Will the Fed pause?

Will the Fed pause? – Underlying US inflation increased more than expected in September, halting recent progress in easing price pressures.

The core consumer price index, which excludes food and energy costs, increased by 0.3% for a second consecutive month, breaking a trend of lower readings, according to figures from the Bureau of Labor Statistics released on Thursday. The three-month annualized rate rose by 3.1%, marking the highest increase since May, according to calculations by Bloomberg.

Economists consider the core gauge to be a more reliable indicator of underlying inflation compared to the overall CPI. This measure increased by 0.2% from the previous month, driven by increases in housing and food prices, which contributed to over 75% of the overall advance. Prices of goods also went up after consistently falling over the past year.

The higher-than-expected inflation figures, along with last week’s blowout US jobs report, will likely amplify the debate whether the Federal Reserve will opt for a small interest rate cut next month or pause after a large September reduction. Officials penciled in another half-point of cuts by year-end, and many have said they’re watching developments in the labor market.

Data ahead

During today’s US session, another round of significant economic figures will be released, potentially impacting the markets based on any surprises in the data.

After yesterday’s inflation data, the Fed Funds Futures are now indicating a probability of less than a 50-basis-point rate cut between the next two meetings. Markets are estimating an 85% chance of a 25-basis-point cut in the November meeting and a 98% chance of another 25-basis-point rate cut in the December meeting. Before the release of the US jobs report last Friday, markets were estimating a 75-basis-point rate cut between the November and December meetings.

DXY testing 103.0 resistance

The US Dollar Index continued to rise after the release of US inflation data, reaching as high as 103.17. However, it closed below the 103.0 resistance area at the end of yesterday’s trading. The inflation data reduced expectations for an aggressive approach to interest rate cuts by the Federal Reserve. Additionally, some members are leaning towards pausing at the next meeting.

In the meantime, the technical indicators are approaching overbought territory, which could be an early sign that the upward retracement is almost complete. However, confirmation is still needed. Today’s PPI data may act as a catalyst, while the next key resistance levels are at 103.25 and 103.75.

Gold holding above $2600

Gold rebounded in yesterday’s trading, rising to a high of $2630 after testing the $2605 support area. The upward momentum continued during today’s Asian session, reaching as high as $2645. This increase is attributed to growing tensions in the Middle East and the anticipation of a potential attack on Iran in the coming days.

Currently, if the price stabilizes above $2600 and $2630, it may indicate potential for further gains. The primary driving factor continues to be the tensions in the Middle East. If these tensions escalate further, it could lead to a new record high in the upcoming weeks. Conversely, any de-escalation might resume downward pressure, possibly retesting $2600 and even $2580 for now.

Aussie holding above 0.67

The AUDUSD pair has been declining for five consecutive trading days after hitting a peak of 0.6950 in September. It dropped as low as 0.67, which has proven to be a strong support level as the pair bounced off during yesterday’s trading. Although the technical indicators do not yet suggest an oversold condition or strong enough bullish momentum to confirm the end of the downtrend, the stability above 0.67 could be an early sign of a potential turnaround.

We will closely monitor the weekly close for potential indications of the end of the downward retracement. If the weekly close is above 0.67, it may suggest a positive trend. In that case, the next level of resistance to keep an eye on is 0.68 for now.

Prepared by Nour Hammoury, Chief Market Analyst at SquaredFinancial
Nour is an investor, independent market strategist, and financial advisor. He holds a BA in Finance and Banking Science from Al-Ahliyya Amman University and a CFTe in Economics from the International Federation of Technical Analysts. He has more than 15 years of experience in forex, stocks, and global economic developments, as well as central bank policies and intermarket analysis. He appears regularly on major international TV networks, such as BBC, Al-Jazeera, Al Hurra, CNBC, and Bloomberg, holding open discussions and sharing insights and readings of the markets and trends.

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