AI concerns pressure markets
Global markets remain cautious as renewed concerns around AI valuations weigh on technology stocks. The sell-off has supported US Treasuries, pushed bond yields lower and taken some momentum out of the US dollar’s recent rally.
European markets remain under pressure as France’s fiscal problems continue to weigh on confidence. French-German bond spreads have widened further, while higher oil prices are adding to concerns around government finances and inflation.
Geopolitical risks also remain elevated, with Brent crude climbing to USD114 per barrel amid renewed tensions in the Middle East. Safe-haven currencies have benefited from the uncertainty, particularly the Japanese yen. Meanwhile, the yuan has remained firm, with the People’s Bank of China continuing to signal tolerance for a stronger Chinese currency.
Aussie rebuilds ahead of inflation
AUD/USD starts the week stronger, almost 2% above last week’s low around 0.6890.
The recovery accelerated after the Reserve Bank of Australia (RBA) warned that the inflation outlook had deteriorated materially, increasing expectations for another rate hike. Markets now see around a 54% chance of a November increase, while Australian two-year bond yields have moved above their US equivalent, providing renewed support for the Aussie.
However, recent weakness in employment and consumer confidence, combined with fragile global sharemarkets, remains a risk.
AUD/USD is now testing important resistance around 0.7030 to 0.7050. A sustained break higher could open the way towards 0.7100, while 0.6890 to 0.6860 remains the key support zone.
Wednesday’s September CPI report is the major domestic event ahead of the RBA’s 3 November meeting. Another strong inflation result would increase expectations for a rate hike and potentially extend the Aussie’s recovery.
Fed, ECB, and Australian CPI headline big week
The Federal Reserve announces its October interest rate decision this week. Markets increasingly expect the Fed to leave rates unchanged following the recent decline in bond yields, although another hike in December remains in play.
The European Central Bank (ECB) also meets this week. After two rate hikes, policymakers face an increasingly difficult balance between elevated inflation, weaker growth, and rising bond-market pressure stemming from France’s fiscal problems.
In Australia, Wednesday’s CPI report will be critical for expectations around next week’s RBA decision. Later that day, the Reserve Bank of New Zealand decision is due.
The UK Autumn Budget is another major event, although high energy prices and limited fiscal room are expected to constrain the government’s options.
Eurozone inflation data will also begin to arrive this week, but with European markets dominated by fiscal concerns, the ECB’s guidance is likely to remain the bigger driver for the euro.
Aussie, kiwi recover
Table: seven-day rolling currency trends and trading ranges
Key global risk events
Calendar: 26 – 31 October
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*The FX rates published are provided by Convera’s Market Insights team for research purposes only. The rates have a unique source and may not align to any live exchange rates quoted on other sites. They are not an indication of actual buy/sell rates, or a financial offer.
