Daily Market Update: FX Markets Consolidate Amidst Central Bank Actions and Economic Data

After a series of risk-on days, FX markets are now consolidating with the dollar on the rise against its major peers. This follows some intriguing price movements triggered by the Reserve Bank of Australia's 25 basis point interest rate hike, as well as mixed economic data from China. Today's trading session appears relatively calm, but it's crucial to keep an eye on how aggressively a lineup of Federal Reserve (Fed) speakers intends to counter the recent slide in US yields that will likely translate into an easing of the credit conditions economy-wide, creating some inflation pressures. In recent overnight trading, the forex markets have partially relinquished their gains from the risk-on sentiment, resulting in a slightly stronger US dollar. However, US ten-year Treasury yields remain at 4.60%.An intriguing development in the FX markets is the unusual reaction of the Australian dollar against the US dollar following the RBA's interest rate hike:The underperformance of AUDUSD could be attributed to positioning or a perception that if the RBA is resuming its tightening cycle after a four-month pause, perhaps the Fed will follow suit. However, US interest rates haven't moved significantly, and the Australian dollar failed to appreciate even with slightly better-than-expected Chinese import data. This could indicate that the market is cautious and seeks more evidence before firmly committing to a scenario of a Fed pause or peak and a weaker US dollar. Today, the focal point in the US will be the Federal Reserve speakers scheduled throughout the day. The primary question is whether the Fed will push back against the easing of US financial conditions. Remember that in mid-October, the tightening of financial conditions prompted remarks from the Fed about the tightening impact of the sharp rise in long-term bond yields. Now that these conditions have completely reversed their October spike, the Fed is likely to emphasize the risks of further rate hikes. The risks seem tilted toward a mildly stronger dollar today. If the US Dollar Index (DXY) closes above 105.50, it would reverse some of the bearish momentum from last week. Meanwhile, EURUSD did not manage to test the resistance at 1.0765 before retracting. In our previous article, we explained why a correction could be due in EURUSD, which has scored steep gains in recent days, rising to the upper bound of its key bullish channel:Given the event risk posed by hawkish Fed speakers today, there's a risk that EURUSD could drop to 1.0650 in the support area. Among the important fundamental data and events due today, we can note Eurozone Producer Price Index (PPI) figures, German industrial production data, and speeches from ECB officials. The euro's performance remains weak, and EURUSD may only rally if the US story weakens enough to trigger a clear bullish flattening of the US yield curve. The baseline expectation might be a range-bound movement between 1.0550 and 1.0750, unless US data takes a marked turn for the worse. Last but not least, the Bank of England (BoE) reintroduced forward guidance last week, raising questions about market expectations for rate cuts in the second half of 2024. However, BoE Chief Economist Huw Pill's recent comments that rate cuts starting next summer appear reasonable have introduced a mildly negative tone for the British pound. Given the possibility that Fed remarks could dampen equities, risk-sensitive sterling may give back some of its recent gains. For instance, EURGBP could potentially trade back up to 0.8710, and GBPUSD might decline to 1.2290 or even 1.2250.