Forex Today: Market optimism prevails in the lead-up to US PCE inflation

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

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

Despite the risk-rally in Asian indices and higher US S&P 500 futures, the US Dollar is looking to build on the overnight recovery, fuelled after a brief dip in early opening hours following the dovish remarks from US Federal Reserve (Fed) Governor Lisa Cook.

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

The Greenback suffered on Thursday, as the European and Wall Street stocks advanced on rate-cut momentum while the mixed US Jobless Claims and Durable Goods Orders data failed to inspire USD buyers.

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

Markets are currently pricing in about a 50% chance of a 50 basis points (bps) rate reduction by the Fed in November, according to the CME Group’s Fed WatchTool, down from over 60% seen a day ago.

The next directional move in the USD hinges on the upcoming US core Personal Consumption Expenditures (PCE) Price Index, the Fed’s most preferred inflation gauge, which could affirm bets of an outsized next rate cut. Additionally, the quarter-end flows could come into play and stir markets.

Across the FX board, USD/JPY remains volatile, falling as low as 144.75 on Tokyo inflation data before rebounding sharply to beyond 146.00. The Japanese Yen sees a steep sell-off, as Japan’s ruling Liberal Democratic Party’s (LDP) leadership race headed to a run-off between ex-defence minister Shigeru Ishiba and economic security minister Sanae Takaichi, with the former winning the battle to become the country’s next Prime Minister.

The higher-yielding Australian Dollar shrugged off the risk-on mood, as AUD/USD corrected from 19-month highs on a broad US Dollar rebound. The Aussie was last seen trading at 0.6870.

USD/CAD is bouncing back to 1.3500, as Oil price mires in two-week troughs. The black gold extends the downtrend, as markets expect increased oil output from Libya and the OPEC+. WTI is currently trading modestly flat on the day to trade near $67.25.

GBP/USD is consolidating weekly gains near 1.3400, slightly on the back foot as the US Dollar upswing offset the risk-on market profile.

EUR/USD is holding losses below 1.1200 early Europe, having faced rejection at that level on Thursday. The Euro remains pressured by the latest Reuters reports, citing sources, ECB doves are likely to fight for an October rate cut after weak data while the push for an October rate cut is likely to face resistance from ECB hawks arguing for pause.

Gold price is treading water below the record high of $2,686. Overbought conditions on Gold’s daily chart keep buyers defensive.