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Forecasting the upcoming week: Markets enter the new year calmly, US Dollar stable ahead of key data

Financial markets extend the holiday mood on the first trading day of the new year. Markets continue playing the waiting game for a data-driven next week.

The US Dollar Index (DXY) is trading near the 98.40 price region on Friday, trimming a big chunk of its New Year losses.

US Dollar Price Today

The table below shows the percentage change of US Dollar (USD) against listed major currencies today. US Dollar was the strongest against the Canadian Dollar.

USDEURGBPJPYCADAUDNZDCHF
USD-0.02%-0.19%-0.16%0.03%-0.18%-0.28%-0.36%
EUR0.02%-0.21%-0.04%0.15%-0.11%-0.15%-0.24%
GBP0.19%0.21%0.15%0.32%0.09%0.05%-0.03%
JPY0.16%0.04%-0.15%0.09%-0.15%-0.17%-0.19%
CAD-0.03%-0.15%-0.32%-0.09%-0.25%-0.27%-0.39%
AUD0.18%0.11%-0.09%0.15%0.25%-0.04%-0.12%
NZD0.28%0.15%-0.05%0.17%0.27%0.04%-0.08%
CHF0.36%0.24%0.03%0.19%0.39%0.12%0.08%

The heat map shows percentage changes of major currencies against each other. The base currency is picked from the left column, while the quote currency is picked from the top row. For example, if you pick the US Dollar from the left column and move along the horizontal line to the Japanese Yen, the percentage change displayed in the box will represent USD (base)/JPY (quote).

Gold (XAU/USD) trades around the $4,320 level, losing all of its intraday gains after the New Year's break. Market expectations of lower interest rates in the United States (US) and rising geopolitical tensions have underpinned precious metals over the last few sessions.

EUR/USD hovers around 1.1740 after edging lower in the first half of the week. The pair remains under pressure as it awaits the upcoming data.

GBP/USD is trading near the 1.3480 price region, little changed in the first American session of the year.

USD/JPY is trading near the 156.50 price region, in negative territory, with little intraday change.

AUD/USD is trading close to the 0.6690 area, posting a small advance after trimming almost half of its intraday gains on Friday.

Central banks FAQs

Central Banks have a key mandate which is making sure that there is price stability in a country or region. Economies are constantly facing inflation or deflation when prices for certain goods and services are fluctuating. Constant rising prices for the same goods means inflation, constant lowered prices for the same goods means deflation. It is the task of the central bank to keep the demand in line by tweaking its policy rate. For the biggest central banks like the US Federal Reserve (Fed), the European Central Bank (ECB) or the Bank of England (BoE), the mandate is to keep inflation close to 2%.

A central bank has one important tool at its disposal to get inflation higher or lower, and that is by tweaking its benchmark policy rate, commonly known as interest rate. On pre-communicated moments, the central bank will issue a statement with its policy rate and provide additional reasoning on why it is either remaining or changing (cutting or hiking) it. Local banks will adjust their savings and lending rates accordingly, which in turn will make it either harder or easier for people to earn on their savings or for companies to take out loans and make investments in their businesses. When the central bank hikes interest rates substantially, this is called monetary tightening. When it is cutting its benchmark rate, it is called monetary easing.

A central bank is often politically independent. Members of the central bank policy board are passing through a series of panels and hearings before being appointed to a policy board seat. Each member in that board often has a certain conviction on how the central bank should control inflation and the subsequent monetary policy. Members that want a very loose monetary policy, with low rates and cheap lending, to boost the economy substantially while being content to see inflation slightly above 2%, are called ‘doves’. Members that rather want to see higher rates to reward savings and want to keep a lit on inflation at all time are called ‘hawks’ and will not rest until inflation is at or just below 2%.

Normally, there is a chairman or president who leads each meeting, needs to create a consensus between the hawks or doves and has his or her final say when it would come down to a vote split to avoid a 50-50 tie on whether the current policy should be adjusted. The chairman will deliver speeches which often can be followed live, where the current monetary stance and outlook is being communicated. A central bank will try to push forward its monetary policy without triggering violent swings in rates, equities, or its currency. All members of the central bank will channel their stance toward the markets in advance of a policy meeting event. A few days before a policy meeting takes place until the new policy has been communicated, members are forbidden to talk publicly. This is called the blackout period.

Key economic data: Upcoming releases to shape market sentiment

Over the coming days, investors will focus on US employment data and global inflation figures, as they inform central banks’ decisions.

The US Institute for Supply Management (ISM) will publish the Manufacturing Purchasing Managers' Index (PMI) for December on Monday.

Germany's Harmonized Index of Consumer Prices (HICP) and the Australian Consumer Price Index (CPI) will be released on Tuesday.

The US ADP Employment Change report (December) and the ISM Services PMI (December) will be released on Wednesday, along with the Eurozone HICP (December preliminary).

The US Trade Balance (October) and Consumer Credit (November) will be released next Thursday.

Finally, the US Nonfarm Payrolls (NFP) report for December and the preliminary estimate of the January Michigan Consumer Sentiment Index will be released on January 9.

Author

Agustin Wazne

Agustin Wazne joined FXStreet as a Junior News Editor, focusing on Commodities and covering Majors.

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