Forex Today: Gold sets new record-high, majors stay quiet ahead of inflation data
Here is what you need to know on Friday, January 31:
Major currency pairs trade in narrow ranges early Friday, following some volatility seen on Thursday. Regional and nation-wide inflation data from Germany and December Personal Consumption Expenditures (PCE) Price Index data from the US will be watched closely by market participants on Friday. Fourth-quarter Employment Cost Index data will also be featured in the US economic calendar ahead of the weekend.
US Dollar PRICE This week
The table below shows the percentage change of US Dollar (USD) against listed major currencies this week. US Dollar was the strongest against the Australian Dollar.
| USD | EUR | GBP | JPY | CAD | AUD | NZD | CHF | |
|---|---|---|---|---|---|---|---|---|
| USD | 0.83% | 0.40% | -0.62% | 0.50% | 1.32% | 0.89% | 0.41% | |
| EUR | -0.83% | -0.35% | -1.30% | -0.18% | 0.50% | 0.19% | -0.31% | |
| GBP | -0.40% | 0.35% | -1.25% | 0.18% | 0.85% | 0.56% | 0.04% | |
| JPY | 0.62% | 1.30% | 1.25% | 1.17% | 2.13% | 1.76% | 1.18% | |
| CAD | -0.50% | 0.18% | -0.18% | -1.17% | 0.62% | 0.39% | -0.13% | |
| AUD | -1.32% | -0.50% | -0.85% | -2.13% | -0.62% | -0.27% | -0.76% | |
| NZD | -0.89% | -0.19% | -0.56% | -1.76% | -0.39% | 0.27% | -0.73% | |
| CHF | -0.41% | 0.31% | -0.04% | -1.18% | 0.13% | 0.76% | 0.73% |
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).
The European Central Bank (ECB) announced on Thursday that it lowered key rates by 25 basis points (bps) as expected. The ECB didn't make any significant changes to its policy statement and ECB Christine Lagarde refrained from committing to the next rate move, reiterating that their next decision will be driven by data and analysis. After rising above 1.0450 in the second half of the day, EUR/USD lost its traction and retreated below to close in negative territory on Thursday. Early Friday, the data from Germany showed that Retail Sales declined by 1.6% on a monthly basis in December, missing the market expectation for an increase of 0.2%. EUR/USD showed no immediate reaction to this data and was last seen trading in a narrow channel at around 1.0400.
The US Bureau of Economic Analysis (BEA) reported on Thursday that the US' Gross Domestic Product expanded at an annual rate of 2.3% in the fourth quarter. This reading followed the 3.1% expansion recorded in the third quarter and came in below the market estimate for a growth of 2.6%. On a positive note, weekly Initial Jobless Claims in the US declined to 207,000 in the week ending January 25 from 223,000 in the previous week. The US Dollar (USD) Index held its ground after mixed data and posted modestly gains on Thursday. Early Friday, the index stays in a consolidation phase near 108.00.
Meanwhile, US President Donald Trump took to social media late Thursday to make a fresh tariff threat against Canada and Mexico. According to President Trump's social media post, the US is set to impose a flat 25% import tax "because of fentanyl" on all goods crossing the border into the US from Canada or Mexico. Trump also warned that they could impose 100% tariffs on BRICS nations if they were to try to replace the USD with a new currency in international trade.
Bank of Japan (BoJ) Governor Kazuo Ueda said on Friday that underlying inflation is still somewhat below 2%. Ueda added that the Japanese central bank would maintain an accommodative policy to support price trends. After losing more than 0.5% on Thursday, USD/JPY stages a rebound and trades in positive territory above 154.50.
GBP/USD closed modestly lower on Thursday after meeting resistance above 1.2450. The pair clings to small daily gains on Friday but remains below 1.2450.
Gold gathered bullish momentum and rose more than 1% on Thursday. Gold continued to stretch higher and trades at an all-time peak near $2,800.
Inflation FAQs
Inflation measures the rise in the price of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core inflation excludes more volatile elements such as food and fuel which can fluctuate because of geopolitical and seasonal factors. Core inflation is the figure economists focus on and is the level targeted by central banks, which are mandated to keep inflation at a manageable level, usually around 2%.
The Consumer Price Index (CPI) measures the change in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core CPI is the figure targeted by central banks as it excludes volatile food and fuel inputs. When Core CPI rises above 2% it usually results in higher interest rates and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually results in a stronger currency. The opposite is true when inflation falls.
Although it may seem counter-intuitive, high inflation in a country pushes up the value of its currency and vice versa for lower inflation. This is because the central bank will normally raise interest rates to combat the higher inflation, which attract more global capital inflows from investors looking for a lucrative place to park their money.
Formerly, Gold was the asset investors turned to in times of high inflation because it preserved its value, and whilst investors will often still buy Gold for its safe-haven properties in times of extreme market turmoil, this is not the case most of the time. This is because when inflation is high, central banks will put up interest rates to combat it. Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold vis-a-vis an interest-bearing asset or placing the money in a cash deposit account. On the flipside, lower inflation tends to be positive for Gold as it brings interest rates down, making the bright metal a more viable investment alternative.
Author
Eren Sengezer
FXStreet
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.
