Investing.com – The news of additional Chinese stimulus proved a clear fillip for risky assets, noted UBS, and has provided an additional reason to maintain a long position in the Australian dollar.

At 07:55 ET (11:55 GMT), fell 0.3% to 0.6872, drifting lower Wednesday, but the pair is still close to 2% higher following the US Federal Reserve’s announcement of a start to its rate-cutting cycle with a 50 basis-point reduction.

fell 0.4% to 1.6288, down close to 1% over the course of the last week.

“The market continues to stick tight to the idea that further 50bp Fed cuts are likely this year, despite the Fed’s SEP [Summary of Economic Projections] not making that a baseline,” analysts at UBS said, in a note. 

“This contrasts strongly with the rest of G10 where rate cuts are expected to be more cautious (eg euro area and UK) or delayed (eg Australia) or not anticipated at all (eg Japan).”

Until now, UBS’s forecasts, such as its end-2024 AUD/USD 0.7000 target, had incorporated no upside expectations from China, and were instead based more on domestic Australian rates resilience given relatively high inflation and the recent fiscal boost. 

As such, the surprise announcement of a monetary package designed to support both property and equity markets in China presents an extra upside opportunity by encouraging divergence sentiment. 

“We don’t dispute the common assertion that to really move China’s markets and economy sustainably towards a better trajectory a fiscal package is also likely to be needed,” UBS added. “But, from our perspective, what matters more near term is simply that the market has been so uniformly bearish on China’s prospects that a tactical rally in Chinese assets and related commodities such as iron ore can be very helpful for the G10 beta currencies.”

In the case of AUD, UBS has noted a reluctance to own the currency from investors who feel it cannot rally sustainably as long as a weak China growth threat looms and commodity prices are under pressure. 

“Given AUD resisted this view pretty easily when the news flow was in this direction, the upside could be higher even beyond our target if the China stimulus story goes beyond stopping out shorts and instead establishes some persistence and gathers more followers,” UBS added. 

The bank expects AUD to continue to outperform on the crosses, “with our original EUR/AUD target of 1.62 now close and our year-end call of 1.60 not a stretch at all.”

Investing.com – The U.S. dollar weakened Wednesday, adding to the previous session’s losses, with the euro benefiting despite signs of economic weakness in the eurozone. 

At 04:00 ET (09:00 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.1% lower to 100.080, after falling more than 0.5% in the previous session, its largest one-day percentage fall in a month.

Dollar continues to fall 

The U.S. dollar has struggled for friends after the started its rate-cutting cycle with a hefty 50 basis-point reduction earlier this month.

Data on Tuesday showed U.S. unexpectedly fell in September, raising concerns about further growth in the largest economy in the world, especially as the labor market shows signs of contracting.

“In a surprise move yesterday, US consumer confidence was much weaker than expected,” said analysts at ING, in a note. “The market is very sensitive to this theme since the US consumer has been so resilient for so long.”

Markets are now pricing in a 59.5% chance of a 50-basis-point rate cut at the Fed’s next policy meeting, up from just 37% a week ago, according to the CME FedWatch tool.

Euro close to 13-month high

In Europe, traded 0.1% higher to 1.1188, hovering near a 13-month high hit last month with the euro benefiting from the dollar weakness despite data pointing to economic weakness in the eurozone.

“There is very little on the European calendar today, so EUR/USD range trading looks likely. But the fact that EUR/USD is holding above 1.1100 is encouraging for modest EUR/USD bulls like ourselves,” added ING.

traded 0.1% lower to 1.3394, falling back from levels not seen since March 2022.

Sterling has received support as the Bank of England is widely seen as unlikely to be as aggressive with its rate cuts this year when compared to the Federal Reserve.

Bank of England’s Megan Greene is set to speak later in the session, and her comments will be studied for further clues over the timing of monetary easing from the UK’s central bank.

rose 0.1% to 10.1041, ahead of the latest policy-setting meeting by Sweden’s .

The central bank is widely expected to cut rates by 25 basis points later in the day, but Riksbank Governor Erik Thedeen hasn’t taken the possibility of a half-point cut off the table.

Yuan close to record levels

traded 0.1% lower to 7.0238, falling close to its lowest level since May 2023 after Beijing announced a slew of stimulus measures on Tuesday, including a cut to banks’ reserve requirements, as well as lower mortgage rates.

rose 0.4% to 143.81, while fell 0.2% to 0.6878, just below a 19-month high after rallying sharply in the prior session.

data released on Wednesday showed inflation fell to a three-year low in August, while declines in core inflation were less pronounced. 

The held interest rates steady on Tuesday, and said that while inflation was expected to fall in the near-term, it only expected price pressures to sustainably reach its target range by 2026.

Investing.com — The European Central Bank and Bank of England will likely adopt “similar” upcoming monetary policy stances, although the BoE is tipped to take a slightly more hawkish approach, according to analysts at UBS.

In a note to clients, the analysts added the economic situation in both regions is “fairly similar, with a slight tilt toward strength in the latter and weakness in the former.”

For these reasons, they estimated that the euro-to-British pound currency pair will trade “slightly weaker” but hold steady near its current range of £0.83 to £0.85. Volatility in the currency pair, they added, will “remain supressed.”

The comments come after the Bank of England left its benchmark interest rate unchanged at 5.0% last week, with officials stating their desire to take a gradual approach to possible future policy easing following a rate cut in August.

Economists had widely expected the decision, particularly after UK consumer price growth came in at 2.2% on an annual basis last month, close to the bank’s medium-term target, but services inflation was running hot at an annual 5.6%. Price gains in the services sector are seen as a key data point for the BoE.

The prospect of potentially sticky services inflation in the UK has led many forecasters to bet that the BoE will move slower than its counterparts to roll out rate reductions.

Other indicators of price pressures have been mixed. Wage growth, another major metric watched by the BoE, has cooled and the broader economy stagnated in July.

Meanwhile, earlier in September, the European Central Bank reduced borrowing costs for the second time in three months.

The rate-setting Governing Council said it had lowered its deposit facility rate — the mechanism through which it steers monetary policy — by 25 basis points to 3.5%. In July, the ECB left its benchmark deposit rate unchanged at 3.75%, after cutting it from an all-time high of 4% in June.

Since that meeting, headline inflation in the eurozone currency area has slowed to a two-year low of 2.2%.

However, speaking in a press conference following the decision, ECB President Christine Lagarde stressed that the central bank was not “committed” to a particular rate path and will remain data-dependent prior to making future policy moves.