Forex Today: UK inflation cools, focus shifts to US data and FOMC Minutes
Here is what you need to know on Wednesday, February 18:
Investors assess the Reserve Bank of New Zealand's (RBNZ) policy decisions and January inflation data from the UK in the European morning on Wednesday. In the second half of the day, Durable Goods Orders, Housing Starts and Building Permits data for December will be featured in the US economic calendar, alongside January Industrial Production figures. Later in the American session, the Federal Reserve (Fed) will publish the minutes of the January policy meeting.
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 British Pound.
| USD | EUR | GBP | JPY | CAD | AUD | NZD | CHF | |
|---|---|---|---|---|---|---|---|---|
| USD | 0.30% | 0.66% | 0.60% | 0.36% | 0.08% | 0.63% | 0.38% | |
| EUR | -0.30% | 0.35% | 0.31% | 0.06% | -0.24% | 0.33% | 0.09% | |
| GBP | -0.66% | -0.35% | -0.33% | -0.32% | -0.60% | -0.03% | -0.27% | |
| JPY | -0.60% | -0.31% | 0.33% | -0.24% | -0.51% | 0.04% | -0.16% | |
| CAD | -0.36% | -0.06% | 0.32% | 0.24% | -0.33% | 0.27% | 0.03% | |
| AUD | -0.08% | 0.24% | 0.60% | 0.51% | 0.33% | 0.57% | 0.33% | |
| NZD | -0.63% | -0.33% | 0.03% | -0.04% | -0.27% | -0.57% | -0.24% | |
| CHF | -0.38% | -0.09% | 0.27% | 0.16% | -0.03% | -0.33% | 0.24% |
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 RBNZ announced that it left the policy rate unchanged 2.25%, as widely anticipated. "As the recovery strengthens and inflation falls sustainably towards the target midpoint, monetary policy settings will gradually normalise," the RBNZ noted in the policy statement. In the post-meeting press conference, RBNZ Governor Anna Breman explained that they are not planning to hike rates until they see a see stronger economy and more inflationary pressure. NZD/USD stays under heavy bearish pressure and trades near 0.6000 early Wednesday, losing about 0.8% on a daily basis.
The UK's Office for National Statistics (ONS) reported that annual inflation in the UK, as measured by the change in the Consumer Price Index (CPI), declined to 3% in January from 3.4% in December, matching the market expectation. In this period, the core CPI rose by 3.1% on a yearly basis, while the Retail Price Index increased by 3.8%. After closing deep in negative territory on Tuesday, GBP/USD holds steady slightly above 1.3550 in the European session on Wednesday.
After rising in the first half of the day on Tuesday, the US Dollar (USD) Index lost its traction and ended the day virtually unchanged as Wall Street's main indexes stabilized after the opening bell. Early Wednesday, the USD Index clings to small gains above 97.00, while US stock index futures rise between 0.1% and 0.3%.
EUR/USD stays under modest bearish pressure and trades below 1.1850 after closing flat on Tuesday. The Financial Times reported that European Central Bank (ECB) Christine Lagarde is planning to leave her position before the end of her eight-year term, more specifically ahead of the French Presidential election in April. The ECB came out with a statement following this news, noting that Lagarde is focused on her job and has not taken any decision regarding the end of her term.
USD/JPY stays relatively calm and clings to small daily gains near 153.50 after posting marginal losses on Tuesday. The data from Japan showed earlier in the day that Exports rose by 16.8% on a yearly basis in January, while Imports declined by 2.5%.
After failing to stabilize above $5,000 earlier in the week, Gold remained under heavy selling pressure on Tuesday and lost more than 2% on a daily basis. XAU/USD stages a rebound early Wednesday and trades above $4,900.
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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