Forex Today: Inflation data from Eurozone and US to ramp up market volatility

Source Fxstreet
May 31, 2024 06:54

Here is what you need to know on Friday, May 31:

Following the choppy action seen on Thursday, major currency pairs hold steady early Friday as investors gear up for key data releases. Eurostat will publish the Harmonized Index of Consumer Prices (HICP) and the US Bureau of Economic Analysis will release the Personal Consumption Expenditures (PCE) Price Index for May. First-quarter Gross Domestic Product (GDP) data from Canada will also be watched closely by investors.

Although safe-haven flows continued to dominate the financial markets on Thursday, the US Dollar (USD) struggled to gather strength against its rivals as US Treasury bond yields corrected lower. After rising 0.5% on Wednesday, the USD Index fell 0.35% on Thursday before settling slightly below 105.00 early Friday.

US core PCE inflation set to steady as Federal Reserve rate cut for September hangs in the balance.

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.

  USD EUR GBP JPY CAD AUD NZD CHF
USD   0.22% 0.16% -0.08% -0.04% -0.18% -0.23% -1.09%
EUR -0.22%   -0.08% -0.27% -0.25% -0.46% -0.54% -1.27%
GBP -0.16% 0.08%   -0.24% -0.20% -0.37% -0.40% -1.22%
JPY 0.08% 0.27% 0.24%   0.00% -0.12% -0.06% -1.04%
CAD 0.04% 0.25% 0.20% -0.00%   -0.16% -0.19% -1.11%
AUD 0.18% 0.46% 0.37% 0.12% 0.16%   -0.00% -0.86%
NZD 0.23% 0.54% 0.40% 0.06% 0.19% 0.00%   -0.87%
CHF 1.09% 1.27% 1.22% 1.04% 1.11% 0.86% 0.87%  

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).

During the Asian trading hours, the data from China showed that the NBS Manufacturing PMI declined to 49.5 in May from 50.4 in April. In the same period, NBS Non-Manufacturing PMI ticked down to 51.1 from 51.2. These readings failed to trigger an immediate reaction. At the time of press, AUD/USD was trading marginally higher on the day at 0.6640.

Retail Sales in Germany declined 1.2% on a monthly basis in April, Germany's Destatis reported early Friday. This print followed the 2.6% expansion recorded in March and came in weaker than the market expectation for a 0.1% decline. EUR/USD largely ignored these data and was last seen fluctuating in a tight channel above 1.0800.

Eurozone Inflation Release: Lower price pressures expected, Euro could suffer.

After rising sharply on Wednesday, USD/CAD turned south and closed the day in negative territory below 1.3700 on Thursday. The pair continues to edge lower toward 1.3650 in the European morning on Friday. Canada's real GDP is forecast to expand at an annual rate of 2.2%.

USD/JPY lost more than 0.5% on Thursday and seems to have entered a consolidation phase at around 157.00 early Friday. The data from Japan showed that the Tokyo Consumer Price Index climbed to 2.2% on a yearly basis in May from 1.8% in April.

GBP/USD staged a rebound on Thursday and closed above 1.2700. The pair stays relatively quiet and moves up and down in a narrow band at around 1.2720 in the European morning on Friday.

Gold benefited from the pullback seen in US Treasury bond yields and registered small gains on Thursday. XAU/USD struggles to gather bullish momentum and trades near mid-$2,340s.

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.

 

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