Forex Today: Choppy action continues ahead of key PMI data

Here is what you need to know on Friday, October 23:

Major currency pairs remain within their weekly ranges in the European morning on Friday as investors await preliminary October Purchasing Managers' Index (PMI) reports from Germany, the Eurozone, the United Kingdom (UK) and the United States (US).

The US Dollar (USD) Index stages a rebound but remains below 102.00 after posting marginal losses on Thursday. Although the risk-averse market atmosphere helped the USD limit its losses, the sharp decline seen in US Treasury bond yields weighed on the currency. The benchmark 10-year US Treasury bond yield lost more than 3% on Thursday and dropped below 5% for the first time in a month. Early Friday, the 10-year yield rebounds but remains slightly below 5%. Meanwhile, US stock index futures trade mixed after the Nasdaq Composite lost nearly 3% on Thursday and the S&P 500 fell more than 1%.

Defensive currencies gain favour as US yield curve signals subtle regime shift

Analysts at ING argue that recent market moves point to a “subtle regime shift,” with “higher energy prices no longer mean higher rates forever; instead, the long end is starting to express a little more fear about growth.” In this backdrop, they suggest “this environment probably favours a little more outperformance of the defensive currencies over commodity currencies.” However, ING cautions that “until the rock-solid short-end of the US yield curve starts to buckle, it is hard to make the case that the Dollar needs to fall across the board,” keeping the US currency underpinned even as growth concerns become more evident further out the curve.

The UK's Office for National Statistics reported on Friday that Retail Sales contracted by 0.4% on a monthly basis in September. This print followed the 0.7% growth recorded in August and came in worse than the market expectation for a decrease of 0.1%. GBP/USD largely ignored this print and was last seen moving sideways, slightly below 1.3400.

The data from Japan showed earlier in the day that the National Consumer Price Index rose by 2.1% on a yearly basis in September, following the 1.9% increase posted in August. Additionally, Jibun Bank Manufacturing PMI retreated to 53.3 in October from 54.1 in September, while the Services PMI improved to 52 from 51.3 in this period. After losing more than 0.8% on Thursday, USD/JPY rebounds and trades near 157.00, gaining about 0.2% on the day.

In Australia, S&P Global Composite PMI dropped to 47.7 in October's flash estimate from 51.3 in September, pointing to a contraction in the private sector's business activity. AUD/USD stays relatively quiet despite the disappointing data and fluctuates above 0.7020.

EUR/USD closed in negative territory on Thursday but managed to stabilize above 1.1200 early Friday.

Gold continued to stretch lower in the Asian session after losing about 2.8% on Thursday and touched its weakest level in three months below $4,000. In the European morning on Friday, Gold holds slightly above this level but struggles to gather recovery momentum.

Gold shrugs off US equity rout as focus shifts to oil and inflation

Analysts at ING highlight that gold prices "failed to benefit from yesterday's equity sell-off and the significant fall in US Treasury yields, with the 10-year yield falling back below 5%." Instead of drawing safe-haven support, they note that "gold prices came under pressure." According to ING, the market appears "more focused on higher oil prices and what it could mean for inflation — and ultimately central bank policy," suggesting that shifting expectations around the policy response to energy-driven price pressures are currently exerting a stronger influence on bullion than moves in equities or US yields.