Geopolitical Tensions and Fed Outlook Boost Safe-Haven Demand (10.14.2024)

The EUR/USD declined to 1.0920 as geopolitical tensions in the Middle East and China-Taiwan conflicts weigh on risk sentiment, boosting demand for the US dollar. 

Expectations of a 25 basis point rate cut by the Federal Reserve in November increased to 87% after the US PPI data. Meanwhile, the euro faces pressure from a dovish ECB outlook. USD/JPY is approaching August lows due to a stronger dollar, while gold holds steady around $2,655, supported by safe-haven demand. GBP/USD dropped to 1.3060 amid safe-haven flows and dovish BoE signals, and silver rallied to $31.30, benefiting from geopolitical risks and expectations of slower Fed rate cuts.

EUR/USD Declines as US PPI Data and ECB Dovish Outlook Weigh on Euro

The EUR/USD pair continued its decline, nearing 1.0920 during the early Asian session on Monday. Risk aversion stemming from rising geopolitical tensions in the Middle East and conflicts between China and Taiwan has put selling pressure on riskier currencies like the euro. On Monday, a spokesperson for the US Department of State expressed serious concerns over the People's Liberation Army's military exercises in the Taiwan Strait and around Taiwan, stating they would closely monitor the situation and collaborate with allies on shared concerns. Any signs of escalating tensions could drive safe-haven flows toward the dollar, putting additional pressure on the EUR/USD pair. Traders are anticipating a 25 basis point rate cut from the Federal Reserve in November, following Friday's US Producer Price Index (PPI) data. According to the CME FedWatch Tool, the probability of this rate cut has risen to approximately 87%, up from 83% before the PPI report. Meanwhile, the euro is facing challenges as the European Central Bank (ECB) is expected to lower interest rates further in its remaining monetary policy meetings this year. The ECB's dovish outlook has been reinforced by a quick decline in inflationary pressures within the Eurozone and a 'fragile' economic recovery.

In the pair, the first support level is at 1.0900. If this level is breached, the next supports to watch will be 1.0870 and 1.0830. On the upside, the first resistance is at 1.0950; if this level is surpassed, the next targets will be 1.1020 and 1.1060.

JPY Weakens, Approaches August Lows Amid Dollar Rally

On Monday, the Japanese yen fell below 149 per dollar, approaching its lowest point since early August. This decline was driven by a strengthening dollar, fueled by solid expectations that the Federal Reserve’s decision not to implement further significant rate cuts in its upcoming meetings this year. The yen's slide also mirrored the weakness in the yuan, following China's recent fiscal stimulus announcement, which left investors uncertain about the details and scale of the package. In Japan, Prime Minister Shigeru Ishiba suggested earlier this month that the current economic climate may not justify additional rate hikes. However, this statement was later softened by other officials, including Chief Cabinet Secretary Yoshimasa Hayashi, who clarified that Ishiba did not make any specific requests to Bank of Japan Governor Kazuo Ueda during their discussions.

From a technical perspective, the first resistance level is at 149.60. If this level is surpassed, the next targets will be 151.15 and 153.15. On the downside, the initial support is at 148.65; if this level is breached, the next support levels to watch will be 147.30 and 145.40.

Gold Holds Steady at $2,655 as Markets Assess Fed Rate Outlook

On Monday, gold remained steady at around $2,655 per ounce after a 1% increase in the previous session. Markets are still evaluating the Federal Reserve's interest rate outlook considering recent inflation data. Reports revealed that US producer prices remained unchanged in September, alongside a rise in jobless claims, which raises questions about the resilience of the US labor market to higher interest rates. Although headline inflation decreased less than expected, core inflation rose more than anticipated. Currently, the likelihood of a 25 basis point cut to the fed funds rate in November is at 87%. Investors are also awaiting further economic data, such as retail sales figures and comments from several Fed officials, for more insights. Additionally, ongoing geopolitical tensions in the Middle East are enhancing gold's appeal as a safe haven.

Technically the first support level is at 2,645. If this level is breached, the next supports to watch will be 2,625 and 2,600. On the upside, the initial resistance is at 2,665; if this level is surpassed, the next targets will be 2,685 and 2,700.

GBP/USD Slides to 1.3060 Amid Safe-Haven Flows and Geopolitical Risks

The GBP/USD pair is trading with slight losses around 1.3060 during the early European session on Monday. Safe-haven flows driven by escalating geopolitical risks are supporting the dollar and pulling the pair lower. Investors are awaiting UK employment data which is scheduled for release on Tuesday. On Friday, the US Bureau of Labor Statistics reported that the annual Producer Price Index (PPI) rose by 1.8% yearly in September, slightly down from a 1.9% increase in August, but above the market expectation of 1.6%. Additionally, the core PPI increased by 2.8% yearly while the core PPI rose by 0.2%. Federal Reserve officials have shifted their focus from combating inflation to maintaining a healthy job market, a key aspect of their dual mandate. However, a strong jobs report in September, along with reduced expectations for a 50 basis point rate cut in November, could strengthen the dollar against the British pound. For the pound, dovish comments from Bank of England (BoE) Governor Andrew Bailey, suggesting that the central bank might adopt a more aggressive stance on rate cuts, are weighing on the currency. Markets are pricing in a 90% chance of a rate cut by the BoE in November, with the Monetary Policy Committee (MPC) set to meet on November 7 to make their decision.

For GBP/USD, the initial support lies at 1.3040, followed by 1.3000 and 1.2920 below. On the upside, the first resistance is at 1.3160, with subsequent levels at 1.3220 and 1.3250 if the pair breaks above this resistance.

Silver Rallies on Safe-Haven Demand Amid Rising Geopolitical Tensions

Silver prices (XAG/USD) are on a three-day winning streak, trading around $31.30 per troy ounce during the Asian session on Monday. The metal is benefiting from safe-haven demand amid escalating geopolitical tensions. On Sunday, Hezbollah claimed responsibility for a drone attack in north-central Israel that resulted in the deaths of at least four Israeli soldiers and injured over 60 others, making it one of the deadliest incidents since the conflict began last October, according to CNN. Additionally, China commenced military drills in the Taiwan Strait, prompting a US Department of State spokesperson to express serious concerns about the People's Liberation Army's actions. In turn, Taiwan's Defense Ministry stated, "We will not escalate conflict in our response." Silver, as a non-yielding asset, may be gaining support from increasing expectations that the Federal Reserve will slow the pace of interest rate cuts more than previously thought. Last week’s data indicated that US producer prices remained stable in September, coupled with a rise in jobless claims, which undermined perceptions of the resilience of the US labor market to higher interest rates. According to the CME FedWatch Tool, markets are pricing in an almost 87% chance of a 25 basis point rate cut in November, with no expectations for a 50 basis point reduction. Lower interest rates enhance silver's appeal for investors seeking better returns, as the opportunity cost of holding non-yielding assets diminishes.

From a technical perspective, the first resistance level to watch is at 31.80. If silver breaks above this level, the next resistance levels to watch will be 32.10 and 33.00, respectively. On the downside, the initial support level is at 31.20, with subsequent support levels at 30.50 and 29.90.