After a particularly data-heavy week, a new pattern in the markets has emerged, notably in forex markets. Following the FOMC and ECB meetings, the EURUSD has caught a bid as the dollar retreats. While this would normally indicate a potential resurgence in risk appetite, equity markets have continued to retreat, implying a shift in market expectations.
The boom in AI stocks is affecting FX, as previously cash-generating tech companies are issuing massive amounts of debt to fund their data centres and other infrastructure build-outs. This has depressed US bonds, undermining the usual performance of the dollar and other currencies. The relatively large supply of US and Japanese debt compared to the UK and Europe has put a premium on dollar- and yen-denominated debt, elevating those currencies.
Central Banks Hold, Data Moves
The main central banks delivered as expected, with the Fed, ECB and BOJ all holding. There was a minor surprise after the FOMC meeting, when Fed Chair Kevin Warsh announced that the Fed would reduce the number of meetings at which it would announce interest rate decisions. However, that was largely a technical factor.
As anticipated, the US data released a day later drove the market, with US GDP coming in hotter than expected. However, when taken together with the Fed’s stance, markets have apparently returned to worrying about inflation overshooting, weakening the dollar in the process.
How Markets Will Perform Now
Notably, both the dollar index and gold declined over the last few days. Despite the recent downturn in tech stocks following disappointing earnings from major AI companies, the market appears to be regaining some confidence. Recent data, the peak earnings season, and steady central banks have eased a notable amount of uncertainty in the markets.
US indices have been in a correction since the summer, and now brokerages like Morgan Stanley are suggesting they might start trending higher. This is a normal phenomenon towards the end of the year, when markets assume a risk-on attitude. For Forex traders, that means the dollar could come under increased pressure, along with gold, while commodity currencies, including the AUD and CAD, trend higher. But it will complicate matters for the yen, as officials try to keep it from rising too high if the dollar weakens.
Next Market Moves
Although the data has reduced some uncertainty, a few major events could still shake up forex markets. Most proximate are Congressional elections in the US next Tuesday, with rampant speculation that the US will renew attacks on Iran afterwards. Crude prices are already higher in anticipation, and an escalation in the Middle East could push the dollar higher.
The RBA’s rate decision next week could be pivotal for the AUD and prevent it from gaining alongside other commodity currencies if the RBA doesn’t meet expectations. Getting past the BOE’s meeting next Thursday clears the calendar until mid-December, allowing the market to continue the current trends for several weeks. That is, unless there is a geopolitical surprise.
