Market optimism prevails in the run-up to US PCE inflation

Here’s what you need to know on Friday, September 27:

The risk-on sentiment seen in global markets on Thursday extends into Friday as a raft of Chinese stimulus measures continue to lift investor confidence. The People’s Bank of China (PBOC) finally cut the reserve requirement ratio (RRR), the minimum required capital that banks must hold in reserve, by 50 basis points (bps) starting Friday. China’s central bank also cut its seven-day repo rate to 1.5 percent from 1.7 percent.

Despite risk-on gains in Asian indices and higher US S&P 500 futures, the US dollar is looking to build on an overnight recovery fueled by a brief drop in the opening hours following dovish remarks from the Federal Reserve governor USA (Fed) Lisa Cook. .

Cook said he “wholeheartedly supported the 50bps rate cut”, adding that “the normalization of the economy, particularly inflation, is welcome”.

The greenback suffered on Thursday as European shares and Wall Street advanced on rate cuts, while mixed data on US jobless claims and durable goods orders failed to inspire USD buyers .

Several Fed policymakers made their scheduled appearances on Thursday, including Fed Chairman Jerome Powell. However, only two of them talked about monetary policy. Fed Governor Cook backed the move to cut the rate by 50 bps in September, while Governor Michelle Bowman stuck to her rhetoric.

Markets are currently pricing in a roughly 50% chance of a 50 basis point (bps) rate cut by the Fed in November, according to CME Group’s Fed WatchTool, down from more than 60% seen a day ago ago.

The USD’s next directional move depends on the upcoming core US Personal Consumer Expenditure (PCE) price index, the Fed’s most preferred gauge of inflation, which could confirm bets for the next rate cut. Additionally, end-of-quarter flows could come into play and roil the markets.

At the FX level, USD/JPY remains volatile, dipping as low as 144.75 on Tokyo inflation data before rebounding sharply above 146.00. The Japanese yen saw a steep sell-off as the leadership race of Japan’s Liberal Democratic Party (LDP) moved toward a duel between former Defense Minister Shigeru Ishiba and Economic Security Minister Sanae Takaichi. However, JPY buyers bounced back after the former won the battle to become the country’s next prime minister. It was Takaichi who always favored keeping interest rates lower. The pair was last seen trading at 143.77, down 0.70% so far.

The higher-yielding Australian dollar shrugged off risk appetite as AUD/USD corrected from 19-month highs with a broad rally in the US dollar. The Aussie was last seen trading at 0.6870.

USD/CAD returns to 1.3500 as Oil the price of mud in the gutters for two weeks. Black gold extends downtrend as markets expect rising oil output from Libya and OPEC+. WTI is currently trading modestly on the day to trade near $67.25.

GBP/USD consolidating weekly gains near 1.3400, slightly on the back foot as the rising US dollar offset the risk profile in the market.

EUR/USD has losses below 1.1200 at the start of Europe after facing rejections at that level on Thursday. Euro remains pressured by latest Reuters reports citing sources ECB doves likely to fight for October rate cut after weak data, while push for October rate cut likely to face resistance from ECB hawks advocating for a break.

Gold the price goes below the record level of $2,686. Overbought conditions on gold’s daily chart are keeping buyers on the defensive.