Fed Caution, Geopolitical Risks Drive Divided Markets

The EUR/USD remained steady above 1.1800 on Tuesday, trading with modest gains of 0.12%, after Federal Reserve Chair Jerome Powell reiterated that monetary policy remains “modestly restrictive” but flexible. Meanwhile, flash PMI surveys from both the U.S. and Eurozone pointed to weaker business activity, heightening concerns ahead of this week’s GDP releases.

Speaking after last week’s policy meeting, the Fed Chair emphasized that the path forward remains challenging given the dual mandate. He noted that downside risks to the labor market have risen, though inflation remains “somewhat elevated” despite moving toward better balance.

Data releases underscored softening activity across both sides of the Atlantic. In the U.S., September’s S&P Global Manufacturing PMI slipped to 52.0 from 53.0, while Services PMI eased to 53.9 from 54.5. Businesses reported higher input costs, with tariffs cited as the main driver of rising prices. In the Eurozone, the HCOB Manufacturing PMI fell below the key 50 threshold to 49.5, while Services PMI edged higher to 51.4, beating expectations.

Governor Michelle Bowman suggested three cuts may be needed in 2025 to support the labor market, while Chicago Fed President Austan Goolsbee reiterated the commitment to returning inflation to 2%. In contrast, ECB policymakers appear in no rush to ease. President Christine Lagarde recently declared that the “disinflation process is over,” signaling a more cautious stance.

The divergence between Fed and ECB outlooks underpins EUR/USD’s resilience, with traders watching for Germany’s IFO survey on Wednesday, along with U.S. housing data and additional Fed commentary.

Gold prices climbed to new record highs on Tuesday, supported by safe-haven flows amid geopolitical tensions and expectations of further Federal Reserve rate cuts. Benchmark 10-year Treasury yields slipped 0.2%, while the U.S. dollar traded largely steady.

Federal Reserve Chair Jerome Powell said the central bank faces a “challenging situation” as it balances the risk of persistent inflation with signs of labor market weakness. He offered little clarity on the timing of the next rate move, though markets continue to expect cuts in October and December after this month’s 25 bp reduction.

Geopolitical tensions also bolstered demand for the metal, after NATO condemned Russia for violating Estonian airspace, warning it would use “all necessary military and non-military tools” to defend itself against what it called a pattern of irresponsible behavior.

Traders now turn their focus to Friday’s release of the U.S. Personal Consumption Expenditures (PCE) index, the Fed’s preferred measure of inflation, for further clues on policy direction.

Oil prices rose more than $1 a barrel on Tuesday after efforts to resume crude exports from Iraq’s Kurdistan region failed to move forward, easing investor concerns that a restart would add to oversupply pressures in the global market.

Exports through the pipeline from Kurdistan to Turkey have been halted since March 2023. Talks to restart flows—around 230,000 barrels per day—remain at an impasse, with key producers seeking guarantees on debt repayments before an agreement can be finalized.

The delay comes as the global oil market continues to grapple with expectations of elevated supply and moderating demand. Rising adoption of electric vehicles, combined with broader economic headwinds and trade tensions, has weighed on consumption prospects.

The International Energy Agency, in its latest monthly report, projected that global oil supply will grow faster this year, with the potential for a larger surplus by 2026 as OPEC+ members and non-OPEC producers alike expand output. At the same time, risks persist. Traders are closely watching potential new European Union sanctions on Russian oil exports and developments in the Middle East that could disrupt supply.

U.S. inventory data also offered some direction to markets. According to figures from the American Petroleum Institute, crude stocks fell by 3.82 million barrels in the week ending September 19. Gasoline inventories declined by 1.05 million barrels, while distillate inventories rose by 518,000 barrels.

Meanwhile, geopolitical tensions escalated as Ukraine reported overnight strikes on two Russian oil distribution facilities in the Bryansk and Samara regions.

The US 500 slipped on Tuesday as major technology stocks, including Nvidia, paused following recent gains and investors digested remarks from Federal Reserve Chair Jerome Powell hinting at a cautious approach to further rate cuts.

Powell emphasized the need to carefully balance inflation risks with employment conditions, noting that monetary policy is “not on a preset course.” Following last week’s 25-basis-point rate cut, markets are pricing in another cut in October and a potential additional reduction in December, though persistent inflation and resilient job growth could limit further easing.

Investors are also weighing flash U.S. business activity data for September, which showed modest slowing in both the manufacturing and services sectors, signaling that economic growth remains steady but not accelerating.

Technology stocks, which have driven much of the market’s recent rally, took a breather, with Nvidia and Apple among the notable laggards. Nvidia’s recent gains had been fueled by its announced partnership with OpenAI to supply data center chips and invest up to $100 billion, highlighting the growing impact of AI-driven demand on the sector.