Market Outlook: Anticipation Builds for US-China Deal and FOMC Decision

US-China Trade Talks and Broader Market Sentiment

The market is positioned optimistically ahead of a potential agreement between the United States and China expected as soon as tomorrow. Key components under consideration include a likely reduction in the fentanyl tariff and a postponement by one year of the expansive export licensing requirements on rare earths and associated technologies. Notably, reports indicate that China has purchased two shipments of US soybeans, marking a first in several months, although specific US concessions remain unclear.

Meanwhile, the US appears to have concluded an agreement with South Korea, adding to positive developments on the trade front.

Currency Market Snapshot Ahead of the FOMC Meeting

As markets await the Federal Open Market Committee’s announcement later today, the US dollar remains relatively firm. Within the G10 currency group, the Australian dollar stands out due to inflation readings exceeding expectations, pushing interest rates higher across the curve and diminishing market expectations for a rate cut next week.

Emerging market currencies mostly weakened, with the exception of a few East Asian currencies. The Philippine peso notably hit a new record low before recovering, despite official statements downplaying intervention rumors.

Equity and Fixed Income Market Activity

Asian equity indices experienced robust gains, with Japan’s Nikkei, China’s CSI 300, and key benchmarks in South Korea and Taiwan all rising by more than 1%. European equities, as measured by the Stoxx 600, remained largely unchanged, while US equity futures showed modest strength.

European 10-year government bond yields were mixed within a narrow range, while the US 10-year Treasury yield firmed slightly but stayed below 4.0%. Gold prices rose, breaching the previous day’s high for the first time since the October 20 record high. Gold now trades near $4030 in European morning trading after settling below $4000 the last two sessions. In contrast, December West Texas Intermediate crude extended its recent pullback to roughly $59.70, approaching the 20-day moving average of $59.60.

Detailed Currency and Economic Analysis

US Dollar Dynamics

The Dollar Index rebounded from a dip near its 20-day moving average (98.65) yesterday, reaching an intraday high close to 98.95 during North American sessions. It edged higher today following its weakest close in seven sessions yesterday. Resistance is noted in the 99.20 area, with a descending trendline near 99.45, stemming from October 9 highs.

Market participants broadly anticipate a 25 basis point Fed rate cut during today’s FOMC, despite continued elevation in year-over-year CPI and core inflation measures. Dissenting views appear possible, with some officials favoring a 50 basis point cut or a pause; though the latter is considered more likely for December. Additionally, the decline of bank reserves below $3 trillion raises the possibility of an announcement to conclude quantitative tightening (QT). Volatility around the FOMC meeting is expected, given historical divergences between statement reactions and Chair Powell’s press conference commentary.

Eurozone Developments

The euro hit a six-day high just below $1.1670 yesterday but retreated below $1.1620 this morning in European trading. A breakdown below this level could trigger a retest of last week’s low near $1.1575, a support zone aligned with a trendline linking July and October lows.

The European Central Bank (ECB) convenes tomorrow. Market consensus holds that the ECB will likely maintain current policy settings even as the Fed signals easing. Updated Q3 GDP data is also expected, with preliminary estimates pointing to 0.1% quarterly growth, matching Q2’s pace. Spain’s Q3 GDP, reported this morning, rose 0.6% quarter-on-quarter after 0.8% growth in Q2 and 0.6% in Q1. Despite lackluster growth, unemployment has stabilized around the low 6.2%-6.3% range. German unemployment figures for September will be released ahead of the ECB’s meeting conclusion.

In the Netherlands, parliamentary elections take place today following the collapse of the ruling coalition earlier this year amid disputes over asylum policies and sanctions related to Israel.

Chinese Yuan and Regional Currency Correlations

The People’s Bank of China (PBOC) continues a measured policy to support gradual yuan appreciation. Year-to-date gains for the onshore yuan hover near 2.8%, while the offshore yuan has appreciated approximately 3.4%. After briefly dipping below yesterday’s CNH7.0915 low, the offshore yuan remains near CNH7.10 in current European trading. This level is close to the lowest point for the year at CNH7.0850, reached during the last Fed rate cut meeting.

The PBOC today set the yuan’s reference rate at CNY7.0843, its lowest in over a year, potentially allowing greater regional currency appreciation against the dollar. However, correlations among regional currencies are uneven. The South Korean won shows the strongest 30- and 60-day rolling correlations with the yuan, at approximately 0.80 and 0.65, respectively. Moderate correlations exist for the Taiwanese dollar and Malaysian ringgit, while correlations with the Thai baht, Japanese yen, and Indonesian rupiah are lower and more variable.

