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Forex Today: Big central bank week starts with flash PMIs

Here is what you need to know on Monday, December 16:

Market participants gear up for a critical week that will feature several major central banks' last policy meeting of the year. Ahead of these key events, flash Manufacturing and Services Purchasing Managers Index (PMI) data for December from Germany, the Eurozone, the UK and the US will be watched closely by investors on Monday.

The US Dollar (USD) Index benefited from rising Treasury bond yields and the cautious market mood, gaining nearly 1% in the previous week. Early Monday, the USD Index fluctuates in a tight range below 107.00. The US economic calendar will also offer NY Empire State Manufacturing Index data for December. On Wednesday, the Federal Reserve (Fed) will announce monetary policy decisions and publish the revised Summary of Economic Projections (SEP) following its two-day meeting.

US Dollar PRICE Last 7 days

The table below shows the percentage change of US Dollar (USD) against listed major currencies last 7 days. US Dollar was the strongest against the Japanese Yen.

 USDEURGBPJPYCADAUDNZDCHF
USD 0.51%0.85%2.52%0.49%0.30%1.09%1.40%
EUR-0.51% 0.36%2.15%0.07%-0.12%0.66%0.97%
GBP-0.85%-0.36% 1.59%-0.28%-0.47%0.31%0.60%
JPY-2.52%-2.15%-1.59% -2.01%-2.09%-1.52%-1.03%
CAD-0.49%-0.07%0.28%2.01% -0.15%0.59%0.89%
AUD-0.30%0.12%0.47%2.09%0.15% 0.79%1.08%
NZD-1.09%-0.66%-0.31%1.52%-0.59%-0.79% 0.28%
CHF-1.40%-0.97%-0.60%1.03%-0.89%-1.08%-0.28% 

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).

During the Asian trading hours, the data from Australia showed that the Judo Bank Composite PMI edged lower to 49.9 in December from 50.2 in November. Meanwhile, Retail Sales in China increased by 3% on a yearly basis in November, falling short of the market expectation for a 4.6% growth. After posting small weekly losses last week, AUD/USD holds steady above 0.6350 to begin the week.

EUR/USD gained traction on Friday and snapped a five-day losing streak. In the European morning on Monday, the pair clings to small daily gains above 1.0500. European Central Bank (ECB) President Christine Lagarde will be delivering a speech during the European trading hours.

After posting large losses on Thursday, GBP/USD continued to push lower and touched its weakest level since late November near 1.2600 on Friday. The pair stages a technical correction toward 1.2650 on Monday.

USD/JPY preserved its bullish momentum and rose more than 2% in the previous week. The pair stays in a consolidation phase at around 153.50 in the early European session. Jibun Bank Manufacturing PMI rose to 49.5 from 49 in November and Services PMI improved to 51.4 from 50.5.

Gold turned south in the second half of the previous week and registered large losses on Thursday and Friday. XAU/USD holds its ground on Monday and trades slightly above $2,650.

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.

Author

Eren Sengezer

As an economist at heart, Eren Sengezer specializes in the assessment of the short-term and long-term impacts of macroeconomic data, central bank policies and political developments on financial assets.

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