US PMI and FOMC rate decision in focus

The safe-haven greenback received some support from overnight losses on Wall Street, but a rise in US stock futures along with the firmness in Asian stocks, led by China, snuffed out that demand on Tuesday. In addition, lower long-term US Treasury yields have also taken away one of the crutches that kept the dollar strong.

The S&P500 futures have rebounded strongly after a bearish Monday for the index. There has been a drop in the yield on the 10-year US Treasury note to 4.02%. At the same time, the US dollar index (DXY) is looking to extend its losses below the intraday low of 111.28 which it reached earlier in the day.

As global investors are focusing on the US Federal Reserve's policy meeting starting today, European markets look to be set for a positive start to the trading session on Tuesday.

On Wednesday, the Federal Reserve is widely expected to hike its benchmark overnight interest rate by 75 basis points, marking its fourth such increase in a row. Nevertheless, for the December meeting, Fed funds futures have split opinions about whether a 75-bps or 50-bps increase will be announced.

As the odds of the Bank of England (BOE) hiking interest rates by 75 basis points (bps) have increased recently, the bulls of the pound are gearing up for a rally. In order to combat double-digit inflation, the only option available to Andrew Bailey is to tighten monetary policy by raising interest rates even more steeply. 75 bps will be the largest in the current rate-escalating cycle.

A slender rebound from 1.1460 in the early European session has given the GBP/USD pair some hope of continuing its recovery above the immediate hurdle of 1.1517. As a result of the risk-on impulse rebounding firmly from a lower level, the cable has been underpinned. It is becoming increasingly clear that investors are parking their funds in assets that are susceptible to risk as uncertainty ahead of Federal Reserve (Fed) policy is fading away.

Events of the day

In a week marked by a light calendar in Europe on Tuesday, EUR/USD could remain firm ahead of October's ISM Manufacturing PMI, which is expected to drop to 50.0 from the previous 50.9. We will also get a look at the S&P Global Manufacturing PMI forecast for October, which is expected to confirm the initial forecast of 49.9 figures, as well as the JOLTS Jobs Openings forecast for September, forecast at 10M versus 10.053M previously.