Forex Today: Key central bank week opens with a modest improvement in sentiment

Markets look ahead on Monday, 26 October:

German business sentiment figures feature on Monday's European economic calendar, as the week begins with tentative improvement in risk appetite and a slight decline in crude oil prices. Attention later in the week will turn to policy meetings at major central banks: 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).

According to Reuters, Yemen's Houthis said on Sunday that attacks on Saudi Arabia's King Khalid Airport in Riyadh would continue. Their 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. Crude oil opened with a downward gap after the previous week's sharp rally, with a barrel of West Texas Intermediate (WTI) last trading more than 2% lower on the day.

US stock index futures are around 0.2% higher on the day as market sentiment improves. By contrast, the US Dollar (USD) Index is slightly weaker near 101.70. Having declined for three successive weeks, the benchmark 10-year US Treasury bond yield also remains lower on the day, below 5%.

October FOMC pause seen raising prospects of December Fed hike

TD Securities expects the Federal Open Market Committee (FOMC) to "keep rates on hold this week despite rising inflation risks," although its analysts believe "the chance of a surprise hike is higher than normal." Policymakers are nevertheless expected 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," which highlights that "inflation risks are still pertinent." Further price releases will therefore play a key role in the Fed's policy decisions, with TD Securities noting that "the evolution of inflation data will determine the extent and pace of hikes later in the cycle."

EUR/USD is trading within a tight range above 1.1200, having ended last week slightly lower.

GBP/USD secured a second successive weekly advance despite slipping slightly on Friday. Trading on Monday remains subdued, with the pair holding in a sideways range below 1.3400.

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

Gold has steadied just above $4,000 on Monday after shedding nearly 4% over the previous week.

Gold approaches another $4000 test for ETF and central bank demand

Despite continued pressure on gold from systematic selling, TD Securities analysts report ongoing "strong physical demand from ETFs and central banks." Whether official-sector and investment purchases can counter CTA-driven weakness remains important. As the bank puts it, 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 balance between these sources of demand and near-term selling.

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