Forex Today: Dollar finally corrects lower

 During the Asian session, Japan will release critical economic reports including the September Tokyo Consumer Price Index, the August Unemployment Rate, Industrial Production, Retail Sales, and Housing Starts. In Australia, Private Sector Credit data is due. Later in the day, a new estimate of UK Q2 GDP and Consumer Credit will be reported, while Germany will release Retail Sales and the Unemployment Rate. The key report to watch will be the Eurozone CPI. The focus will then shift to the US Core Personal Consumption Expenditures and Canada's monthly GDP.

Here is what you need to know on Friday, September 29:

It is the last day of September and the end of the third quarter, which could contribute to increased volatility on Friday due to end-of-month flows. The key economic report will be the US Core Personal Consumption Expenditure Price Index, the Federal Reserve's preferred inflation gauge. It is expected to show a decline from 4.25% to 3.9%. A higher-than-expected number could potentially trigger further gains for the US Dollar. The report also includes personal income and personal spending data. Later, the University of Michigan's final reading of Consumer Sentiment for September is due.

US Core PCE Preview: Forecasts from seven major banks, losing speed

The US Dollar index (DXY) experienced a correction lower on Thursday, declining by 0.50%. After rallying for five consecutive days and reaching a monthly high, the index pulled back toward the 106.00 area.

The Greenback weakened amid improved risk sentiment and lower US Treasury yields. Second-quarter US GDP growth data aligned with expectations, while Initial Jobless Claims rose less than expected. The US 10-year Treasury yield fell from 4.69% (the highest since 2007) to 4.57%.

A US government shutdown is looming as bills to fund the government have yet to become law in both the House and Senate. A government shutdown could have a negative impact on economic growth and delay the publication of key economic reports.

EUR/USD rebounded from below 1.0500 toward 1.0600. The overall trend is still down, but the short-term outlook has improved for the Euro. A break above 1.0580 would strengthen the common currency. The Eurozone Harmonized Index of Consumer Prices is due on Friday, although its impact may be limited considering that Germany has already released its inflation numbers. Additionally, German Retail Sales and the Unemployment Rate are also due on Friday.

Analysts at Commerzbank on German inflation: 

German inflation fell from 6.1% to 4.5% in September. This is partly due to the fact that the 9-euro ticket and the tax cuts on fuel ("petrol rebate") expired a year ago. But even without this base effect, headline inflation and the core rate excluding energy and food would have fallen significantly. This trend is likely to continue in the months ahead. Next year, underlying inflation is expected to stabilize well above the ECB's target of 2%, as wage growth picks up noticeably.

GBP/USD had its best day in over a month, benefiting from a weaker US Dollar, hovering around the 1.2200 area. The correction could continue in the next sessions, but the outlook is bearish as long as it stays below 1.2460. The UK is set to release a new estimate of Q2 GDP growth and later Consumer Credit data.

USD/JPY experienced a modest drop despite the reversal in US yields. The pair is still holding above 149.00. Japan has several economic data releases scheduled for Friday, including the Tokyo Consumer Price Index for September, Unemployment Rate, Industrial Production, and Retail Sales for August.

AUD/USD gained nearly 80 pips on Thursday, recovering from monthly lows and moving back above the 20-day Simple Moving Average (SMA). It consolidated around 0.6420. Australia will release Private Sector Credit data.

The Canadian Dollar (CAD) lagged behind on Thursday because of the correction in crude oil prices. USD/CAD essentially remained unchanged near 1.3500 despite the weaker US Dollar. Canada will report July GDP data on Friday.

Analysts at TD Securities on Canada's GDP

We look for GDP to rise by 0.1% in July, unwinding half of June's pullback, with the goods sector leading the rebound. Manufacturing/mining will provide a source of strength, while services should underperform with a muted performance for retail/wholesale trade. New flash estimates should point to another soft (+0.1%) print in August, providing more evidence that higher rates are working to slow demand. We would need a sizeable miss to shake the additional hike priced in for the BoC out of the market.

Gold extended its decline, printing fresh monthly lows at $1,857 before rebounding to the $1,866 area. The recovery can be attributed to the reversal in US yields. Although the yellow metal remains under pressure, the potential for a weaker Dollar and lower yields could support a stabilization.