Forex Today: Risk flows return on PMI day

Here is what you need to know on Monday, September 23:

It seems like a positive start to the week, as risk sentiment recovers on renewed China optimism after the People’s Bank of China (PBOC) surprised markets by lowering its 14-day repo rate by 10 bps to stimulate the economic turnaround.

Despite a better risk tone, investors remain wary amid escalating tensions between Israel and the Lebanese militant group – Hezbollah. Over the weekend, Hezbollah fired at least 10 missiles into northern towns and cities of Israel's Jezreel Valley, the Times of Israel reported. In response, Israeli Defense Force (IDF) jets carried out a series of retaliatory strikes across southern Lebanon, targetting at least 110 Hezbollah positions. 

This comes in response to last week’s pagers and walkie-talkies explosions in Lebonan, with Isreal suspected of these attacks. The US Dollar (USD) finds some safe-haven demand against its major rivals, in the face of looming Mid-East geopolitical risks. Meanwhile, US House Republicans’s declaration to unveil a stopgap spending bill to fund the government through December 20 also offers fresh signs of life to the Greenback.

Increased expectations of another 50 basis points (bps) interest rate cut by the US Federal Reserve in November curbs the USD rebound, despite the modest upswing in the US treasury bond yields.

All eyes now turn toward the Euro area, the UK and the US S&P Global preliminary Manufacturing and Services PMI data for fresh hints on the state of the global economy, as recession fears loom. Further, speeches from Fed policymakers Raphael Bostic, Austan Goolsbee and Neel Kashkari will also grab attention, as markets brace for Fed Chair Jerome Powell’s speech and the critical US PCE inflation data due later this week.

Within the G10 currency basket, the Australian Dollar emerged as the main performer, driving AUD/USD back toward 0.6850. The pair cheers the PBOC’s easing move, despite weak domestic PMI data. Traders also resort to position readjustments ahead of Tuesday’s Reserve Bank of Australia (RBA) policy announcements.

USD/JPY rebounded firmly above 144.00 but faced rejection near 144.50 before consolating at around 144.25. The pair fails to find fresh impetus amid a public holiday in Japan. The upside, however, remains capped due to the divergent monetary policy outlooks between the Fed and the Bank of Japan (BoJ). The BoJ maintained the short-term rate target in the range of 0.15%-0.25%, as expected, sticking to its cautious stance.

USD/CAD remains on a slippery slope toward 1.3550 as Oil rallies nearly 1% on the Middle East geopolitical escalation and reports of Shell shutting down its production at two oil facilities in the Gulf of Mexico. WTI rises about 1% so far, flirting with $71.50 at the moment.

GBP/USD is keeping its range above 1.3300, consolidating the recent uptrend to over two-year highs before the next push higher. UK Chancellor Rachel Reeves's speech on Monday at the Labour Party conference will be closely eyed alongside the UK PMI data.

EUR/USD is defending 1.1150, extending its side trend into the early European session. The major awaits the German and Eurozone PMI data for fresh trading incentives.

Gold stretches higher and records a new lifetime high above $2,630 on Chinese stimulus optimism and Mid-East concerns. Gold traders turn cautious, as the Relative Strength Index (RSI), a leading indicator, on the daily chart has entered the overbought territory.