Forex Today: Sentiment brightens modestly as pivotal central bank week gets under way

What is on the market radar for Monday, 26 October?

Risk appetite appears to be improving as the week gets under way, with crude oil prices edging down. Germany's business sentiment figures are due on Monday as part of the European economic calendar. As the week progresses, the focus 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).

Crude oil opened with a downward gap after the previous week's sharp rally, with West Texas Intermediate (WTI) last trading more than 2% lower on the day. On Sunday, Yemen's Houthis said they would continue targeting Saudi Arabia's King Khalid Airport in Riyadh, according to Reuters. Their announcement followed, by a few hours, the kingdom's statement 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.

Improved sentiment is showing through in US stock index futures, which are up about 0.2% on the day. By contrast, the US Dollar (USD) Index is slightly lower, trading near 101.70. The benchmark 10-year US Treasury bond yield also remains lower on the day, below 5%, having declined for the third week in a row.

Could FOMC patience in October raise the chances of a December Fed hike?

A December rate increase would become more likely if the Federal Open Market Committee (FOMC) leaves policy unchanged in October, in the view of TD Securities. Its analysts expect the committee to "keep rates on hold this week despite rising inflation risks," although they acknowledge that "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." With "the evolution of inflation data will determine the extent and pace of hikes later in the cycle," TD Securities points to forthcoming price readings as a crucial influence on the Fed's next policy decisions.

EUR/USD is trading within a tight band above 1.1200, following a modest decline over the previous week.

GBP/USD is moving sideways below 1.3400 in subdued Monday trading. Despite a slight decline on Friday, the pair ended the week higher for the second week running.

USD/JPY is holding on to 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.

Can ETF and central bank Gold demand withstand another test near $4000?

Systematic selling continues to weigh on Gold, although TD Securities analysts report "strong physical demand from ETFs and central banks." According to the bank, 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 role of official-sector and investment demand in offsetting CTA-driven pressure.

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