30.09.2022: USD takes breather; stocks drop following Fed hawkish remarks. USDX, USD/JPY, AUD/USD

Sentiment in global markets is still bearish due to the escalation of geopolitical tensions and the growing risks of a recession. The Fed’s monetary policy has a big impact on stocks, especially high-tech companies with mega capitalization.

Some internal events or economic data also affect the market sentiment of some countries. Nevertheless, the world's largest economy and the main reserve currency are the driving force on Forex. After the BoE intervention this week, the UK government bond yields have been rising for some time.

However, today, US Treasuries resumed growth. The volatility index, also known as the fear gauge, signals market panic. It surged to a high above 33.

The index reflects market expectations for the volatility of the S&P 500 for the next 30 days. When the VIX index rises above 40-45, it means that market fear is growing and investors are getting rid of risky assets.

What exactly scared investors and triggered risk aversion? The answer is a batch of recent hawkish remarks from Fed policymakers.

President of the San Francisco Fed Mary Daly noted yesterday that markets are “trying to get their footing,” with investors assessing a myriad of risks.

President of the Cleveland Fed Loretta Mester offered an even more aggressive outlook. She said that the Fed misjudged the persistence and scale of inflation. For this reason, she does not see a case for slowing rate hikes right now.

President of the St. Louis Fed James Bullard expressed a similar opinion. He thinks that the rates will have to remain higher for longer than previously expected. Such hawkish rhetoric has intensified market uncertainty.

Usually, the greenback climbs following the Fed’s hawkish comments. However, it has been rapidly declining for the second day in a row. It has already dipped below its yesterday's highs of 113.28. Shortly after, it dropped to 111.69 versus its main rivals.

On Thursday, the Bank of England intervened in the bond market for the second time to buy long-dated UK government bonds. As a result, the British currency notched its best weekly performance against the US dollar in 2.5 years. In the Asian session, the US dollar slipped into the downward range of 111.58–112.22.

The yen has also regained ground thanks to the BoJ intervention. Last week, the regulator decided to buy back the national currency for the first time since 1998 when its exchange rate against the US dollar reached a new 24-year high of 145.90

Yesterday, Minister of Finance Shinichi Suzuki signaled his readiness to conduct another intervention if there are sharp moves.

However, today, the yen is hovering again near the threshold level despite the relatively weak US dollar. In the Asian session, the dollar/yen pair remained almost unchanged, flirting with the critical level of 145. It was moving in the sideways corridor of 144.18-144.77.

To some extent, the risk-off sentiment is also bolstering the yen as a safe-haven asset. The dollar/yen pair has already advanced to 144.29. The swing highs and lows are also gradually moving up.

Yet, a one-time intervention will hardly change the trend. Besides, the divergence in the monetary policies of the Fed and the BoJ will continue to adversely affect the yen in the long term.

The Australian dollar is also drifting higher on the last trading day of September. This week, the Aussie hit an all-time low of 0.6360 even despite the RBA’s upcoming meeting.

Hot weather and lockdowns have pushed China’s Manufacturing PMI index to a 4-month low. According to the fresh reports, Manufacturing and PMI Services indices contracted once again.

So, a rise in the Australian dollar is mainly associated with the weakening US dollar. Today, the AUD/USD pair managed to rebound from 0.6446 and rise to 0.6509.

The pair is still trying to break through to the resistance level of 0.6500. It means that highs and lows are located higher. The price may reach 0.6600.

Even if the pair climbs higher, the main trend will remain bearish. If bears enter the market, the Aussie may retreat to 0.6400 and the low of September 28. Now, the pair is trading in the upward channel of 0.6476-0.6522.


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