$4,000 breached: Gold slides below key level; BoJ holds policy steady | Forex Today

30 October: Friday’s Market Briefing

Third-quarter Eurozone Gross Domestic Product (GDP) figures are due on Friday. The session’s economic calendar also includes preliminary German inflation data for October and the US third-quarter Employment Cost Index. Early trading is seeing heightened volatility as investors weigh the latest central bank decisions and macroeconomic releases, with US stock index futures closely watched. European Central Bank (ECB) and Federal Reserve (Fed) policymakers are also scheduled to speak.

As widely expected, the ECB kept its key interest rates on hold at Thursday’s October meeting. ECB President Christine Lagarde told the subsequent press conference that the Governing Council had considered whether a rate increase was appropriate. She added that headline inflation was expected to stay "well above target" over the coming quarters. Her hawkish tone helped EUR/USD recover from a decline towards 1.1100, leaving the pair higher on Thursday above 1.1150. It remains supported in Friday’s European morning, although deteriorating risk appetite is limiting gains and making 1.1200 difficult to overcome.

TMGM Analysis: Financial Market News, Economic Calendar & Market Insights

Euro outlook: ECB policy after December takes priority

Despite the ECB having “delivered the largely expected pause” at yesterday’s meeting, Commerzbank analysts caution that policy is far from running on autopilot. The bank says ECB President Christine Lagarde “made it clear that, in light of higher energy prices, the Governing Council had indeed discussed another rate hike” and “left the door open to a third rate increase this year in December.”

Commerzbank sees the broader inflation environment, rather than the next meeting alone, as the stronger influence on the Euro’s direction. For the currency, it argues, “the more important question is likely to be what happens after December,” adding that “much will depend on energy-price developments,” as these will be central to expectations for the ECB’s policy trajectory.

US Gross Domestic Product (GDP) expanded at an annualised 3.4% in the third quarter, above the market forecast of 3.2%, according to data from the United States (US). September’s core Personal Consumption Expenditures (PCE) Price Index, the Fed’s preferred inflation measure, rose 3.1% year on year, in line with analysts’ expectations.

A drop of more than 10% took Google parent Alphabet’s shares to their lowest level since April on Thursday. The company said artificial intelligence summaries in search were reducing advertising revenue and reported negative free cash flow of about $9 billion. By Friday’s European morning, Nasdaq Futures are trading about 2% lower on the day. The US Dollar Index is little changed near 101.80, while the benchmark 10-year US Treasury bond yield is broadly steady below 5%, following Thursday’s decline of more than 1%.

The Bank of Japan (BoJ) kept its short-term interest rate at 1.25%, announcing the decision during Asian trading after its two-day monetary policy review. At the post-meeting press conference, BoJ Governor Kazuo Ueda reiterated that the bank would continue increasing the policy rate and adjusting the degree of monetary easing as economic activity, prices and financial conditions develop. USD/JPY recovered after slipping towards 157.00 and was last trading almost flat at 157.55.

A score of 7.2/10 from FXS Speechtracker put Ueda’s remarks slightly below the historical baseline of 7.7/10. This signalled a mildly less confident tone, despite his clear acknowledgement that underlying CPI inflation is now broadly in line with the 2% target. His pledge to keep raising the policy rate and adjust monetary easing in response to changes in economic activity, prices and financial conditions conveyed a modest hawkish bias. Repeated references to accommodative financial conditions and government support for growth tempered that message.

Gold fell more than 1% on Thursday under heavy selling pressure, reversing a run of marginal gains over three consecutive days. The decline has continued, with the precious metal last trading near $3,980, about 1% lower on the day.

Gold recovery stalls: OCBC cites weak buying and risk of fresh lows

OCBC strategists point to a faltering recovery in gold "despite some easing in US Treasury yields and oil prices.” Their assessment is that “more notably, Gold’s inability to benefit from lower yields suggests that fresh buying interest remains limited, even as earlier liquidation pressures may be easing.” Technology shares are another concern: OCBC says “renewed weakness in technology equities also weighed on sentiment as it raises concerns over another bout of broader deleveraging.” The bank’s near-term stance remains guarded: “we remain cautious near term, with further consolidation or another test of recent lows not ruled out,” it says. It also highlights Friday’s Employment Cost Index, stressing that “the direction of equities, yields and USD will be important to watch.”

GBP/USD is maintaining its gains near 1.3400, trading higher after Thursday’s advance of about 0.4%.

Risk sentiment: key questions

Risk-on and risk-off: what do these financial market terms describe?

Investors’ willingness to accept risk over a given period is commonly described as “risk-on” or “risk-off”. Optimism about the outlook characterises a risk-on market, encouraging purchases of riskier assets. When sentiment turns risk-off, concerns about the future prompt investors to favour safety. They shift towards lower-risk assets offering a more dependable return, even if that return is relatively small.

Risk sentiment indicators: which assets matter most?

Rising equities and gains across most commodities, apart from Gold, typically accompany risk-on conditions as a favourable growth outlook supports prices. Stronger demand also lifts the currencies of major commodity-exporting economies, while Cryptocurrencies advance. Risk-off conditions favour Bonds, particularly major government Bonds, alongside Gold. Safe-haven currencies, including the Japanese Yen, Swiss Franc and US Dollar, also tend to benefit.

Risk-on conditions: which currencies tend to gain?

Commodity-linked currencies generally strengthen when investors favour risk. These include the Australian Dollar (AUD), Canadian Dollar (CAD) and New Zealand Dollar (NZD), as well as smaller FX currencies such as the Ruble (RUB) and South African Rand (ZAR). Their economies depend heavily on commodity exports for growth. Greater expected economic activity leads investors to anticipate stronger demand for raw materials, which tends to raise commodity prices during risk-on periods and support these currencies.

Risk-off conditions: which currencies tend to gain?

The US Dollar (USD), Japanese Yen (JPY) and Swiss Franc (CHF) are the main currencies that typically appreciate when investors turn risk-averse. The Dollar benefits from its role as the world’s reserve currency and from crisis-driven demand for US government debt. Investors regard that debt as safe because the world’s largest economy is unlikely to default. Demand for Japanese government bonds supports the Yen: a large share of these bonds is held by domestic investors who are unlikely to sell heavily, even during a crisis. For the Swiss Franc, strict Swiss banking laws provide the appeal of stronger capital protection for investors.