Eyes on Fed minutes and PPI

European markets experienced a notable upswing yesterday, reaching their highest levels in over a week. This occurred as financial markets adopted a more measured approach toward recent geopolitical events. Additionally, investors were contemplating the possibility of a stimulus plan in China and a subtle shift in tone from Fed policymakers regarding the next move on interest rates.

This change in sentiment was also evident in US markets, which marked their third consecutive day of gains. The sharp decline in yields, following indications from several Fed policymakers that the recent increase in yields might mean the central bank could consider fewer rate hikes, contributed to this positive trend.

In the past few days, Fed officials including Fed Vice Chair Philip Jefferson, Dallas Fed President Lori Logan, Atlanta Fed President Raphael Bostic, and Minneapolis Fed President Neel Kashkari have acknowledged that rising yields might prompt the Fed to be less aggressive, potentially avoiding a rate hike in November.

However, this week’s inflation data, starting with today’s Producer Price Index (PPI) numbers for September and tomorrow’s Consumer Price Index (CPI) report, could influence market expectations. While headline CPI has seen a slight uptick recently, today’s headline PPI for September is expected to remain unchanged at 1.6%, while core PPI is anticipated to increase to 2.3% from 2.2%.

Following the release of today’s PPI data, investors will scrutinize the latest Fed minutes after the decision to maintain rates and the unexpected shift toward a more prolonged period of higher rates. Although these minutes are dated, they might offer insights into Fed officials’ concerns about the risks of tightening policy too aggressively.

The dot plots from the Fed indicated a less dovish stance regarding rates in 2024, with the recent jobs report justifying the Fed’s decision to raise its rate guidance for that year.

The US Dollar Index (DXY) has been testing the support at the 20-day Simple Moving Average (SMA) since early September, experiencing a pullback from its multi-month highs. Technical indicators on the daily chart are indicating a potential downward trend, with Momentum, the Relative Strength Index (RSI), and the Moving Average Convergence Divergence (MACD) showing signs of weakening. However, it’s important to note that the overall trend still maintains a bullish outlook.

If the consolidation below the 106.00 level becomes more stable, there is a possibility of further downside, initially targeting 105.50 and then focusing on the significant support area around 104.40, which might act as a strong barrier against further decline.

On the flip side, if the DXY manages to stay above the 20-day SMA, it could extend the consolidation phase within the range of 106.00 to 107.00. A daily close comfortably above the 107.00 level would suggest a potential resumption of the bullish trend.

In the currency markets:

• EUR/USD: Expected to test resistance at the 1.0620 level, with a potential break targeting the 1.0740 area. Key support remains at last week’s lows at 1.0450, as well as the 1.0400 area, representing a 50% retracement of the 0.9535/1.1275 upward move.
• GBP/USD: Aiming to test the 1.2300 area, with a breakthrough potentially leading to a move back to the 1.2430 area and the 200-day SMA. A drop below 1.2000 targets the 1.1835 area, equivalent to a 50% retracement of the move from the record lows at 1.0330 to the recent peaks at 1.3145.
• EUR/GBP: Appears to be testing support at the 0.8620 area, along with the 50 and 200-day SMA. Resistance is seen at the 200-day SMA at the 0.8720 area.
• USD/JPY: Currently range trading above last week’s lows, with main resistance at last week’s highs at 150.16. A drop below 147.30 signals a possible move toward 145.00.