Dollar drops to weakest since September, eyes on Nvidia earnings

Headlines

* USD slides to over two-month low as Fed cut bets take charge

* Oil rises on expectations of further OPEC+ supply cuts

* BoE’s Bailey says the bank is on track to bring inflation down to target

* Gold loses footing as focus turns to Fed minutes

FX: USD selling continued with the technical breakdown from Friday and poor weakly close seemingly confirmed.  The 50% level of the July rally is 103.46. The greenback dropped to its lowest level in over two months as risk sentiment remained buoyant. Bets on Fed rate expectations were solidified with cuts priced in for springtime next year.

EUR broke to the upside again yesterday after pushing higher from a bullish flag pattern on Friday. Prices are now overbought on momentum indicators. Moody’s helped eurozone sentiment when it lifted its outlook for Italian government bond debt over the weekend. There had been speculation of a possible downgrade last week. There are numerous ECB speakers over the next few days. PMIs are released on Thursday. The next upside target is at 1.0960.

GBP is trying to break to the upside from a bullish continuation pattern. Prices had been hovering around the 200-day SMA at 1.2446. The 100-day SMA sits above at 1.2507. The Chancellor’s Autumn Statement will be a focus for fiscal watchers but shouldn’t move the BoE rate picture. Money markets price in a first rate cut by June.

USD/JPY fell gain as 10-year US treasury yields dipped. Prices had been supported by the 21-day SMA, which is now at 149.49. The October spike low is at 147.27. Recent futures data showed an increase in JPY shorts to the largest in nearly a year. This comes as the yen was starting to show some signs of steadying.

AUD outperformed on positive risk sentiment. The major advanced through resistance around 0.65 with bulls eyeing up the midpoint of the July decline at 0.6584. The 200-day SMA is just above at 0.6591. The RBA minutes will be released today from the prior meeting which was seen as less hawkish. The bank stated that inflation had passed its peak and further tightening of policy was data dependent.

Stocks: US equities closed higher with tech the top gainer closing up 1.5%.  The benchmark S&P 500 added 0.74% to settle at 4547. That was less than 1% below its closing 2023 peak made in late July. The tech-dominated Nasdaq finished 1.19% higher at 16,027. That was its highest close since July 31. The Dow settled 0.58% higher at 35,151. Microsoft stock touched a record high and closed 2% higher. This comes after news that OpenAI chiefs will join MSFT.

Nvidia reports after the US close today. This company has been the AI-bellwether this year. The pace of its success will be a key driver for sentiment in the overall tech sector. It is the last of the “Magnificent Seven” to report Q3 earnings and will drive price action in the broader market as well, as tech has led this year’s gains. Some questions are being asked about whether chip demand has been frontloaded and could be lower in the medium term.

Asian futures are in the green. APAC stocks were mostly positive with the Nikkei 225 climbing above 33,850, its highest print since 1990 before finishing below. China outperformed amid tech resilience and property underpinned by stimulus pledges.

Gold clawed back some of its intraday losses as it traded around $1980. The dollar sold off but yields traded in a narrow range.

Day Ahead – FOMC minutes

The Fed minutes release is the most notable market moving risk event on the calendar. The most recent meeting saw the FOMC leaves rates unchanged at 5.25 – 5.50% while retaining its tightening bias. It continued to emphasise the strength of job growth and the low unemployment rate. But policymakers acknowledged that tighter financial conditions were doing some of the Fed’s heavy lifting for it.

Since the meeting, the easing in financial conditions could mean that some of the commentary is already stale and outdated. We’ve also had softer top tier data including monthly non-farm payrolls figures and a cooler than expected inflation report. In addition, Chair Powell has appeared modestly more hawkish recently. He reiterated that officials were not confident that they have achieved a sufficiently restrictive policy stance, while stating the Fed will continue to move carefully.

Chart of the Day – Dollar Index falls through the 200-day SMA

The dollar selling is continuing with the recent soft weekly close pointing to extended losses. Sentiment on the greenback has changed as markets become more convinced Fed rate hikes are done. The focus is now on when policy easing starts. In that sense, the market bias will shift to “selling rallies” rather than “buying dips”. But has the market got ahead of itself again with the futures pricing in a near 75% chance of a 25bp May cut?

The dollar index took out a major Fib level (38.2%) of the July rally at 104.18 after the soft US CPI data last week. Prices are now on the halfway point of the summer move. The 200-day SMA sits at 103.61. The next major Fib level (61.8%) below is at 102.54.