhile, commodities such as gold and crude oil are reacting to geopolitical tensions and fluctuations in demand forecasts.

USD:

US Dollar Hits the Brakes, Tallies a Winning Week

The US Dollar Index (DXY), which measures the USD against a basket of six currencies, has begun to decline on Friday as profit-taking sets in after a strong rally earlier in the month. This retreat occurs ahead of a series of speeches from Federal Reserve officials, which could provide further insights into the central bank's monetary policy stance. Recent US housing data also showed decreases in Building Permits and Housing Starts, indicating a potential slowdown in the housing market.

Despite this period of deceleration, the economy shows signs of resilience, with the Federal Reserve indicating that its monetary policy will adapt to evolving economic data.

Daily Digest Market Movers:

• US Building Permits fell to 1.428 million from 1.47 million in August, while Housing Starts decreased to 1.354 million from 1.61 million.
• Fed officials Raphael Bostic, Neel Kashkari, and Christopher Waller are scheduled to speak, and investors will look for clues on the Fed’s monetary policy direction. The market largely expects two 25-basis-point cuts in November and December.
• Swap futures indicate a strong market expectation for these cuts, with the US 10-year benchmark rate stabilizing near 4.10%.

DXY Technical Outlook: The DXY index is facing resistance at the 200-day Simple Moving Average (SMA), leading to a period of consolidation. The Relative Strength Index (RSI) and Moving Average Convergence Divergence (MACD) have flattened in positive territory, suggesting neutral momentum. Supports are located at 103.50, 103.30, and 103.00, while resistances lie at 103.80, 104.00, and 104.30.

EUR:

The EUR/USD pair remains steady after recent gains, hovering around 1.0860 during Monday's Asian trading hours. Speculation about a potential 50-basis-point rate cut by the Federal Reserve in November has diminished due to recent data highlighting the US economy's strength.

According to the CME FedWatch Tool, the probability of a 25-basis-point rate cut in November has increased to 99.3%, up from 89.5% a week earlier. US Retail Sales rose by 0.4% month-over-month in September, exceeding market expectations. Additionally, Initial Jobless Claims fell significantly, signaling strength in the labor market.

Rabobank's research suggests that recent comments from European Central Bank (ECB) officials indicate increasing comfort with the Eurozone's inflation outlook, shifting the ECB's focus toward supporting regional growth. This has led to speculation about a faster pace of ECB easing, potentially weighing on the Euro.

The Euro faced downward pressure following the ECB's decision to cut interest rates by 25 basis points in response to a significant decline in inflation, which has dropped from a high of 10.6% in October 2022 to 1.7% in September, now below the ECB's 2% target.

GBP:

The GBP/USD pair struggles to capitalize on modest recovery gains, oscillating around 1.3050-1.3045 during the Asian session on Monday. It remains near a one-month low touched last Thursday and seems vulnerable to further retracement from the 1.3435 area, the highest level since March 2022.

A surprising drop in the UK Consumer Price Index (CPI) to its lowest level since April 2021 and below the Bank of England's (BoE) 2% target has heightened expectations for a 25-basis-point interest rate cut at the upcoming BoE meeting on November 7. Furthermore, the market is pricing in the possibility of another rate cut in December, which may continue to undermine the British Pound.

The USD Index (DXY) has started the week positively, seemingly stalling its modest pullback from its highest level since early August. Market expectations of modest Fed rate cuts over the coming year support elevated US Treasury bond yields, providing a tailwind for the USD. In the absence of significant economic releases from the UK or the US, the path of least resistance for GBP/USD appears to be to the downside, with bearish traders potentially waiting for acceptance below the 1.3000 psychological mark before placing new bets.

JPY:

The Japanese Yen (JPY) has strengthened against the USD for the second consecutive day, moving away from recent lows. Speculation regarding potential government intervention and geopolitical risks have supported the safe-haven JPY.

However, BoJ Governor Kazuo Ueda warned about the high uncertainty surrounding Japan's recovery prospects, indicating that the BoJ is unlikely to tighten its policy ahead of the general election on October 27. Additionally, the prevailing risk-on sentiment, bolstered by stimulus measures from China, may cap any significant JPY gains.

Expectations for modest Fed interest rate cuts over the coming year keep US Treasury yields elevated, which could further undermine the low-yielding JPY. This dynamic, combined with a bullish sentiment for the USD, is likely to support the USD/JPY pair.

Gold:

Gold prices (XAU/USD) have extended their upward trend, reaching around $2,720 during early Asian trading. Geopolitical tensions in the Middle East and uncertainties surrounding the US presidential election are driving safe-haven flows into gold.

The recent uptick is bolstered by ongoing geopolitical tensions and easing monetary policy expectations from the Fed. According to Alexander Zumpfe, a precious metals trader, the intensification of conflict has prompted investors to flock to gold as a traditional safe-haven asset.

Furthermore, expectations for further Fed rate cuts are likely to support gold prices, with current odds for a quarter-point cut in November exceeding 90%. However, China’s sluggish economic growth could weigh on demand, as the country is the largest consumer of gold.

Crude Oil:

WTI crude oil prices are edging higher, trading around $68.90 per barrel following a decline of over 7% last week. The downside may be limited as rate cuts in China, the largest oil importer, are expected to stimulate domestic economic activity and increase oil demand.

The People's Bank of China (PBoC) has lowered the 1-year Loan Prime Rate (LPR) to 3.10% from 3.35% and the 5-year LPR to 3.6% from 3.85%. However, crude oil prices face downward pressure due to slowing economic growth in China. The latest GDP figures indicate a growth rate of 4.6% in Q3 2024, slightly below expectations.

Easing geopolitical tensions in the Middle East have also reduced concerns over supply disruptions. In a related development, Shell and Singapore's Maritime and Port Authority have implemented clean-up measures following a leak from a land-based pipeline, with no reported impact on navigation safety.

The financial markets are seeing a decline in the USD amid profit-taking, while the EUR and GBP face downward pressure from central bank actions, the JPY strengthens on intervention speculation, gold rises due to geopolitical tensions, and crude oil prices stabilize amid mixed demand signals from China.

The weekly market update is published every Monday. If missed due to unforeseen circumstances, it will be posted the following day.

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