S&P 500 Surges Amid Chip Stock Rally, Currency Pairs Fluctuate as Investors Eye Inflation Data | Daily Market Analysis

Key events:

• Eurozone - ECB's Lane Speaks
• USA - Core PCE Price Index (MoM) (Aug)
• USA - Core PCE Price Index (YoY) (Aug)
• USA - Michigan Consumer Sentiment (Sep)
• USA - FOMC Member Bowman Speaks

The S&P 500 surged to a new record close on Thursday, propelled by a boost in chip stocks, led by Micron, and stronger-than-expected economic data that lifted market sentiment.

The S&P 500 rose 0.5% to a record of 5,743.73, while the NASDAQ Composite gained 0.6%, and the Dow Jones Industrial Average climbed 280 points, or 0.7%.

The GBP/USD pair moved lower during Friday’s Asian session, retreating from the prior day’s high near 1.3435 - levels last seen in March 2022. The pair slipped below 1.3400, as the US Dollar saw a modest uptick, though a significant corrective pullback remains unlikely.

The US Dollar regained ground, recovering some of the previous day's losses ahead of crucial inflation data, specifically the Personal Consumption Expenditure (PCE) Price Index, due later today. Additionally, increased expectations for more aggressive Federal Reserve rate cuts, alongside positive market sentiment, could limit the upside for the safe-haven USD.

Despite Federal Reserve officials' attempts to downplay the likelihood of more aggressive policy easing, markets are still pricing in the possibility of a notable rate cut in November. This has overshadowed Thursday’s positive US economic data, likely tempering further gains for USD bulls and providing some support for the GBP/USD pair.

Global risk appetite remains buoyed by hopes that interest rate cuts will boost global economic activity. China’s People’s Bank also implemented stimulus measures, including reducing the seven-day repo rate from 1.7% to 1.5% and cutting the Reserve Requirement Ratio (RRR) by 50 basis points, spurring demand for riskier assets.

Additionally, expectations that the Bank of England will move more slowly than the US in cutting rates may continue to support the British Pound, potentially limiting losses in the GBP/USD pair. As a result, stronger selling pressure may be necessary to confirm a near-term top for the pair, which remains on track to end the week positively.

The Japanese Yen continued its downward trend for the third consecutive session following the release of Tokyo’s Consumer Price Index (CPI) data. The JPY faces challenges as markets speculate on the Bank of Japan’s next rate hike.

Tokyo’s CPI rose 2.2% year-on-year in September, down from 2.6% in August. The CPI excluding fresh food and energy held steady at 1.6%, while the CPI excluding fresh food increased by 2.0%, as expected.

The Australian Dollar weakened against the US Dollar on Friday, pressured by steady US Treasury yields. However, the downside for the risk-sensitive AUD may be limited as news of additional Chinese stimulus measures, Australia’s largest trading partner, supported global market sentiment.

During a visit to China, Australian Treasurer Jim Chalmers held constructive talks with China’s National Development and Reform Commission (NDRC), highlighting China’s economic slowdown as a drag on global growth, but welcomed its recent stimulus measures as a "positive step."

The NZD/USD pair saw selling pressure around the 0.6335 level during the Asian session, pulling back from the previous day’s gains. Currently trading near 0.6300, down 0.30% for the day, it remains close to the year-to-date high.

The US Dollar inched higher within its recent trading range as investors reposition ahead of the release of the PCE Price Index, a key factor likely to influence the NZD/USD pair. The inflation data is expected to provide insight into the Federal Reserve’s next policy move, impacting near-term USD price action.

Heading into the data release, expectations for further aggressive Fed rate cuts could keep the US Dollar range-bound near recent lows. Markets currently price in over a 50% chance of another large rate cut at the upcoming FOMC meeting in November. This sentiment, along with Thursday’s solid US economic data, could cap further USD gains.

Investors continue to welcome China's stimulus actions, including the decision to reduce the seven-day repo rate to 1.5% and lower the Reserve Requirement Ratio by 50 bps. These measures, combined with hopes for global economic growth, have fueled a risk-on rally in global equity markets. As a result, caution is advised before anticipating further depreciation in the NZD/USD pair.

Gold prices dipped slightly during the Asian session on Friday but lacked any strong follow-through, remaining close to the all-time high reached the previous day. The US Dollar found some buyers, recovering part of its earlier losses ahead of the PCE inflation data. This, alongside positive market sentiment, created resistance for the safe-haven metal amid overbought technical conditions.

However, expectations of aggressive policy easing by the Federal Reserve should limit any significant USD gains. In addition, ongoing geopolitical tensions, particularly in the Middle East, continue to support traditional safe-haven assets like gold, helping to prevent a more substantial decline. Investors are likely to wait for the US inflation data release, which could shape the Fed’s next policy move and offer fresh direction for non-yielding assets like gold.