Forex Today: Mood improves slightly to begin critical central bank week

Source Fxstreet

Here is what you need to know on Monday, October 26:

There seems to be a positive shift in risk mood at the beginning of the week as crude Oil prices edge lower. The European economic calendar will feature business sentiment data from Germany on Monday. Later in the week, all attention will be on policy meetings of major economies' central banks, including the Reserve Bank of New Zealand (RBNZ), the Bank of Canada (BoC), the Federal Reserve (Fed), the European Central Bank (ECB), and the Bank of Japan (BoJ).

Yemen's Houthis said on Sunday that they will keep attacking Saudi Arabia's King Khalid Airport in Riyadh, Reuters reported. This move came hours after the kingdom announced that flights had resumed despite repeated attacks by Houthis. Meanwhile, United States (US) President Donald Trump has ruled out immediate military action against Iran, saying “there will not be a strike today,” as per Aljazeera. Following the previous week's sharp upsurge, crude Oil prices opened with a bearish gap and the barrel of West Texas Intermediate (WTI) was last seen losing more than 2% on a daily basis.

Reflecting the improving market sentiment, US stock index futures rise about 0.2% on a daily basis, while the US Dollar (USD) Index trades marginally lower near 101.70. Finally, the benchmark 10-year US Treasury bond yield stays in negative territory below 5% after posting losses for the third consecutive week.

US Dollar Price Today

The table below shows the percentage change of US Dollar (USD) against listed major currencies today. US Dollar was the weakest against the Swiss Franc.

USD EUR GBP JPY CAD AUD NZD CHF
USD -0.14% -0.02% 0.11% 0.05% 0.12% 0.00% -0.14%
EUR 0.14% 0.16% 0.23% 0.18% 0.26% 0.17% 0.00%
GBP 0.02% -0.16% 0.06% 0.04% 0.10% 0.00% -0.16%
JPY -0.11% -0.23% -0.06% -0.04% 0.01% -0.10% -0.25%
CAD -0.05% -0.18% -0.04% 0.04% 0.05% -0.03% -0.18%
AUD -0.12% -0.26% -0.10% -0.01% -0.05% -0.10% -0.25%
NZD -0.00% -0.17% -0.01% 0.10% 0.03% 0.10% -0.14%
CHF 0.14% -0.00% 0.16% 0.25% 0.18% 0.25% 0.14%

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).

FOMC patience in October seen boosting odds of December Fed hike

According to TD Securities, the Federal Open Market Committee (FOMC) is likely to "keep rates on hold this week despite rising inflation risks," with analysts judging that while "the chance of a surprise hike is higher than normal," policymakers are still expected to "prioritize patience and wait until December." In their view, "a hold in October will make a December hike all the more likely," particularly after the "upside surprise in September CPI," which underscores that "inflation risks are still pertinent." TD Securities adds that "the evolution of inflation data will determine the extent and pace of hikes later in the cycle," suggesting that incoming price figures will be crucial in shaping the Fed’s next steps.

EUR/USD fluctuates in a narrow range above 1.1200 after closing the previous week marginally lower.

GBP/USD registered marginal losses on Friday but managed to post gains for the second consecutive week. The pair stays quiet on Monday and moves sideways below 1.3400.

USD/JPY clings to small gains near 157.00 in the European morning on Monday after falling about 0.7% last week.

Gold lost nearly 4% in the previous week before stabilizing slightly above $4,000 on Monday.

Gold demand from ETFs and central banks faces another test near $4000

TD Securities analysts noted that we continue to see "strong physical demand from ETFs and central banks," even as Gold remains under pressure from systematic selling. The bank argues that prices "drifting back toward the $4000/oz level yet again will be another test if these flows can offset near-term systematic flows," underscoring the importance of official and investment demand in counterbalancing CTA-driven weakness.

AUD/USD stays in a consolidation phase above 0.7000 after rising more than 1% last week. In the early trading hours of the Asian session on Wednesday, September inflation data from Australia could ramp up the pair's volatility.

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.

Disclaimer: For information purposes only. Past performance is not indicative of future results.
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