Markets Climb as Fed Signals Weigh on Alphabet, GBP/USD, and AUD/USD Ahead of Inflation Data | Daily Market Analysis

Key events:

• USA - Core CPI (MoM) (Sep)
• USA - CPI (YoY) (Sep)
• USA - CPI (MoM) (Sep)
• USA - Initial Jobless Claims
• USA - 30-Year Bond Auction

The S&P 500 closed higher on Wednesday as investors continued to analyze signals from the Federal Reserve regarding future interest rate moves, ahead of important inflation data and Tesla’s robotaxi event. The Dow Jones Industrial Average gained 431 points (1%), the S&P 500 rose 0.7%, and the NASDAQ Composite added 0.5%.

However, Alphabet shares dropped 2% following reports that the US Department of Justice (DOJ) is considering potential sanctions against Google's parent company. This comes in the wake of a landmark antitrust ruling that found Google guilty of abusing its dominant market position. The DOJ is weighing both behavioral and structural remedies, which could prevent Google from leveraging products like its web browser, app store, or operating system to unfairly benefit its search business over competitors. This development adds significant regulatory pressure on the tech giant.

The GBP/USD pair is showing a slight upward bias around 1.3075 during Thursday’s Asian session, though it remains near the one-month low touched previously. The US Dollar continues to consolidate its recent gains, driven by expectations of a 25 basis points (bps) rate cut by the Federal Reserve in November. These expectations were reinforced by the FOMC meeting minutes, which suggested that this potential rate cut would not set a firm path for future reductions. Elevated US Treasury bond yields, especially the 10-year yield above 4%, continue to support the USD, limiting gains for the GBP/USD pair.

Additionally, dovish comments from Bank of England Governor Andrew Bailey last week signaled that the BoE may accelerate its own rate-cutting cycle, further weighing on the British Pound. Traders are also waiting for upcoming US inflation data, which, along with Friday’s Producer Price Index (PPI), will influence expectations for the Fed's rate cut, impacting USD demand.

In light of these factors, Thursday’s BoE Credit Conditions Survey may provide short-term trading opportunities. However, the overall outlook suggests the GBP/USD pair is more likely to trend downward, with any rallies likely to be seen as selling opportunities. The pair seems poised to extend its pullback from the 1.3435 level, its highest since March 2022.

Meanwhile, the Australian Dollar has recovered slightly, breaking a five-day losing streak. However, the stronger USD, supported by Fed rate cut expectations, could weigh on the Aussie in the near term. Investor disappointment over China’s lack of additional economic measures also impacts the AUD, given China’s role as a key trading partner to Australia.

Traders are closely watching the upcoming US Consumer Price Index (CPI) report, expected to show a 2.3% year-on-year increase for September, with core CPI rising 3.2% year-on-year. A softer-than-expected reading could prompt a larger Fed rate cut, weakening the USD and potentially providing some support for AUD/USD.

The Japanese Yen remains range-bound, consolidating its recent losses against the USD, which reached its lowest point since mid-August. Japan's PPI data showed stronger-than-expected yearly growth for September, while concerns over escalating Middle East tensions are supporting safe-haven demand for the JPY. However, uncertainty over the Bank of Japan’s rate hike plans and strong USD demand ahead of US inflation data may limit JPY gains.

The EUR/USD pair remains in a tight range below mid-1.0900s, recovering from a two-month low. The Euro continues to struggle as expectations grow that the European Central Bank will cut rates by 25 bps at both remaining policy meetings this year. Geopolitical risks in the Middle East are also driving demand for the safe-haven USD, suggesting further downside for EUR/USD. However, traders are waiting for US inflation data before committing to further bearish positions.

Gold has edged higher during Thursday’s Asian session, halting a six-day losing streak. The USD is in a consolidation phase as traders await key US CPI data. This pre-data positioning is offering some support to gold prices.

However, the likelihood of a more aggressive Fed rate cut remains low, keeping US Treasury yields elevated, which could limit further gains for the non-yielding precious metal. A stronger buying momentum would be required to confirm that gold’s recent decline from its all-time high has ended.