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In a week marked by a decrease in US bond yields, global indices, commodity currencies, and select emerging market currencies have witnessed a strong resurgence. This rebound is a direct result of investors reevaluating the Federal Reserve’s stance on interest rate cuts. Thus, diverging from the previously held belief in the “higher-for-longer” narrative.
Fed Rate Hike Uncertainty Spurs Market Rebound
The recent NFP data has played a pivotal role, indicating a soft economic landing, thereby reducing the likelihood of a December Fed rate hike that could have threatened the bond market’s rally.
EUR/USD and AUD/USD Dynamics
EUR/USD has been impacted by the Eurozone’s persistent underperformance, as the European Central Bank signals no interest rate hikes. Meanwhile, a positive risk sentiment and an expected rate hike by the Reserve Bank of Australia have bolstered the Australian dollar’s recovery. Thus, aligning with the Fed’s pause in rate hikes. If the “higher-for-longer” narrative continues to fade, AUD/USD may become more attractive than EUR/USD. Conversely, should US economic resilience persist, shorting EUR/USD might outweigh AUD/USD’s downside.
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The direction of near-term bond yields, influencing markets like EUR/USD, AUD/USD, and gold, hinges on today’s US jobs data. The forecast for the October nonfarm payrolls report +180K, with potential revisions to last month’s +336K figure being of significant importance. Wage growth at +0.3% month-on-month may reduce the year-on-year rate to 4.0%, while the unemployment rate is expected to remain steady at 3.8%.
Later today, the release of ISM services PMI data could have a notable impact on the dollar if it significantly deviates from expectations, with expectations hovering around last month’s 53.6. The upcoming highlight in US data is the release of UoM Consumer Sentiment data on Friday.
Market’s Belief in the Fed’s Policy Shift
The October jobs report, featuring the addition of 150,000 new jobs, steers clear of a negative NFP headline and provides further evidence for a data softening scenario. The October payroll figures, coupled with upcoming inflation updates. In addition to various other indicators for the forthcoming policy meeting. Thus, reinforce the market’s belief that the Fed’s tightening cycle has concluded, potentially boosting bond, currency, and stock markets.
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