By Han Tan, Market Analyst at FXTM
Shares across Asia-Pacific rose on Wednesday, carrying over the momentum from the late surge in US stocks. The lull in the US-China trade conflict has prompted safe-haven assets to unwind recent gains.
Gold is now trading around the $1490 level, the Japanese Yen has weakened with USDJPY edging higher above 107.80, while yields on 10-year US Treasuries have surged past 1.70%.
Still, South Korea’s decision to file a WTO complaint against Japan on Wednesday is a reminder to investors that global trade tensions remain an ongoing concern. Although risk appetite may occasionally peek out from behind the risk-off curtain, the overall mood in the markets is apprehensive towards riskier assets and this can only change with a meaningful de-escalation of the US-China trade conflict.
EURUSD steady ahead of ECB expected rate cut
The Euro has remained subdued around the 1.10 level against the US Dollar so far this week, in the lead up to the European Central Bank’s policy decision on Thursday.
Markets expect a series of easing measures to be unleashed on the ailing Eurozone economy. These include a 10-basis point cut in the deposit rate to 0.50%, the first cut since 2016, and a new pledge to keep rates low for longer.
It remains to be seen whether this easing package will be enough to offset the headwinds faced by the region, even as policymakers prepare for a leadership transition at the ECB on November 1. Should the ECB not live up to markets’ dovish expectations this week, it may allow the Euro to post some immediate gains, although the broader outlook for the single currency is expected to remain lackluster.
The ECB’s policy statement and Mario Draghi’s press conference may also prompt immediate moves in the Dollar, considering that the Euro accounts for more than half of the Dollar Index (DXY).
US inflation, retail sales data in focus
Despite last Friday’s lower-than-expected headline of the US non-farm payrolls (NFP) print, Dollar bulls have taken the softer US jobs market in their stride, propping up the DXY this week with strong support around 98.10. Most G10 currencies are gaining against the greenback, while Asian currencies are posting mixed results.
Looking at the Fed Funds Futures, markets expect the Federal Reserve to lower US interest rates next week by 25 basis points and again in October, before pausing in December. One more rate cut is then priced in around January.
The upcoming US inflation and retail sales data releases for August are set to shape market expectations over the Fed’s rates path in the lead up to next week’s policy decision. Should the incoming economic indicators prompt policymakers to pivot towards a more dovish stance, it could send the Dollar Index below the psychological 98 level, on the way towards the 97.55 support level, which is around the 100-day Moving Average.
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