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Forex Today: US Dollar clings to weekly recovery gains ahead of PCE inflation

Here is what you need to know on Friday, August 30:

The US Dollar (USD) Index seems to have entered a consolidation phase slightly below 101.50 on Friday, after posting gains for two consecutive days. Eurostat will release the Harmonized Index of Consumer Prices (HICP) for August in the European session. Ahead of the weekend, investors will pay close attention to the July Personal Consumption Expenditures (PCE) Price Index data, the Federal Reserve's preferred gauge of inflation.

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 Euro.

 USDEURGBPJPYCADAUDNZDCHF
USD 0.99%0.28%0.45%-0.24%-0.17%-0.56%-0.01%
EUR-0.99% -0.76%-0.53%-1.21%-1.24%-1.52%-0.97%
GBP-0.28%0.76% 0.11%-0.52%-0.49%-0.84%-0.28%
JPY-0.45%0.53%-0.11% -0.66%-0.53%-0.78%-0.37%
CAD0.24%1.21%0.52%0.66% 0.06%-0.28%0.23%
AUD0.17%1.24%0.49%0.53%-0.06% -0.30%0.26%
NZD0.56%1.52%0.84%0.78%0.28%0.30% 0.55%
CHF0.01%0.97%0.28%0.37%-0.23%-0.26%-0.55% 

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 USD benefited from upbeat macroeconomic data releases on Thursday and gathered strength against its major rivals. The US Bureau of Economic Analysis announced that it revised the annualized Gross Domestic Product (GDP) growth for the second quarter higher to 3% from 2.8% in the previous estimate. Additionally, the US Department of Labor reported that the weekly Initial Jobless Claims edged slightly lower to 231,000 in the week ending August 24 from 233,000. Early Friday, US stock index futures trade marginally higher and the benchmark 10-year US Treasury bond yield fluctuates at around 3.85%.

During the Asian trading hours, the data from Australia showed that Retail Sales remained unchanged on a monthly basis in July. This reading followed the 0.5% increase recorded in June and came in worse than analysts' estimate of 0.3%. AUD/USD showed no reaction to this data and was last seen moving sideways near 0.6800. 

EUR/USD closed in negative territory on Thursday, pressured by the renewed USD strength. The pair holds steady slightly below 1.1100 in the early European session.

GBP/USD registered losses for the second straight on Thursday and dropped to a fresh weekly low below 1.3150. The pair struggles to gather recovery momentum on Friday but holds above 1.3150.

The Tokyo Consumer Price Index (CPI) rose 3.6% on a yearly basis in August, up from 2.2% in July, the data from Japan showed early Friday. The Unemployment Rate edged higher to 2.7% and Industrial Production grew by 2.8% on a monthly basis. USD/JPY largely ignored these figures and was last seen trading marginally lower on the day slightly below 145.00.

Following Wednesday's sharp decline, Gold regained its traction on Thursday and rose nearly 0.7%. XAU/USD moves up and down in a narrow range at around $2,520 in the European morning on Friday.

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

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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