The US dollar holds ground amid China optimism and Middle East concerns

Here’s what you need to know on Tuesday, September 24:

Risk flows appear to have returned in Tuesday’s trade as investors cheer China’s stimulus announcement and overnight commentary from the US Federal Reserve (Fed). People’s Bank of China (PBOC) Governor Pan Gongsheng announced plans to implement a series of measures to boost the economic recovery, including the intention to cut the required reserve ratio (RRR) by 50 basis points (bps).

Wall Street indices closed modestly as favorable Fed bets continued to provide support for stocks despite dismal global S&P Manufacturing and Services PMI readings. The preliminary S&P Global US manufacturing PMI continued to decline to 47.0 in September, compared to an expected 48.5 and August’s 47.9. The services PMI also fell to 55.4 in September from 55.7 in August.

Fed policymakers Raphael Bostic, Austan Goolsbee and Neel Kashkari spoke on Monday and all three suggested that more rate cuts are on the cards, with Goolsbee seen as the most accommodating as he noted that “it will probably take a lot more interest reductions in the following year. , rates need to come down significantly.” “I’m comfortable with the 50 basis point (bps) Fed rate cut, it shows the Fed is focusing on the risks to employment, not just inflation,” he added.

Markets are currently pricing in 75 bps of rate cuts by the end of 2024, according to CME Group’s FedWatch tool.

Despite market optimism, the US dollar (USD) is looking to build on overnight recovery gains as US Treasury yields rebound. Rising geopolitical tensions between Israel and the Lebanese militant group Hezbollah appear to be keeping the USD asylum claim afloat.

Bloomberg reported that Israel stepped up its airstrikes in southern Lebanon, killing about 500 people and injuring 1,000, marking the deadliest attack since the Israel-Hezbollah war in 2006. This follows the exchange of rockets over the weekend by both Israel and Hezbollah, as the conflict in the Middle East now seeks to turn into a wider regional conflict.

With the Reserve Bank of Australia (RBA) policy event, Fed Governor Michelle Bowman’s speech, US Conference Board (CB) consumer confidence data and Middle East geopolitical updates will now be on traders’ radars. Also of note will be the findings of Germany’s IFO survey, especially after downbeat Eurozone preliminary business PMI reports reignited recession fears.

AUD/USD saw some good price action following the RBA policy announcements, initially jumping to refresh the 2024 high at 0.6870 after the central bank kept the benchmark interest rate at 4.35% at its policy meeting from September. However, the pair headed south following RBA governor Michele Bullock’s press conference, where she said the bank had not “explicitly” discussed raising interest rates. The Aussie was last seen trading around 0.6830 as downside looks limited due to China’s stimulus announcement.

USD/JPY regains 144.00 and higher after falling as low as 143.38. The rising US dollar and better market sentiment are lifting the pair, even as Bank of Japan (BoJ) Governor Kazuo Ueda reiterated on Tuesday that it is “appropriate to raise rates if the inflation trend rises in line with our forecast”.

USD/CAD looks to test the 1.3500 support zone, despite the US dollar’s broad rally due to renewed Oil price increase. Oil prices found fresh demand amid Middle East tensions and China’s policy optimism, with WTI adding over 1% so far to regain $71.

GBP/USD it is recovering above 1.3350 after falling to 1.3330 in an immediate reaction to the latest remarks from Bank of England (BoE) Governor Andrew Bailey. Bailey said that “I’m very encouraged that the path of inflation is down, so I think the path of interest rates will be down, gradually.”

EUR/USD it rebounded from the 1.1100 level at the start of the European session, drawing support from the risk-friendly market environment. Traders await the German IFO survey and European Central Bank (ECB) policymaker Joachim Nagel’s speech for some fresh trade stimulus.

Gold is consolidating the upside, just below the new lifetime high of $2,640, thanks to stimulus measures from China and conflicts in the Middle East.