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Forex Today: Market mood sours as investors reassess Fed rate outlook

Here is what you need to know on Tuesday, November 18:

Safe-haven flows dominate the financial markets early Tuesday as investors adopt a cautious stance amid the uncertainty created by the US data backlog and easing bets of a Federal Reserve (Fed) rate cut in December. The economic calendar will feature weekly ADP Employment Change data and several Fed policymakers will be delivering speeches during the American trading hours.

The risk-averse market atmosphere, as reflected by the bearish action seen in Wall Street's main indexes, helped the US Dollar (USD) gather strength against its rivals on Monday. The USD Index rose nearly 0.3%, while the S&P 500 and the Nasdaq Composite lost 0.9% and 0.8%, respectively. Early Tuesday, the USD Index stays in a consolidation phase near 99.50 and US stock index futures are down between 0.3% and 0.6%.

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.

USDEURGBPJPYCADAUDNZDCHF
USD0.20%0.00%0.20%0.19%0.86%0.44%-0.02%
EUR-0.20%-0.09%0.36%0.00%0.65%0.25%-0.21%
GBP-0.00%0.09%0.20%0.10%0.74%0.34%-0.11%
JPY-0.20%-0.36%-0.20%0.01%0.67%0.24%-0.24%
CAD-0.19%-0.01%-0.10%-0.01%0.67%0.23%-0.21%
AUD-0.86%-0.65%-0.74%-0.67%-0.67%-0.39%-0.83%
NZD-0.44%-0.25%-0.34%-0.24%-0.23%0.39%-0.45%
CHF0.02%0.21%0.11%0.24%0.21%0.83%0.45%

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 minutes of the Reserve Bank of Australia's (RBA) November monetary policy meeting showed on Tuesday that policymakers would be comfortable keeping the policy rate unchanged for longer if incoming data prove to be stronger than expected. However, policymakers could also consider easing the policy further is growth weakens, according to the publication. After losing more than 0.6% on Monday, AUD/USD stays on the back foot and trades in negative territory below 0.6500 in the European morning on Tuesday.

Japan's Finance Minister Satsuki Katayama said on Tuesday that the government’s upcoming economic stimulus package has become “sizable,” but declined to disclose its exact scale. USD/JPY holds steady at around 155.00 after touching its highest level since February near 155.40 earlier in the Asian session.

The data from Canada showed on Monday that the annual inflation, as measured by the change in the Consumer Price Index (CPI), softened to 2.2% in October from 2.4% in September. USD/CAD trades in a tight range at around 1.4050 in the European session on Tuesday.

EUR/USD fell about 0.3% on Monday and closed the second consecutive day in negative territory. The pair moves sideways at around 1.1600 in the European morning.

Gold declined for the third consecutive trading day on Monday and closed below $4,100. XAU/USD remains under bearish pressure and falls toward $4,000.

Fed FAQs

Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.

The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.

In extreme situations, the Federal Reserve may resort to a policy named Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.

Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.

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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