Forex Today: Market focus shifts to Eurozone inflation and key US data
Here is what you need to know on Thursday, February 4:
Major currency pairs stay relatively quiet early Wednesday as investors gear up for key macroeconomic data releases. The Eurostat will publish January inflation figures later in the session and the US economic calendar will feature private sector employment report and the Institute for Supply Management's (ISM) Services Purchasing Managers' Index (PMI) data.
The US House passed a package on Tuesday to end the partial government shutdown that started on Saturday. Markets largely ignored this development and major equity indexes in the US ended the day deep in negative territory, while the US Dollar (USD) Index registered marginal daily losses. In the European morning on Wednesday, the USD Index moves sideways below 97.50, while US stock index futures rise between 0.2% and 0.3%.
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 | 0.15% | -0.14% | 0.92% | 0.20% | -1.14% | -0.50% | 0.42% | |
| EUR | -0.15% | -0.34% | 0.80% | 0.04% | -1.30% | -0.65% | 0.26% | |
| GBP | 0.14% | 0.34% | 1.01% | 0.38% | -0.97% | -0.32% | 0.60% | |
| JPY | -0.92% | -0.80% | -1.01% | -0.70% | -2.06% | -1.35% | -0.76% | |
| CAD | -0.20% | -0.04% | -0.38% | 0.70% | -1.32% | -0.68% | 0.22% | |
| AUD | 1.14% | 1.30% | 0.97% | 2.06% | 1.32% | 0.66% | 1.58% | |
| NZD | 0.50% | 0.65% | 0.32% | 1.35% | 0.68% | -0.66% | 0.92% | |
| CHF | -0.42% | -0.26% | -0.60% | 0.76% | -0.22% | -1.58% | -0.92% |
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 data from New Zealand showed that the Unemployment Rate edged higher to 5.4% in the fourth quarter from 5.3%. After rising nearly 0.8% on Tuesday, NZD/USD stays in a consolidation phase at around 0.6050 in the European morning on Wednesday.
AUD/USD holds its ground and trades in positive territory above 0.7000 after rising more than 1% on the Reserve Bank of Australia's (RBA) rate hike and hawkish tone on policy outlook on Tuesday.
Gold preserves its bullish momentum and trades above $5,000 early Wednesday, rising more than 2% on a daily basis. Similarly, Silver extends its recovery into a second straight day and gains more than 4% on the day to trade above $89.
EUR/USD clings to small gains above 1.1800 after rising about 0.25% on Tuesday. The Harmonized Index of Consumer Prices (HICP), the European Central Bank's (ECB) preferred gauge of inflation, is forecast rise 1.7% on a yearly basis in January, compared to the 1.9% increase recorded in December.
GBP/USD trades in a narrow channel above 1.3700 to start the European session on Wednesday. On Thursday, the Bank of England (BoE) will announce monetary policy decisions.
USD/JPY continues to push higher after posting gains for three consecutive trading days and rises toward 156.50.
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.
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