Forex Today: A busy week ahead, between data and geopolitics

A busy week is coming in terms of the economic calendar. The PMI surveys will provide the first glimpse of global economic activity during October. The Bank of Canada and the European Central Bank will announce their monetary policy decisions. In the US, data to be released includes the first estimate of Q3 GDP and consumer inflation with the Core PCE.

Here is what you need to know for next week: 

The US Dollar Index lost 0.30% during the week, marking its worst performance since early July. Although the decline does not change the Dollar's positive outlook, it suggests that the DXY could continue to consolidate around 106.50.

Fundamental factors continue to favor the US Dollar, as economic data still indicate a tight US labor market. Next week, data from the US includes the S&P Global PMI, the first reading of Q3 Gross Domestic Product (GDP) growth on Thursday. Additionally, consumer inflation data is due, including the Core Personal Consumption Expenditures (PCE), on Friday. These figures will be critical before the next FOMC meeting on November 1. Federal Reserve (Fed) Chair Jerome Powell and other central bank officials have suggested that rates will remain on hold in the short term and may have peaked, unless inflation rebounds.

Analysts at TD Securities on GDP:

We look for GDP growth to surge in Q3 following the near-trend prints registered over the first half of the year. Activity was likely largely supported by a strong consumer, though we expect the volatile inventory and net exports categories to explain about 1pp of headline growth. We expect Q3's impetus to fizzle out in Q4 as the consumer moderates post excess summer spending. 

The bond market remains volatile, with the 10-year Treasury yield closing the week at 4.92%, a level not seen since 2007. In the short end of the yield curve, rates hit multi-year highs but later pulled back. Economic data from the US continues to support the upward movement in yields.

Despite the increase in bond yields, Gold experienced a significant jump of over $50, approaching the $2,000 mark. XAU/USD peaked at $1,997 on Friday, the highest level since May, before trimming some gains. The chart for the yellow metal continues to show bullish signs. Silver rose during the week, closing around $23.30, just below the 20-week Simple Moving Average (SMA). 

Geopolitics will continue to play an important role, with a focus on the Middle East. Corporate earnings will also be relevant for risk sentiment. In the upcoming week, big tech companies such as Microsoft, Alphabet, Meta, and Amazon, as well as healthcare and major oil companies, will be reporting.

EUR/USD saw a gain of approximately 70 pips, marking the biggest weekly gain since July. The pair held above 1.0500 but faced resistance around the 1.0600 area. Although no clear bullish signs exist, the consolidation phase is starting to appear more robust. 

The Euro has a busy week ahead, with the key event being the European Central Bank (ECB) meeting on Thursday. No rate change is expected, with the Deposit Rate likely to remain at 4.00%. Market participants will closely watch the language and ECB President Christine Lagarde's press conference. Additionally, on Tuesday, the preliminary PMI survey results for the region will be released, providing an initial glimpse into the October performance. There will be a summit of European Union leaders on Thursday and Friday.

Analysts at Nomura on ECB:

We do not expect material changes to the ECB’s initial statement. Importantly, we expect the language on guidance – that “rates have reached levels that, maintained for a sufficiently long duration, will make a substantial contribution to the timely return
of inflation to the target” – to remain unchanged.

The Pound languished during the week, with GBP/USD ending marginally higher, around 1.2160, while EUR/GBP recorded its highest weekly close since May. The Bank of England's cautious stance in September and subsequent data weighed on the currency. The UK will release employment data on Tuesday.

USD/JPY continues to trade dangerously close to 150.00. A breakout higher could trigger volatility and potentially prompt intervention from Japanese authorities. The Tokyo CPI is scheduled for release on Friday.

AUD/USD finished the week modestly higher but still far from its peak, signaling towards the critical support level at 0.6285. It will be a decisive week for Australian economic data, with the monthly and quarterly Consumer Price Index (CPI) on Wednesday, followed by the Producer Price Index on Friday. These reports will shape expectations for the upcoming Reserve Bank of Australia (RBA) meeting on November 7. RBA Governor Michele Bullock is set to deliver a speech on Tuesday.

USD/CAD posted its highest weekly close since March, around 1.3700, maintaining a bullish tone. The Bank of Canada (BoC) will hold its monetary policy meeting on Wednesday, and it is expected to keep the overnight rate unchanged at 5.00%, with a hawkish tone.

The New Zealand Dollar (NZD) was the worst performer among G10 currencies. NZD/USD broke below 0.5860 and tumbled to 0.5815, the lowest level since November of last year. The chart suggests further losses, with the next support area seen at 0.5740.

An improvement in risk sentiment would be beneficial for antipodean currencies. This boost could be even more significant if it coincides with a decrease in US yields. Conversely, a negative shock to market sentiment would increase demand for safe-haven assets, potentially strengthening the US Dollar as investors seek refuge.