Forex Today: US Dollar steady as mid-tier data releases and FOMC meeting approach

27 October, Tuesday: Key market developments to watch

The benchmark 10-year US Treasury yield remains below 5%. Despite this, the US Dollar (USD) holds firm against its peers as markets turn cautious on Tuesday after Monday's volatile trading. September Durable Goods Orders and New Home Sales are due on the US economic calendar, together with regional manufacturing surveys and the Conference Board's October Consumer Confidence Index. Late Tuesday also marks the start of the Federal Open Market Committee's (FOMC) two-day policy meeting.

TMGM Analysis: Financial Market News, Economic Calendar & Market Insights

Monday's advance in the USD Index lacked strong bullish momentum. Gains on Wall Street, alongside lower crude oil prices, signalled an improvement in market sentiment. Early on Tuesday, the USD Index holds modest gains above 102.00, while US stock index futures edge lower.

Following Monday's decline of about 2%, a barrel of West Texas Intermediate (WTI) is trading slightly higher on the day. Reuters reported that the Saudi-led coalition said early Tuesday that air defences had intercepted and destroyed four drones launched by the Houthis towards Saudi Arabia's southern region.

0.50% Against CHF: US Dollar Performance This Week

This week's percentage moves in the US Dollar (USD) against the major currencies listed appear in the table below. The Swiss Franc was the currency against which the US Dollar performed most strongly.

	USD	EUR	GBP	JPY	CAD	AUD	NZD	CHF
USD		0.49%	0.33%	0.47%	-0.16%	0.27%	0.06%	0.50%
EUR	-0.49%		-0.18%	-0.05%	-0.68%	-0.30%	-0.50%	-0.06%
GBP	-0.33%	0.18%		0.04%	-0.53%	-0.12%	-0.26%	0.09%
JPY	-0.47%	0.05%	-0.04%		-0.58%	-0.26%	-0.37%	-0.06%
CAD	0.16%	0.68%	0.53%	0.58%		0.36%	0.15%	0.62%
AUD	-0.27%	0.30%	0.12%	0.26%	-0.36%		-0.19%	0.04%
NZD	-0.06%	0.50%	0.26%	0.37%	-0.15%	0.19%		0.41%
CHF	-0.50%	0.06%	-0.09%	0.06%	-0.62%	-0.04%	-0.41%

Percentage movements between major currencies are displayed in the heat map. Select the base currency in the left-hand column and the quote currency in the top row. Selecting the US Dollar on the left and moving horizontally to the Japanese Yen, for instance, gives the percentage change for USD (base)/JPY (quote) in the corresponding cell.

October Fed hold expected; BNY flags December tightening risks

Further tightening is a December consideration rather than an October expectation for BNY Markets strategists, who say: "in line with the market, we don’t foresee a rate hike at the October FOMC tomorrow and prefer to place our expectations for further tightening on the December meeting." Explaining their assessment, they add: "based on Fed commentary and a steady, if sticky, inflation outlook, we don’t think the weight of the Committee will fall on the hawkish side."

Readiness to take decisive action in the foreign exchange market was reiterated on Tuesday by Japanese Finance Minister Satsuki Katayama. She said officials would monitor market movements closely with heightened urgency. Following Monday's 0.4% gain, USD/JPY extends its advance, last trading at 157.80, up 0.2% on the day.

GBP/USD fell about 0.3% on Monday, recording a second successive daily loss. Early Tuesday trading leaves the pair below 1.3330 and still under pressure. Market participants will closely examine Wednesday's UK August Budget announcement, including economic forecasts from the Office for Budget Responsibility (OBR).

Major progress from the forthcoming UK budget under Prime Minister Andy Burnham remains doubtful, according to Commerzbank’s Michael Pfister. He describes it as “unlikely to result in major progress,” observing that Burnham has “recently announced that significant changes would only occur following a potential re-election.” Even so, Pfister says “market participants are likely to be relieved that the presentation of the new budget is proceeding relatively calmly,” suggesting that a more measured approach to fiscal communication could support the Pound.

EUR/USD heads towards 1.1150 in early European trading on Tuesday, with selling pressure persisting for a fourth consecutive session.

Gold trades in a narrow range around $4,000 early Tuesday, following a modest advance on Monday.

AUD/USD ended Monday lower, although it found stability above 0.7000. Australia's September Consumer Price Index (CPI) release, due early in Wednesday's Asian session, could increase volatility in the pair.

Risk sentiment: key questions answered

How do "risk-on" and "risk-off" describe financial market sentiment?

Investors' willingness to accept risk over a given period is commonly described in financial markets as “risk-on” or “risk-off”. Optimism about the outlook characterises a “risk-on” environment, making investors more inclined to purchase risky assets. Concern about the future produces a “risk-off” environment instead. Investors then seek safety in lower-risk assets with a more dependable prospect of returns, even when those returns are relatively modest.

Which assets best indicate shifts in risk sentiment?

A positive growth outlook generally lifts equities and most commodities, apart from Gold, during “risk-on” periods. Stronger demand also supports the currencies of major commodity-exporting countries, while cryptocurrencies advance. By contrast, “risk-off” conditions favour bonds, particularly major government bonds, as well as Gold. Safe-haven currencies, including the Japanese Yen, Swiss Franc and US Dollar, also benefit.

Which currencies typically benefit from "risk-on" conditions?

Stronger economic activity leads investors to anticipate greater future demand for raw materials, which tends to lift commodity prices in “risk-on” markets. Economies that depend heavily on commodity exports for growth therefore tend to see their currencies strengthen. These include the Australian Dollar (AUD), Canadian Dollar (CAD) and New Zealand Dollar (NZD), alongside smaller FX currencies such as the Ruble (RUB) and South African Rand (ZAR).

Which currencies typically benefit from "risk-off" conditions?

During “risk-off” periods, the US Dollar (USD), Japanese Yen (JPY) and Swiss Franc (CHF) are the main currencies that tend to appreciate. Reserve-currency status supports the US Dollar, as does crisis-driven buying of US government debt. Investors view that debt as safe because the world's largest economy is unlikely to default. The Yen benefits from stronger demand for Japanese government bonds: domestic investors hold a large share and are unlikely to sell them heavily, even in a crisis. For the Swiss Franc, the attraction lies in Switzerland's strict banking laws, which provide enhanced protection for investors' capital.