Forex Today: BoE and ECB policy decisions to lift market volatility
Here is what you need to know on Thursday, February 5:
Investors move to the sidelines and markets turn quiet early Thursday ahead of key events. The Bank of England (BoE) and the European Central Bank (ECB) will both announce monetary policy decisions later in the session. The US economic calendar will feature the weekly Initial Jobless Claims data, alongside the JOLTS Job Openings report for December.
The US Dollar (USD) gathered strength against its rivals in the second half of the day on Wednesday despite the mixed macroeconomic data releases. The Automatic Data Processing (ADP) reported that employment in the private sector rose 22K in January, missing the market expectation of 48K. On a positive note, the Institute for Supply Management's (ISM) Services Purchasing Managers' Index (PMI) held steady at 53.8, reflecting an ongoing expansion in the service sector's business activity at a robust pace. After closing in positive territory on Wednesday, the USD Index holds steady at around 97.70 in the European session on Thursday.
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 Japanese Yen.
| USD | EUR | GBP | JPY | CAD | AUD | NZD | CHF | |
|---|---|---|---|---|---|---|---|---|
| USD | 0.39% | 0.51% | 1.35% | 0.54% | -0.46% | 0.26% | 0.67% | |
| EUR | -0.39% | 0.08% | 0.98% | 0.14% | -0.86% | -0.11% | 0.27% | |
| GBP | -0.51% | -0.08% | 0.79% | 0.06% | -0.93% | -0.20% | 0.19% | |
| JPY | -1.35% | -0.98% | -0.79% | -0.81% | -1.81% | -1.02% | -0.94% | |
| CAD | -0.54% | -0.14% | -0.06% | 0.81% | -0.95% | -0.23% | 0.13% | |
| AUD | 0.46% | 0.86% | 0.93% | 1.81% | 0.95% | 0.75% | 1.13% | |
| NZD | -0.26% | 0.11% | 0.20% | 1.02% | 0.23% | -0.75% | 0.38% | |
| CHF | -0.67% | -0.27% | -0.19% | 0.94% | -0.13% | -1.13% | -0.38% |
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 US Bureau of Labor Statistics announced late Wednesday that the postponed Nonfarm Payrolls data will be published next Wednesday, February 11, and the release date of the Consumer Price Index (CPI) will be moved to February 13 from the originally planned February 11.
The ECB is widely expected to keep key rates unchanged after the February meeting. Investors, however, will pay close attention to how the ECB assesses downside risks to inflation, given the recent Euro strength and the Harmonized Index of Consumer Prices (HICP) data. Eurostat reported on Wednesday that the HICP rose 1.7% on a yearly basis in January, compared to the 1.9% increase recorded in December. After posting marginal losses on Wednesday, EUR/USD moves sideways at around 1.1800 in the European morning on Thursday.
The BoE is anticipated to maintain the bank rate at 3.75%. The vote split and BoE Governor Andrew Bailey's comments in the post-meeting press conference could drive Pound Sterling's valuation. As of writing, GBP/USD was down 0.2% on the day at 1.3625.
Following Tuesday's rally, AUD/USD corrected lower on Wednesday. The pair struggles to regain its traction and trades below 0.7000 in the European morning.
Gold extended its rebound in the first half of the day on Wednesday but met resistance above $5,000. XAU/USD edges lower early Thursday and trades below $4,950. After posting gains for two consecutive days, Silver turns south on Thursday and trades below $81, losing more than 8% on the day.
USD/JPY continues to push higher and trades near 157.00 after rising nearly 0.7% on Wednesday.
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.
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