Forex Today: US Dollar holds ground amid China optimism, Mideast concerns

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

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

Wall Street indices closed modestly flat, as the dovish Fed bets continued to offer support to stocks, despite the discouraging S&P Manufacturing and Services PMI readings worldwide. The S&P Global US preliminary Manufacturing PMI contracted further to 47.0 in September, compared to 48.5 expected and August’s 47.9. The Services PMI also dipped 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 dovish, as he noted that “many more rate cuts are likely needed over the next year, rates need to come down significantly.” “I am comfortable with the Fed's 50 basis points (bps) rate cut, it shows the Fed is focused on risks to employment, not just inflation,” he added.

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

Despite the market’s optimism, the US Dollar (USD) looks to build onto overnight recovery gains, as the US Treasury bond yields rebound. Escalating geopolitical tensions between Israel and the Lebanese militant group – Hezbollah appear to keep the safe-haven demand for the USD afloat.

Bloomberg reported that Israel intensified its airstrikes in southern Lebanon, killing about 500 people while injuring 1000, marking the deadliest attack since the 2006 Israel-Hezbollah war. This follows the weekend’s exchange of missiles by both, Israel and Hezbollah, as the Middle East strife now looks to translate into a wider regional conflict.

With the Reserve Bank of Australia (RBA) policy event out of the way, 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 Germany’s IFO survey findings, especially after the downbeat Euro area preliminary business PMI reports, which rekindled recessionary fears.

AUD/USD witnessed good way price moves on the RBA policy announcements, initially jumping to refresh 2024 high at 0.6870 after the central bank held the benchmark interest rate at 4.35% at its September policy meeting. However, the pair turned south following RBA Governor Michele Bullock’s press conference, where she said that the bank did not 'explicitly' discuss rate rise. The Aussie was last seen trading at around 0.6830, as the downside appears limited due to the Chinese stimulus announcement.

USD/JPY regains 144.00 and beyond after dropping as low as 143.38. The US Dollar upswing and a better market mood lift the pair even as Bank of Japan (BoJ) Governor Kazuo Ueda repeated on Tuesday that it is “appropriate to raise rates if trend inflation heightens in line with our forecast.”

USD/CAD looks to test the 1.3500 support area, notwithstanding the broad US Dollar rebound due to the renewed Oil price rally. Oil price found fresh demand amid Middle-East tensions and China policy optimism, with WTI adding over 1% so far to regain $71.

GBP/USD is recovering above 1.3350, having dipped to 1.3330 in an immediate reaction to Bank of England (BoE) Governor Andrew Bailey’s latest remarks. Bailey said that “I'm very encouraged that the path of inflation is downwards therefore I do think the path for interest rates will be downwards, gradually.”

EUR/USD has bounced off the 1.1100 level in the early 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 trading incentives.

Gold consolidates the upside, just below the new lifetime high of $2,640, courtesy of the Chinese stimulus measures and Mideast strife.