EUR/USD Extends Gains as Dollar Weakens Further

The EUR/USD pair rose for the second straight session, trading near 1.1720[1] in Monday's Asian trading hours. It is believed that the move reflects continued strain on the US dollar following last week's inflation data, which reinforced views that the Federal Reserve (Fed)[2] may ease policy further in the coming months.

Market reports[3] point out that the US Personal Consumption Expenditures (PCE) Price Index rose 2.7% year on year in August, slightly higher than the previous estimate of 2.6% and in line with market expectations. The core PCE, the Fed's preferred inflation index that excludes food and energy, rose 2.9% year on year, meeting expectations. Despite being over the Fed's 2% target, the data suggested a modest disinflationary trend, allowing policymakers to grant monetary accommodation. Market commentators[4] point out that following September's 25-basis-point cut to 4.00%-4.25%, futures markets now expect another reduction in October and a 65% possibility of another move in December, according to the CME FedWatch Tool.

Market commentators[5] point out that traders have keen focus on awaited remarks by several Fed officials, including Governor Christopher Waller and regional Presidents Beth Hammack, Alberto Musalem, John Williams, and Raphael Bostic. Analysts[6] anticipate that any hints regarding the pace and scope of easing may cause volatility in USD crosses. Furthermore, impending US releases, such as labour market data and the ISM manufacturing survey, could provide additional guidance. Softer readings would likely reinforce the case for greater cuts, putting further pressure on the dollar.

Market reports[7] point out that on the European side, the ECB held rates steady for a second meeting, indicating that its easing cycle may be nearing an end. Economic momentum remains uneven, with strength in services contrasted with continued weakness in manufacturing. This disparity restricts the potential for major euro gains while providing a short-term policy edge over the Fed.

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GBP/USD Edges Higher as Fed Cut Bets Grow

The GBP/USD pair advanced modestly in early Asian trading on Monday, and traded toward 1.3415[8] as the US dollar came under renewed selling pressure. It is believed that the move is indicative of increasing expectations that the Federal Reserve (Fed)[9] is set continue on its rate-cutting path as the U.S. inflation dynamics remain softer and the price pressure is in evidence.

Market reports[10] point out that the data released on Friday indicated that the headline U.S. Personal Consumption Expenditures (PCE) Price Index rose 2.7% year-over-year in August compared to 2.6% in July and is generally in line with market expectations. Meanwhile, core PCE inflation was stable at 2.9% YoY, which is also expected. However, the slight increase was seen by markets as part of the Fed easing trend, especially following the cut of 25 basis-points to 4.00%-4.25 in September. The CME FedWatch Tool[11] shows that there is an 88% chance that the Fed will make another rate cut in the October meeting and a 65 percent chance that the Fed will move in December, continuing to push the greenback down.

Market commentators[12] point out that the pound is still relatively stable on the UK front with the Bank of England (BoE) likely to maintain its policy rate at 4.0% throughout the year. Constant domestic inflation constrains the easing potential of the BoE which offers some relief to sterling. The poor UK growth indicators and low consumer sentiment are, however, a medium term burden on the currency prospects.

Analysts[13] state that traders expect to closely watch the comments of some Fed officials who are set to speak, such as Governor Christopher Waller and New York Fed President John Williams. Any opposition to aggressive easing expectations or even indications of a reserved position would provide short-term relief to the USD and subdued GBP/USD profits.

Market reports[14] point out that the forthcoming US data, such as consumer confidence, jobless claims and the September report on nonfarm payrolls, would prove crucial in market expectations. Analysts[15] state that weaker readings would support the bets of lowering the rates, and the USD would be on the defensive, whereas a stronger figure would trigger the repricing of the Fed outlook, directly influencing the GBP to USD exchange rate.

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USD/JPY Weakens Amid Fed Signals and Political Uncertainty

The USD/JPY pair edged lower and traded towards 149.50[16] in Monday's Asian session as the US dollar lost traction against the Japanese Yen. It is believed that the shift is a reaction to the shift in sentiment after the release of the US Personal Consumption Expenditures (PCE) Price Index[17] on Friday which generally matched expectations but supported the perception that the Fed is headed toward additional rate cuts later in the year.

Market reports[18] point out that the data indicate that headline PCE inflation rose 2.7% a year on a year-on-year basis in August, an increase of 0.1% point over July, with core PCE index remaining at 2.9% YoY. Each month, headline and core readings rose 0.3% and 0.2%, respectively. Although the inflation is still above the Fed rate of 2%, the policymakers have indicated that the trend is aligned with a reduction of price pressures. Market observers[19] note that markets currently are pricing in high chances of a 25-basis point cut in October, a second reduction in December being less definite and depending on further data. Fed Chair Jerome Powell[20] has stressed that the future economic releases, such as labour market releases later this week, will play a key role in defining the policy outlook in the near term.

Market commentators[21] point out that technically, USD/JPY maintained trading above critical psychological support of 149.00 and resistance is around 150.20. The downward tilt in the short-term is maintained as U.S. yields retract by small margins weakening the Dollar. Analysts[22] state that the wider risk sentiment, and relative policy difference between the Fed and Bank of Japan (BoJ) still support medium-term upside risks to the pair, however.

Market reports[23] point out that political uncertainty is another source of volatility on the Japanese side. The leadership change election of the Liberal Democratic Party (LDP) on October 4 may have an impact on the policy of the BoJ[24]. Market commentators[25] point out that an election by a dovish candidate can put a hold on further rate increases, capping Yen strength and possibly causing tailwinds USD/JPY once political clarity is achieved.

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NZD/USD Steadies as Dollar Weakens, Risks Persist

The NZD/USD pair traded near 0.5770[26] with a firmer tone in Monday's early Asian hours, underpinned by broad-based US dollar softness. It is believed that the greenback has been a target as the markets balance the rising risk of a US government[27] shutdown, which could start on Wednesday unless funds legislation is enacted. Market reports[28] point out that the US President Trump would be meeting congress leaders today and any indication of political gridlock would lead to additional downside pressure on the USD.

Market commentators[29] point out that data wise, the inflation background of the US is still core to short term sentiment. The Personal Consumption Expenditures (PCE)[30] Price Index of Friday affirmed inflation of 2.7% YoY in August, which was generally consistent with the null hypothesis, and the core level at 2.9%. The finding kept alive expectations of Fed easing in the second half of the year, and the traders awaited the next Fedspeak. Analysts[31] state that any dovish speech would add to the anticipation of rate drops and strong cap USD, which would give short-term credence to the Kiwi.

Market commentators[32] point out that head winds continue on the New Zealand side. Poor GDP results have solidified the perception that the Reserve Bank of New Zealand (RBNZ) can offer further rate cuts by the end of the year. The current Governor, Christian Hawkesby[33] is set to act as Governor and make policies in October and November before the incoming Governor Anna Breman can take over in December. Market commentators[34] point out that the outlook of additional easing is also a drag over the medium-term on NZD, although the currency is gaining a strategic boost by the backdrop of the weaker USD.

Market commentators[35] point out that the economic releases in the US including ISM Manufacturing data and labour market reports later this week will be closely monitored. Any indications of decelerating growth would strengthen Fed rate cut[36] expectations, which would further pressure the Dollar. In the case of NZD/USD[37], the current support is 0.5730 and it has a current resistance of 0.5810. Analysts[38] point out that long-term trading at levels above the present may see gains expanded to 0.5850, but medium-term risks are skewed to the downside with the softer growth prospects in New Zealand and the possibility of a policy cut.

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