EUR/USD trades flat below 1.1700 before entering into central banks’ policies week
- EUR/USD trades flat at around 1.1685, but remains close to its weekly low.
- Investors await the Fed and the ECB's monetary policy announcements next week.
- Germany’s IFO Business Climate deteriorates at a faster pace to 84.4 in April.
The EUR/USD pair trades in a tight range around 1.1700 during the European trading session on Friday. The major currency pair consolidates while the US Dollar (USD) trades broadly firm, with investors shifting focus to central banks’ policy meetings next week.
As of writing, the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, trades firmly near the weekly high of 99.00.
Major global central banks, including the Bank of Japan (BoJ), the Federal Reserve (Fed), the Bank of England (BoE), and the European Central Bank (ECB) will announce their monetary policies.
Both the Fed and the ECB are expected to leave interest rates unchanged and guide a data-dependent approach for further policy meetings. Officials from both central banks will likely warn of upside inflation risks in the wake of higher oil prices due to a prolonged closure of the Strait of Hormuz, a vital passage to almost 20% of global energy supply.
ECB Governing Council member and head of Lithuania's central bank, Gediminas Simkus, said on Wednesday that an interest rate hike this year cannot be ruled out. However, he remained in favor that the central bank should not cut interest rates in the policy announcement on April 30.
On the economic data front, Germany’s IFO Institute's Business Climate Index arrives significantly lower at 84.4 in April. The sentiment data was already anticipated to deteriorate, but at a slower pace to 85.5 from 86.3 in March, revised lower from 86.4.
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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