Forex Today: Central bank speak to garner attention in absence of data releases
Here is what you need to know on Wednesday, May 14:
Major currency pairs stay relatively quiet early Wednesday following a volatile start to the week. Since the economic calendar will not offer any high-impact data releases, investors will focus on comments from central bankers and assess the latest trade talks.
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 | 0.49% | 0.01% | 0.56% | 0.21% | -0.96% | -0.25% | 0.52% | |
| EUR | -0.49% | -0.35% | 0.61% | 0.21% | -0.83% | -0.26% | 0.51% | |
| GBP | -0.01% | 0.35% | 1.15% | 0.56% | -0.47% | 0.02% | 0.86% | |
| JPY | -0.56% | -0.61% | -1.15% | -0.36% | -2.13% | -1.65% | -0.27% | |
| CAD | -0.21% | -0.21% | -0.56% | 0.36% | -0.91% | -0.46% | 0.30% | |
| AUD | 0.96% | 0.83% | 0.47% | 2.13% | 0.91% | 0.48% | 1.31% | |
| NZD | 0.25% | 0.26% | -0.02% | 1.65% | 0.46% | -0.48% | 0.74% | |
| CHF | -0.52% | -0.51% | -0.86% | 0.27% | -0.30% | -1.31% | -0.74% |
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).
After outperforming its rivals on the US-China trade deal on Monday, the US Dollar (USD) came under bearish pressure on Tuesday. The data published by the Bureau of Labor Statistics showed that the Consumer Price Index (CPI) and the core CPI rose 0.2% on a monthly basis in April, coming in below the market expectation of 0.3% increase for both. The USD Index fell about 0.8% on the day and erased a majority of Monday's gains. Meanwhile, US President Donald Trump called upon the Federal Reserve to lower the interest rate again, arguing that there is no inflation.
During the Asian trading hours, the Australian Bureau of Statistics announced that the Wage Price Index rose 0.9% on a quarterly basis in the first quarter. This print followed the 0.7% increase recorded in the previous quarter and surpassed the market expectation of 0.8%. After rising about 1.5% on Tuesday, AUD/USD holds its ground in the European morning on Wednesday and trades marginally higher on the day above 0.6470. Early Thursday, April employment data from Australia will be watched closely by market participants.
EUR/USD gathered bullish momentum and gained nearly 1% on Tuesday. The pair stays calm and moves up and down in a narrow channel at around 1.1200 to begin the European session on Wednesday.
GBP/USD seems to have entered a consolidation phase near 1.3300 after rising 1% on Tuesday.
USD/JPY reversed its direction following Monday's decisive rally and lost about 0.75% on Tuesday. The pair continues to stretch lower early Wednesday and trades near 147.00.
Gold failed to benefit from the renewed USD weakness and registered small gains on Tuesday. XAU/USD stays on the back foot in the European morning and trades below $3,250.
USD/CAD closed in negative territory on Tuesday and snapped a four-day winning streak. The pair stabilizes above 1.3900 to begin the European session.
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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