The softening in US August core PCE inflation (3.9% YoY vs previous 4.3%, 0.1% MoM vs previous 0.2%) failed to drive a sustained rebound in Wall Street last Friday, as Treasury yields stayed firm despite some paring in rate hike bets. While further progress on the core inflation front may offer room for the Federal Reserve (Fed) to hold off on its last rate hike, still-resilient personal income and spending (both 0.4% MoM), along with higher-than-expected final consumer inflation expectations, could have reinforced the narrative for high-for-longer rates.

Into the new week, a temporary resolution in the US government shutdown situation may provide some respite, which may allow sentiments to shift its focus onto upcoming US economic data, such as the US Institute for Supply Management (ISM) manufacturing purchasing managers index (PMI) release today. Key focus around the data may revolve around employment, where the fourth straight month of contraction is expected, while manufacturing prices is expected to show a lesser extent of contraction. Further comments from Fed Chair Jerome Powell may also be on the radar today, although his script may be unlikely to shift too significantly from the recent Fed meeting.

Following some profit-taking from oversold technical conditions, elevated Treasury yields continue to be supportive of the US dollar, with the formation of a bullish pin bar last Friday reflecting buyers still in control. The next resistance at the 106.84 level remains on watch to overcome, with its weekly Moving Average Convergence/Divergence (MACD) crossing above zero for the first time this year. On the downside, the 105.00 level serves as immediate support to hold. The latest Commodity Futures Trading Commission (CFTC) figures show that the US dollar's net aggregate positioning against G10 currencies has crossed into net-long territory for the second straight week.

Source: IG charts

Asia Open

Asian stocks look set for a mixed open, with Nikkei +1.54%, ASX -0.16% and NZX -0.36% at the time of writing. China and Hong Kong markets are closed for National Day today. There are some outperformance in Japan’s 3Q 2023 Tankan survey, more notably in large firms, but positive sentiments around the Nikkei 225 index may revolve around the Bank of Japan (BoJ) minutes.

Particularly, a continued dovish stance is displayed, whereby “even if the Bank were to terminate its negative interest rate policy, this can be considered as continuation of monetary easing if real interest rates remain negative”. There are also more clarity on a potential policy pivot guided to be around January-March next year, whereby the central bank may be able to determine if its “2% sustainable inflation” condition has been met.

The minutes seem to be well-received by the Nikkei, with the index moving higher to retest the Ichimoku cloud resistance on the daily chart. More positive follow-through may be needed, with a move back above the cloud may provide greater conviction for buyers. For now, its daily MACD has crossed below the zero mark as a reflection of broad downward momentum, while its RSI is still trading below the key 50 level, both of which may have to be overturned by buyers.

Source: IG charts

On another front, PMI data from China released over the weekend have been largely mixed. There were further signs of stabilising in the official data (52 vs previous 51.3), as the manufacturing read heads into expansionary territory for the first time since March 2023 (50.2 vs previous 49.7) while the services sector reversed higher for the first time (51.7 vs previous 51.0) since March this year as well. The resilience, however, was not mirrored in the Caixin composite readings (50.9 vs previous 51.7), which tracks sentiments from the small and medium-sized enterprises.

This week will bring about the Reserve Bank of Australia (RBA) rate decision on Tuesday, with market participants largely expecting the central bank to keep its cash rate on hold for the fourth straight meeting but are still unconvinced that the peak rate has been seen just yet. Much may depend on whether recent uptick in Australia’s August inflation is sufficient to prompt a more hawkish stance from the RBA.

The AUD/USD continues to trade in a range since August this year, with a retest of the upper bound at the 0.650 level last week failing to find any successful break. For now, its daily RSI continues to hang around its key 50 level as an indication of near-term indecision, awaiting cues from the RBA to provide more conviction moves. On the downside, the 0.636 level remains a key support to hold, failing which may pave the way to retest its October 2022 bottom at the 0.620 level next.

Source: IG charts

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