Forex Today: Investors brace for BoE and ECB policy decisions, US inflation data
Here is what you need to know on Thursday, December 18:
Market participants gear up for a highly volatile day that will feature Bank of England (BoE) and the European Central Bank (ECB) policy decisions, in addition to the November Consumer Price Index (CPI) data from the United States (US).
Ahead of these key events, trading action remains relatively subdued in the European morning. After staging a rebound and closing modestly higher on Wednesday, the US Dollar (USD) Index moves sideways below 98.50 in the European morning. Annual inflation in the US, as measured by the change in the CPI, is forecast to edge higher to 3.1% in November from 3% in October. In this period, the core CPI is expected to rise 3%, matching October's print. Weekly Initial Jobless Claims data and regional manufacturing activity reports from the US will also be watched closely by market participants. Meanwhile, US stock index futures trade mixed to start the European session.
US Dollar Price This Month
The table below shows the percentage change of US Dollar (USD) against listed major currencies this month. US Dollar was the weakest against the Canadian Dollar.
| USD | EUR | GBP | JPY | CAD | AUD | NZD | CHF | |
|---|---|---|---|---|---|---|---|---|
| USD | -1.26% | -0.98% | -0.20% | -1.43% | -0.84% | -0.55% | -1.03% | |
| EUR | 1.26% | 0.29% | 1.08% | -0.16% | 0.43% | 0.74% | 0.22% | |
| GBP | 0.98% | -0.29% | 1.04% | -0.45% | 0.15% | 0.44% | -0.07% | |
| JPY | 0.20% | -1.08% | -1.04% | -1.23% | -0.66% | -0.36% | -0.87% | |
| CAD | 1.43% | 0.16% | 0.45% | 1.23% | 0.55% | 0.89% | 0.37% | |
| AUD | 0.84% | -0.43% | -0.15% | 0.66% | -0.55% | 0.29% | -0.20% | |
| NZD | 0.55% | -0.74% | -0.44% | 0.36% | -0.89% | -0.29% | -0.51% | |
| CHF | 1.03% | -0.22% | 0.07% | 0.87% | -0.37% | 0.20% | 0.51% |
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).
EUR/USD declined toward 1.1700 on Wednesday but managed to erase a large portion of its daily losses in the American session. The pair was last seen trading virtually unchanged on the day at 1.1745. The ECB is widely anticipated to maintain policy settings after the last meeting of the year. Alongside the policy statement, the ECB will also publish the revised macroeconomic projections. Starting at 13:45 GMT, ECB President Christine Lagarde will speak on the policy outlook and respond to questions from the press.
GBP/USD came under bearish pressure following the soft inflation data from the UK and came in within a touching distance of 1.3300 on Wednesday. Although the pair recovered later in the day, it still lost more than 0.3%. The BoE is expected to cut the policy rate by 25-basis-points, and there won't be a press conference this time around. At the time of press, GBP/USD was trading marginally lower on the day at 1.3365.
The data from Australia showed that Consumer Inflation Expectations edged higher to 4.7% in December from 4.5% in November. After losing about 0.4% on Wednesday, AUD/USD stays on the back foot and trades near 0.6600 early Thursday.
Following a two-day slide, USD/JPY reversed its direction and gained more than 0.6% on Wednesday. The pair continues to stretch higher toward 156.00 in the European session on Thursday. The Bank of Japan (BoJ) will announce its interest rate decision in the Asian session on Friday.
New Zealand's Gross Domestic Product (GDP) expanded at an annual rate of 1.3% in the third quarter, Statistics New Zealand reported on Thursday. This print followed the 1.1% contraction recorded in the second quarter and came in line with the market expectation. Nevertheless, NZD/USD failed to benefit from the upbeat GDP print and was last seen losing 0.2% on the day near 0.5760.
Following the choppy action seen earlier in the week, Gold gathered bullish momentum and rose about 0.8% on Wednesday. XAU/USD consolidates its recent gains in the European morning on Thursday and fluctuates in a narrow channel below $4,350.
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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