Forex Today: Crucial central bank week opens with slightly firmer sentiment

Monday, 26 October: the key market developments to watch.

Crude oil prices ease as the week begins. Risk appetite appears to be improving alongside the decline. Germany's business sentiment figures are on Monday's European economic calendar. Later this week, the focus turns to policy meetings at major central banks, including the Reserve Bank of New Zealand (RBNZ), the Bank of Canada (BoC), the Federal Reserve (Fed), the European Central Bank (ECB) and the Bank of Japan (BoJ).

Reuters reported that Yemen's Houthis said on Sunday they would continue attacks on Saudi Arabia's King Khalid Airport in Riyadh. The statement followed the kingdom's announcement, hours earlier, that flights had resumed despite repeated Houthi attacks. Separately, United States (US) President Donald Trump ruled out immediate military action against Iran, stating “there will not be a strike today,” according to Aljazeera. After surging the previous week, crude oil opened with a gap lower. West Texas Intermediate (WTI) was last trading more than 2% lower on the day.

US stock index futures are up about 0.2% on the day, signalling firmer market sentiment. The US Dollar (USD) Index, meanwhile, is slightly lower near 101.70. Following a third consecutive weekly decline, the benchmark 10-year US Treasury bond yield remains lower on the day, below 5%.

December Fed hike seen more likely if FOMC holds in October

TD Securities expects the Federal Open Market Committee (FOMC) to "keep rates on hold this week despite rising inflation risks," even though its analysts see "the chance of a surprise hike is higher than normal," and still expect policymakers to "prioritize patience and wait until December." The analysts argue that "a hold in October will make a December hike all the more likely," especially following the "upside surprise in September CPI," a reminder that "inflation risks are still pertinent." Looking further ahead, TD Securities says "the evolution of inflation data will determine the extent and pace of hikes later in the cycle," making forthcoming price data central to the Fed's policy decisions.

EUR/USD trades within a tight band above 1.1200, having ended the previous week slightly lower.

GBP/USD secured a second straight weekly gain despite a small decline on Friday. Monday's trading remains subdued, with the pair tracking sideways below 1.3400.

USD/JPY retains modest gains around 157.00 during Monday's European morning, following a decline of about 0.7% last week.

Gold steadies just above $4,000 on Monday after dropping nearly 4% over the previous week.

$4000 nears: Gold ETF and central bank demand faces fresh test

Despite continued pressure on Gold from systematic selling, TD Securities analysts say they still observe "strong physical demand from ETFs and central banks," in the market. The bank says prices "drifting back toward the $4000/oz level yet again will be another test if these flows can offset near-term systematic flows," highlighting the role of official-sector and investment demand in offsetting CTA-driven declines.

AUD/USD consolidates above 0.7000 following last week's advance of more than 1%. Australia's September inflation release, due early in Wednesday's Asian session, could increase volatility in the pair.