Forex Today: Pound Sterling finds support on hot inflation, eyes on FOMC Minutes
Here is what you need to know on Wednesday, August 20:
Pound Sterling holds its ground following a two-day slide as markets assess July inflation data from the UK. Later in the American session, the Federal Reserve (Fed) will release the minutes of the July 29-30 policy meeting. Several Fed policymakers are scheduled to deliver speeches in the second half of the day.
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 New Zealand Dollar.
| USD | EUR | GBP | JPY | CAD | AUD | NZD | CHF | |
|---|---|---|---|---|---|---|---|---|
| USD | 0.67% | 0.44% | 0.13% | 0.40% | 1.02% | 1.62% | 0.32% | |
| EUR | -0.67% | -0.23% | -0.55% | -0.27% | 0.36% | 0.91% | -0.35% | |
| GBP | -0.44% | 0.23% | -0.42% | -0.04% | 0.59% | 1.14% | -0.16% | |
| JPY | -0.13% | 0.55% | 0.42% | 0.29% | 0.90% | 1.51% | 0.19% | |
| CAD | -0.40% | 0.27% | 0.04% | -0.29% | 0.59% | 1.22% | -0.12% | |
| AUD | -1.02% | -0.36% | -0.59% | -0.90% | -0.59% | 0.55% | -0.75% | |
| NZD | -1.62% | -0.91% | -1.14% | -1.51% | -1.22% | -0.55% | -1.31% | |
| CHF | -0.32% | 0.35% | 0.16% | -0.19% | 0.12% | 0.75% | 1.31% |
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 Reserve Bank of New Zealand (RBNZ) announced early Wednesday that it lowered the policy rate by 25 basis-points (bps) to 3%, as anticipated. The policy statement showed that some policymakers preferred a 50 bps rate cut and highlighted that there is scope to lower the policy rate further if medium-term inflation pressures continue to ease as expected. RBNZ acting Governor Christian Hawkesby noted that they are comfortable with the fall in the New Zealand Dollar (NZD). NZD/USD stays under strong selling pressure early Wednesday and trades at its weakest level since mid-April below 0.5850, losing more than 1% on a daily basis.
The UK's Office for National Statistics reported on Wednesday that the Consumer Price Index (CPI) rose by 3.8% on a yearly basis in July. This print followed the 3.6% increase recorded in June and came in above the market expectation of 3.7%. In this period, the core CPI also increased by 3.8%. On a monthly basis, the CPI was up 0.1%, compared to analysts' estimate for a 0.1% decrease. GBP/USD recovered from daily lows after the inflation report and was last seen trading marginally higher on the day, slightly above 1.3500.
The US Dollar (USD) Index stays in a consolidation phase above 98.00 after closing in positive territory for two consecutive days. Meanwhile, US stock index futures lose between 0.3% and 0.4% in the early European session, highlighting a cautious market stance. The US Treasury will hold a 20-year note auction later in the day.
EUR/USD struggles to stage a rebound and trades below 1.1650 in the European session on Wednesday. Eurostat will release revisions to July inflation data later in the session.
Annual inflation in Canada, as measured by the change in the CPI, declined to 1.7% in July from 1.8% in June, Statistics Canada reported on Tuesday. After rising about 0.5% on Tuesday, USD/CAD fluctuates in a tight channel above 1.3850 early Wednesday.
The data from Japan showed early Wednesday that Machine Orders increased by 3% on a monthly basis in June. This print surpassed the market expectation for a 1% decline by a wide margin. Other data revealed that Exports and Imports declined by 2.6% and 7.5%, respectively, on a yearly basis in July. USD/JPY edges lower in the European session and trades below 147.50.
Gold lost more than 0.5% on Tuesday and registered its lowest daily close since August 1. XAU/USD corrects higher early Wednesday and trades slightly above $3,320.
Fed FAQs
Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.
The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.
In extreme situations, the Federal Reserve may resort to a policy named Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.
Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.
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