Japanese Yen and Monetary Policy Prospects

Yesterday’s verbal intervention by Japanese authorities, declining oil prices, and the new US-Japan agreement have not fully stabilized the dollar near the recent highs around JPY153.25. The dollar’s retracement found support near JPY151.80, close to the 38.2% Fibonacci retracement of the prior rally and near last week’s congestion zone.

US Treasury Secretary’s comments advocating flexibility for the Bank of Japan (BOJ) to adjust monetary policy amid inflationary pressures temporarily weighed on the dollar, driving it below JPY151.50 before a late-session recovery to JPY152.55.

The BOJ monetary policy decision scheduled for early tomorrow is unlikely to include a rate hike, reflecting diminished market expectations. Instead, the central bank is expected to update its economic projections with limited changes. Previous forecasts called for GDP growth of 0.6% in 2024, 0.7% in 2025, and 1.0% in 2027, with core inflation headed back below target after 2024. Tokyo will release October CPI data before the weekend, with headline inflation expected to edge down from 2.5%, while core measures may rise slightly.

Market pricing currently assigns less than a 50% probability to a December BOJ rate increase.

British Pound Performance

Sterling experienced a bearish outside down day yesterday, trading below Monday’s range and closing at its lowest level since late July, near $1.3275. Today, selling pressure persisted, pushing the currency below the $1.3200 threshold and beneath its 200-day moving average for the first time in over six months. Support lies near the August and May lows around $1.3140, coinciding with a 38.2% retracement of this year’s rally.

Against the euro, sterling fell to a fresh annual low and has declined in four out of five trading sessions, recently surpassing €0.8800 for the first time in roughly two and a half years. The UK’s consumer credit data showed a modest contraction in September, its first decline in four months, but this was not a significant market factor.

Canadian Dollar Movements and Outlook

Yesterday, the US dollar sold off to nearly CAD1.3935, the lowest rate since October 9 and dipping below its 200-day moving average (~CAD1.3955). Follow-through selling today pushed the pair down to roughly CAD1.3925 before a partial recovery in European hours brought it back near CAD1.3950.

Following an October 14 peak at approximately CAD1.4080, the US dollar has retraced key Fibonacci levels, correcting about 38.2% of gains since the last Fed rate cut. The next technical target may be around CAD1.3900.

Market pricing shows near parity in monetary policy easing expectations for the Bank of Canada (BoC) and the Federal Reserve. The BoC decision is scheduled for early today (9:45 AM ET), ahead of the Fed’s 2:00 PM ET announcement. However, divergence is anticipated moving forward, with the market pricing roughly 12 basis points of easing for Canada over the next year versus approximately 75 basis points for the US.

BoC Governor Macklem has downplayed elevated core inflation readings, with officials appearing more focused on supporting economic growth. Statistics Canada will release August monthly GDP data on Friday, likely showing stagnation following a 0.2% increase in July and preceding three months of slight contraction.

Australian Dollar and Inflation Data

The Australian dollar continued its upward trend yesterday, surpassing $0.6590—the strongest level since October 9—and eclipsing the 61.8% retracement of this month’s decline, a barrier that held on Monday. Today’s session saw further gains around $0.6620 before moderating near $0.6600.

Q3 CPI data released today was firmer than expected, underpinning the Aussie’s appreciation. Monthly inflation rose 3.5% year-over-year, the highest since June 2024, marking the third consecutive monthly increase. The quarterly increase of 1.3% translated to a 3.2% annualized rate, up from 2.1% in Q2. Underlying inflation measures, including the trimmed mean and weighted median, also rose modestly.

Following commentary from the Reserve Bank of Australia’s Governor Bullock on Monday, futures market odds for a rate hike next week have fallen sharply from around 55% to approximately 10%, now below 6%.

Mexican Peso and Regional Economic Outlook

The Mexican peso remains range-bound, trading mostly between MXN18.34 and MXN18.50 over the past two weeks. So far today, the US dollar has fluctuated between roughly MXN18.46 and MXN19.42. Mexico’s Q3 GDP report is due tomorrow, with consensus expecting a 0.4% contraction following Q2’s 0.65% growth.

Mexico’s central bank forecasts 0.6% GDP growth for 2024—the slowest since the pandemic—followed by 1.1% growth in 2025. The economy expanded by 1.5% last year. The central bank’s November 6 meeting faces a nearly evenly split market on the policy outcome.

Elsewhere in Latin America, the US dollar stands near a two-and-a-half-week low against the Brazilian real (~BRL5.35), with support projected around BRL5.30-BRL5.32. Argentine dollar bond yields declined 25 basis points yesterday even as the peso weakened nearly 3%, tempering post-election optimism amid speculation of dollar purchases by the Argentine Treasury.

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_Disclaimer: This report is for informational purposes only and does not constitute investment advice._