Forex Today: US Dollar remains steady as markets await mid-tier data releases and FOMC meeting

What is on the market radar for Tuesday, 27 October?

Caution prevails across markets on Tuesday after a volatile session on Monday. Despite the benchmark 10-year US Treasury bond yield holding below 5%, the US Dollar (USD) remains firm against other major currencies. On the US data front, September Durable Goods Orders and New Home Sales are due, along with regional manufacturing surveys and the Conference Board's October Consumer Confidence Index. Late Tuesday also marks the start of the Federal Open Market Committee's (FOMC) two-day policy meeting.

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

The USD Index ended Monday higher, although sustained upward momentum proved elusive. Gains on Wall Street, alongside declining crude oil prices, signalled an improvement in market sentiment. In early Tuesday trade, the USD Index holds modest gains above 102.00, while US stock index futures edge lower.

Following Monday's decline of about 2%, a barrel of West Texas Intermediate (WTI) is trading slightly higher on the day. According to Reuters, the Saudi-led coalition reported early Tuesday that air defences had intercepted and destroyed four drones launched by the Houthis towards Saudi Arabia's southern region.

How Has the US Dollar Performed This Week?

This week's percentage moves in the US Dollar (USD) against the major currencies listed are set out below. The Swiss Franc recorded the largest decline against the US Dollar.

	USD	EUR	GBP	JPY	CAD	AUD	NZD	CHF
USD		0.49%	0.33%	0.47%	-0.16%	0.27%	0.06%	0.50%
EUR	-0.49%		-0.18%	-0.05%	-0.68%	-0.30%	-0.50%	-0.06%
GBP	-0.33%	0.18%		0.04%	-0.53%	-0.12%	-0.26%	0.09%
JPY	-0.47%	0.05%	-0.04%		-0.58%	-0.26%	-0.37%	-0.06%
CAD	0.16%	0.68%	0.53%	0.58%		0.36%	0.15%	0.62%
AUD	-0.27%	0.30%	0.12%	0.26%	-0.36%		-0.19%	0.04%
NZD	-0.06%	0.50%	0.26%	0.37%	-0.15%	0.19%		0.41%
CHF	-0.50%	0.06%	-0.09%	0.06%	-0.62%	-0.04%	-0.41%

Percentage movements between the major currencies are displayed in the heat map. Select the base currency in the left-hand column and the quote currency in the top row. To read USD (base)/JPY (quote), for instance, choose the US Dollar on the left and follow that row across to the Japanese Yen; the intersecting cell gives the percentage change.

Will the Fed hold in October as BNY eyes December tightening risks?

An October rate pause remains the expectation of BNY Markets strategists, consistent with broader market pricing. They say that "in line with the market, we don’t foresee a rate hike at the October FOMC tomorrow and prefer to place our expectations for further tightening on the December meeting." Explaining their assessment, they add that, "based on Fed commentary and a steady, if sticky, inflation outlook, we don’t think the weight of the Committee will fall on the hawkish side."

On Tuesday, Japanese Finance Minister Satsuki Katayama reiterated that officials would watch market movements with heightened urgency, saying the government stood ready to act decisively in the foreign exchange market. Following Monday's 0.4% advance, USD/JPY extends its gains, last trading at 157.80, up 0.2% on the day.

GBP/USD registered a second successive daily decline on Monday, shedding about 0.3%. Selling pressure persists early Tuesday, with the pair trading below 1.3330. Market participants will closely examine Wednesday's August Budget announcement from the UK, including the economic projections drawn up by the Office for Budget Responsibility (OBR).

With the UK budget under Prime Minister Andy Burnham approaching, Commerzbank’s Michael Pfister warns it is “unlikely to result in major progress,” pointing out that Burnham has “recently announced that significant changes would only occur following a potential re-election.” Even so, Pfister believes that “market participants are likely to be relieved that the presentation of the new budget is proceeding relatively calmly,” supporting the view that a more measured approach to fiscal communication could underpin the Pound.

EUR/USD heads towards 1.1150 in early European trading on Tuesday, extending bearish pressure into a fourth consecutive trading day.

Gold is holding around $4,000 in sideways trading early Tuesday, following modest gains on Monday.

AUD/USD managed to find stability above 0.7000 despite ending Monday lower. Australia's September Consumer Price Index (CPI) release, due early in Wednesday's Asian session, could increase volatility in the pair.

Risk sentiment: key questions answered

How do "risk-on" and "risk-off" describe financial market sentiment?

Investors' willingness to accept risk over a given period is commonly described in financial markets as “risk-on” or “risk-off”. Optimism about the future characterises a “risk-on” market, encouraging purchases of riskier assets. Conversely, concerns about the outlook prompt investors in a “risk-off” market to ‘play it safe’. They favour lower-risk assets offering greater certainty of a return, even if that return is relatively modest.

Which assets offer the clearest signals of changing risk sentiment?

A positive growth outlook generally lifts equities and most commodities, apart from Gold, during “risk-on” periods. Stronger demand also supports the currencies of major commodity-exporting countries, while cryptocurrencies advance. When sentiment turns “risk-off”, bonds typically rise, particularly major government bonds. Gold performs well too, alongside safe-haven currencies including the Japanese Yen, Swiss Franc and US Dollar.

Which currencies tend to benefit from "risk-on" markets?

Currencies commonly supported by “risk-on” conditions include the Australian Dollar (AUD), Canadian Dollar (CAD) and New Zealand Dollar (NZD), as well as minor currencies such as the Ruble (RUB) and South African Rand (ZAR). Their economies depend heavily on commodity exports for growth. As investors anticipate stronger economic activity and, consequently, greater future demand for raw materials, commodity prices tend to increase during risk-on periods, supporting these currencies.

Which currencies tend to gain when markets turn "risk-off"?

During “risk-off” periods, the US Dollar (USD), Japanese Yen (JPY) and Swiss Franc (CHF) are the major currencies that typically strengthen. The US Dollar benefits from its status as the world's reserve currency and from investors buying US government debt during crises. That debt is regarded as safe, as 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 unlikely to sell them even during a crisis. For the Swiss Franc, the attraction lies in Switzerland's strict banking laws, which provide investors with greater capital protection.