Forex Today: BoJ hikes policy rate, USD recovers despite soft inflation
Here is what you need to know on Friday, December 19:
The US Dollar (USD) manages to hold its ground early Friday and the Japanese Yen (JPY) stays resilient against its rivals following the Bank of Japan's (BoJ) decision to raise the policy by 25 basis-points (bps) to 0.75%. The economic calendar will feature mid-tier data releases from the UK, Germany and the US ahead of the weekend.
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 weakest against the Swiss Franc.
| USD | EUR | GBP | JPY | CAD | AUD | NZD | CHF | |
|---|---|---|---|---|---|---|---|---|
| USD | 0.15% | 0.00% | 0.08% | 0.13% | 0.58% | 0.62% | -0.15% | |
| EUR | -0.15% | -0.14% | -0.09% | -0.03% | 0.45% | 0.47% | -0.32% | |
| GBP | -0.01% | 0.14% | 0.19% | 0.13% | 0.60% | 0.61% | -0.17% | |
| JPY | -0.08% | 0.09% | -0.19% | 0.05% | 0.50% | 0.52% | -0.04% | |
| CAD | -0.13% | 0.03% | -0.13% | -0.05% | 0.46% | 0.49% | -0.15% | |
| AUD | -0.58% | -0.45% | -0.60% | -0.50% | -0.46% | 0.02% | -0.77% | |
| NZD | -0.62% | -0.47% | -0.61% | -0.52% | -0.49% | -0.02% | -0.78% | |
| CHF | 0.15% | 0.32% | 0.17% | 0.04% | 0.15% | 0.77% | 0.78% |
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 Bank of England (BoE) cut the bank rate by 25 bps to 3.7% following the December meeting, with a slim majority of 5 vs 4. BoE Governor Andrew Bailey's vote to cut became the deciding factor. In the policy statement, the BoE reiterated that they think rates are still on a gradual downward path but noted that judgments around further policy easing will become a closer call in the near future. After rising toward 1.3450 with the initial reaction to the BoE, GBP/USD reversed its direction in the American session on Thursday and closed the day marginally higher. The pair stays in a consolidation phase early Friday and trades below 1.3400. The UK's Office for National Statistics will publish November Retail Sales data later in the session.
The US Bureau of Labor Statistics (BLS) reported on Thursday that annual inflation, as measured by the Consumer Price Index (CPI), softened to 2.7% in November, while the core CPI inflation declined to 2.6% in the same period. Both of these prints came in below analysts' estimate and caused the USD to come under bearish pressure. Nevertheless, the cautious market mood helped the USD find support and the USD Index registered small daily gains. In the European morning on Friday, the USD Index holds steady at around 98.50. Other data from the US showed that the weekly Initial Jobless Claims fell to 224,000 from 237,000 in the week ending December 15. Existing Home Sales data for November and the final revision to the University of Michigan's Consumer Sentiment Index data for December will be released on Friday.
The European Central Bank (ECB) left key rates unchanged following the last policy meeting of the year, as widely expected. In the post-meeting press conference, ECB President Christine Lagarde reiterated that the Eurozone economy remains resilient and said that they can't offer forward guidance on policy, given the uncertainty surrounding the outlook. Lagarde also noted that they don't target exchange rates but added that they pay close attention to the Euro's appreciation. EUR/USD closed in negative territory following a volatile second half of the day on Thursday but managed to stabilize above 1.1700 early Friday. The European economic docket will offer consumer sentiment and producer inflation data from Germany.
The BoJ board members decided to raise the short-term interest rate by 25 bps to 0.75% from 0.50% following the conclusion of its two-day monetary policy review meeting on Friday. The BoJ repeated that they will continue to raise the policy rate if economy, prices move in line with forecast, in accordance with improvements in the economy. Regarding the JPY's valuation, the BoJ said that they must be vigilant to risks, including developments in foreign exchange markets. USD/JPY edges higher toward 156.00 in the early European session on Friday and gains about 0.3% on the day.
Gold surged higher and came within a touching distance of a fresh all-time high on Thursday but lost its traction later in the American session. After correcting toward $4,300 during the Asian trading hours on Friday, XAU/USD found a foothold and recovered above $4,320 by the European morning.
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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