Forex Today: Fed-inspired USD rally pauses, eyes on PCE inflation data
Here is what you need to know on Friday, December 20:
After rising sharply on Wednesday, the US Dollar (USD) Index preserved its bullish momentum on Thursday and touched its highest level in over two years early Friday before entering a consolidation phase. The US economic calendar will feature Personal Consumption Expenditures (PCE) Price Index data for November and the European Commission will publish preliminary Consumer Confidence Index for December later in the day.
The Federal Reserve's (Fed) hawkish twist in the Summary of Economic Projections fuelled a rally in the US Treasury bond yields and boosted the USD in the second half of the week. Additionally, upbeat macroeconomic data releases from the US further supported the currency during the American trading hours on Thursday. Early Friday, investors adopt a cautious stance on growing concerns over a US government shutdown ahead of the holidays. At the time of press, US stock index futures were last seen losing between 0.1% and 0.4%.
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 New Zealand Dollar.
| USD | EUR | GBP | JPY | CAD | AUD | NZD | CHF | |
|---|---|---|---|---|---|---|---|---|
| USD | 1.18% | 0.96% | 2.15% | 1.11% | 2.00% | 2.34% | 0.45% | |
| EUR | -1.18% | -0.17% | 1.08% | -0.01% | 0.98% | 1.22% | -0.66% | |
| GBP | -0.96% | 0.17% | 1.12% | 0.16% | 1.16% | 1.37% | -0.49% | |
| JPY | -2.15% | -1.08% | -1.12% | -1.03% | -0.13% | 0.20% | -1.58% | |
| CAD | -1.11% | 0.00% | -0.16% | 1.03% | 0.94% | 1.21% | -0.65% | |
| AUD | -2.00% | -0.98% | -1.16% | 0.13% | -0.94% | 0.23% | -1.63% | |
| NZD | -2.34% | -1.22% | -1.37% | -0.20% | -1.21% | -0.23% | -1.86% | |
| CHF | -0.45% | 0.66% | 0.49% | 1.58% | 0.65% | 1.63% | 1.86% |
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 Bank of England (BoE) announced on Thursday that it maintained the bank rate at 4.75% after the December meeting. Three members of the Monetary Policy Committee (MPC), however, unexpectedly voted in favor of a rate cut, causing Pound Sterling to come under selling pressure. After losing more than 0.5%, GBP/USD extended its slide in the Asian session on Friday and touched its lowest level since May below 1.2480. The pair stages a technical correction and trades at around 1.2500 early Friday. Meanwhile, the data from the UK showed that Retail Sales rose by 0.2% on a monthly basis in November, falling short of analysts' estimate for an increase of 0.5%.
The People’s Bank of China (PBoC) announced on Friday that it left one-year and five-year Loan Prime Rates (LPRs) unchanged at 3.10% and 3.60%, respectively. AUD/USD showed no reaction to this headline and was last seen trading in a tight range below 0.6250.
USD/JPY gathered bullish momentum and gained more than 1.5% on Thursday after the Bank of Japan (BoJ) refrained from committing to additional policy tightening. The pair touched a multi-month high near 158.00 in the Asian session but retreated to the 157.00 area by the European morning. Japan's Finance Minister Katsunobu Kato said on Friday that he is concerned about the recent foreign exchange move, including those driven by speculation. Kato added that he will ake appropriate action against excessive moves.
After suffering large losses on Wednesday, EUR/USD found a foothold on Thursday and ended the day virtually unchanged. The pair clings to small daily gains early Friday but continues to trade below 1.0400.
Gold holds steady at around $2,600 following Wednesday's drop. The risk-averse market atmosphere helps XAU/USD hold its ground despite the broad-based USD strength.
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.