US dollar struggles, gold shines after China rate cut; Fedspeak waited

Here’s what you need to know on Wednesday, September 25:

After another record close for Wall Street indices, Asian equity markets also maintained a buoyant tone, led by the ongoing rise in Chinese shares. Market optimism was boosted by the People’s Bank of China’s (PBOC) cut in the medium-term lending rate (MLF) from 2.30% to 2.0%. The MLF rate cut is one such measure among a number of other stimulus efforts undertaken by China of late to boost economic growth.

Traders shrugged off Middle East tensions, with the latest news indicating that “an Israeli airstrike in Beirut killed a senior Hezbollah commander on Tuesday, raising fears of a full-scale war amid increasing cross-border missile attacks between both sides,” according to Reuters. .

As risk appetite remains in vogue, the safe-haven U.S. dollar (USD) is licking its wounds alongside U.S. Treasury yields after witnessing a further decline in early trade in Asia. The USD was thrown under the bus against its major rivals in US trade on Tuesday on risk flows driven by China’s stimulus and weak data on consumer confidence from the US Conference Board (CB) and regional activity. Weak US data has intensified bets for another Federal Reserve (Fed) rate cut in November.

The CB consumer confidence index fell to 98.7 this month from an upwardly revised 105.6 in August, posting the biggest drop since August 2021. Meanwhile, the Richmond Fed fell to a low of 52 months of -21 from a previous low of -19 in August and a prior low of -17 in July.

Markets are currently pricing in about a 60 percent chance of such a move, CME Group’s Fed WatchTool shows. For the Fed’s next two meetings, futures imply cuts of more than 80 bps. In addition, the US dollar also bore the brunt of the sell-off in US Treasury yields across the curve, triggered by a moderate auction of two-year US Treasuries.

The fate of the greenback remains in the hands of persistent risk trends and a speech by Fed Governor Adriana Kugler in the absence of any top US economic data. Kugler is scheduled to speak on the economic outlook at the Harvard Kennedy School in Cambridge later Wednesday.

At the FX level, AUD/USD is nearing $0.6900, close to the highest level since February 2023. Monthly Australian consumer price index (CPI) data added to dovish bets for an RBA rate cut. Australia’s CPI rose 2.7% year-on-year in August, down from 3.5% in July and back within the RBA’s 2%-3% target range. However, the risk-on mood keeps the higher-yielding Aussie afloat.

USD/JPY remains on front foot above 143.00 after facing rejection at 143.50. The pair is supported by the prevailing risk-on sentiment, which is weighing on the safe Japanese yen. Growth appears capped due to the recent weakness of the US dollar.

USD/CAD holds lower ground, eyeing a test of 1.3400 despite renewed weakness in Oil price. Black gold is reversing the last gasp on renewed concerns that China’s stimulus plans may not be enough to support fuel demand in the world’s biggest consumer. WTI is down 0.35% on the day to trade near $71.

GBP/USD is consolidating just below 30-month highs as risk flows dominate and support the risk currency – sterling. Bank of England (BoE) Governor Andrew Bailey said on Tuesday: “I’m very encouraged that the path of inflation is down, so I think the path of interest rates will be down, gradually.” His dovish comments failed to deter GBP buyers.

EUR/USD it is approaching the August high, struggling with 1.1200 at the start of Europe. Increased bets for big Fed rate cuts outweigh weakening euro zone growth prospects, underpinning the pair.

Gold the price continues to rise, currently maintaining renewed growth at a new record high of $2,671. Overbought conditions on gold’s daily chart indicate a potential near-term corrective decline. Traders look to Fed official Kugler’s speech for new policy cues.

(This story was corrected on 25 September at 0605 GMT to say “Risk sentiment, however, keeps Aussie higher yield afloat”, not risk condition.)