Risk flows return to PMI day

Here’s what you need to know on Monday, September 23:

It looks like a positive start to the week as risk sentiment recovers on China’s renewed optimism after the People’s Bank of China (PBOC) surprised markets by cutting the 14-day repo rate by 10bps to boost economic recovery.

Despite a better risk-on tone, investors remain cautious amid escalating tensions between Israel and the Lebanese militant group Hezbollah. Over the weekend, Hezbollah fired at least 10 rockets into towns and cities in Israel’s northern Jezreel Valley, the Times of Israel reported. In response, Israeli Defense Forces (IDF) aircraft carried out a series of retaliatory strikes in southern Lebanon, targeting at least 110 Hezbollah positions.

This comes in response to last week’s pager and walkie-talkie explosions in Lebonan, with Isreal suspected of these attacks. The US dollar (USD) is finding a refuge from its main rivals amid geopolitical risks looming in the Middle East. Meanwhile, the announcement by US House Republicans to unveil a spending bill to fund the government through December 20 also offers new signs of life for the greenback.

Heightened expectations of another 50 basis point (bps) interest rate cut by the US Federal Reserve in November are capping the USD’s rally, despite a modest rise in US Treasury yields.

All eyes now turn to the Eurozone, UK and US S&P Global Manufacturing and Services preliminary PMI data for fresh clues on the state of the global economy as recession fears loom. In addition, speeches from Fed policy makers Raphael Bostic, Austan Goolsbee and Neel Kashkari will also be in focus as markets prepare for Fed Chair Jerome Powell’s speech and critical US PCE inflation data due this week .

Within the G10 currency basket, the Australian dollar became the main performer, leading the way AUD/USD back towards 0.6850. The pair applauds the PBOC’s easing move despite weak domestic PMI data. Traders are also resorting to position adjustments ahead of Tuesday’s Reserve Bank of Australia (RBA) policy announcements.

USD/JPY it bounced back firmly above 144.00 but faced rejection near 144.50 before consolidating around 144.25. The pair fail to find new momentum amid a public holiday in Japan. However, the upside remains capped due to diverging monetary policy outlooks between the Fed and the Bank of Japan (BoJ). The BoJ kept its short-term rate target in the range of 0.15%-0.25% as expected, maintaining its cautious stance.

USD/CAD remains on a slippery slope towards 1.3550 ca Oil up nearly 1 percent on geopolitical escalation in the Middle East and reports that Shell has halted production at two oil facilities in the Gulf of Mexico. WTI is up about 1% so far, flirting with $71.50 at the moment.

GBP/USD it is holding its range above 1.3300, consolidating the recent uptrend to over two-year highs ahead of the next push higher. British Chancellor Rachel Reeves’ speech to the Labor Party conference on Monday will be closely watched alongside UK PMI data.

EUR/USD it defends 1.1150, extending its sideways trend until the start of the European session. The major is awaiting PMI data from Germany and the Eurozone for further trading stimulus.

Gold it stretches further and hits a new lifetime high above $2,630 on China stimulus optimism and Middle East concerns. Gold traders are becoming cautious as the Relative Strength Index (RSI), a leading indicator, has entered overbought territory on the daily chart.