Forex Today: Markets await mid-tier data before switching gears for central bank meetings
Here is what you need to know on Tuesday, December 17:
Following a quiet start to the week, financial markets hold steady early Tuesday. IFO and ZEW sentiment surveys from Germany will be featured in the European docket. In the second half of the day, November Consumer Price Index (CPI) data from Canada and Retail Sales figures from the US will be watched closely by market participants. The US economic calendar will also offer Industrial Production and Business Inventories data.
The US Dollar (USD) Index failed to make a decisive move in either direction and closed virtually unchanged on Monday. The index continues to move up and down in a narrow band slightly below 107.00 in the early European session. The Federal Reserve's (Fed) two-day policy meeting will get underway on Tuesday.
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 Swiss Franc.
| USD | EUR | GBP | JPY | CAD | AUD | NZD | CHF | |
|---|---|---|---|---|---|---|---|---|
| USD | 0.42% | 0.40% | 1.93% | 0.64% | 1.31% | 1.69% | 1.97% | |
| EUR | -0.42% | -0.02% | 1.47% | 0.22% | 0.89% | 1.28% | 1.55% | |
| GBP | -0.40% | 0.02% | 1.49% | 0.24% | 0.91% | 1.29% | 1.55% | |
| JPY | -1.93% | -1.47% | -1.49% | -1.25% | -0.59% | -0.22% | 0.05% | |
| CAD | -0.64% | -0.22% | -0.24% | 1.25% | 0.67% | 1.05% | 1.32% | |
| AUD | -1.31% | -0.89% | -0.91% | 0.59% | -0.67% | 0.37% | 0.65% | |
| NZD | -1.69% | -1.28% | -1.29% | 0.22% | -1.05% | -0.37% | 0.27% | |
| CHF | -1.97% | -1.55% | -1.55% | -0.05% | -1.32% | -0.65% | -0.27% |
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).
While speaking at the Vancouver Board of Trade on Monday, Bank of Canada (BoC) Governor Tiff Macklem said they are facing risks around the inflation outlook. "We are equally concerned with inflation coming in higher or lower than expected," Macklem noted. In Canada, the annual CPI is forecast to rise 2%, matching October's increase. USD/CAD registered small gains on Monday and was last seen trading at its highest level since April 2020 above 1.4250.
The UK's Office for National Statistics (ONS) reported early Tuesday that the ILO Unemployment Rate was unchanged at 4.3% in the three months to October, as expected. In this period, Employment Change was up by 173,000. Finally, annual wage inflation, as measured by the Average Earnings Excluding Bonus, rose to 5.2% from 4.9%. Following a choppy Asian session, GBP/USD recovered toward 1.2700 after the labor market report. The ONS will publish CPI data on Wednesday and the Bank of England (BoE) will announce monetary policy decisions on Thursday.
EUR/USD holds steady in the European morning and trades slightly above 1.0500 after posting small gains on Monday.
USD/JPY closed the sixth consecutive trading day in positive territory on Monday. The pair struggles to preserve its bullish momentum and fluctuates at around 154.00 early Tuesday. Japan economy minister, Ryosei Akazawa, on Tuesday reiterated that the Bank of Japan (BoJ) and the government will work together to conduct appropriate monetary policy. The BoJ will release its interest rate decision in the Asian session on Thursday.
Gold ended the first day of the week virtually unchanged. XAU/USD extends its sideways grind at around $2,650 to begin the European session.
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.
