Forex Today: British Pound struggles to benefit from hot inflation data
Here is what you need to know on Wednesday, October 21:
Fİnancial markets remain relatively quiet midweek amid a lack of key macroeconomic data releases. Although the British Pound shows some volatility following the inflation data, it struggles to make a decisive move in either direction against its peers.
Pound Sterling Price This week
The table below shows the percentage change of British Pound (GBP) against listed major currencies this week. British Pound was the strongest against the Japanese Yen.
| USD | EUR | GBP | JPY | CAD | AUD | NZD | CHF | |
|---|---|---|---|---|---|---|---|---|
| USD | -0.33% | -0.51% | 0.05% | -0.42% | -0.87% | -0.38% | -0.09% | |
| EUR | 0.33% | -0.14% | 0.43% | -0.03% | -0.47% | -0.03% | 0.27% | |
| GBP | 0.51% | 0.14% | 0.57% | 0.13% | -0.29% | 0.12% | 0.47% | |
| JPY | -0.05% | -0.43% | -0.57% | -0.46% | -0.92% | -0.43% | -0.02% | |
| CAD | 0.42% | 0.03% | -0.13% | 0.46% | -0.46% | 0.08% | 0.38% | |
| AUD | 0.87% | 0.47% | 0.29% | 0.92% | 0.46% | 0.42% | 0.74% | |
| NZD | 0.38% | 0.03% | -0.12% | 0.43% | -0.08% | -0.42% | 0.34% | |
| CHF | 0.09% | -0.27% | -0.47% | 0.02% | -0.38% | -0.74% | -0.34% |
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 British Pound from the left column and move along the horizontal line to the US Dollar, the percentage change displayed in the box will represent GBP (base)/USD (quote).
The UK's Office for National Statistics (ONS) reported that annual inflation, as measured by the change in the Consumer Price Index (CPI), rose to 3.5% in September from 3.1% in August. This print came in higher than the market expectation of 3.4%. The core CPI, which excludes volatile food and energy prices, rose by 2.8% following the 2.6% increase recorded previously. Additional details of the report showed that the Retail Price Index increased by 3.9% on a yearly basis, as anticipated. After gaining about 0.5% and reaching its highest level since mid-September above 1.3400 on Tuesday, GBP/USD trades flat near 1.3370 in the European morning on Wednesday. EUR/GBP trades marginally lower on the day below 0.8400, while GBP/JPY stays virtually unchanged at 211.50.
The US Dollar (USD) Index closed in negative territory on Tuesday as risk flows dominated the action in financial markets following the bullish opening seen in Wall Street. Early Wednesday, the USD Index clings to small gains but stays below 102.00, while US stock index futures gain between 0.1% and 0.5%. After the closing bell, SpaceX announced a 161% revenue growth for the the third quarter, driven by a ninefold growth in its artificial intelligence business, as per CNBC. Tesla will report third-quarter earnings figures after the closing bell on Wednesday.
Iran's Foreign Minister Abbas Araghchi said that indirect negotiations with the US are continuing through intermediary countries. Araghchi further explained that Washington agreed to Iran's seven-day proposal but sought to add several additional conditions, although he declined to disclose their details. Araghchi also reportedly demonstrated that the US cannot be trusted in the negotiation process. Following Tuesday's volatile action, crude Oil prices edge higher on Wednesday, with the barrel of West Texas Intermediate (WTI) rising about 1% on the day.
Brent swings as Middle East negotiation headlines are challenged
Analysts at Deutsche Bank note that yesterday’s Oil trade was dominated by headline-driven volatility around Middle East negotiations. They point out that Brent “dropped from around $112 to $106 in the early London afternoon after several unconfirmed reports indicated that Qatar and Pakistan had put forward a proposal that could potentially revive talks aimed at ending the conflict in the Middle East.”
However, Deutsche Bank adds that the move quickly reversed as the narrative shifted. “Later, Brent crude started to climb again, as the story was discredited by a diplomat involved in negotiations.” Citing Bloomberg, they highlight that “while talks to reach a deal are ongoing, reports that the negotiating sides were close to a solution were false,” helping Brent retrace much of its earlier decline.
USD/JPY extends its sideways grind at around 158.00 in the European morning on Wednesday. Japanese Finance Minister (FM) Satsuki Katayama said on Wednesday that the government is coordinating closely with the Bank of Japan (BoJ) and there is no major divergence on inflation outlook and policy. Earlier in the day, the data from Japan showed that Exports and Imports rose by 16.7% and 18.9%, respectively, on a yearly basis in September. Both of these figures fell short of analysts' forecasts.
EUR/USD continues to fluctuate in a relatively tight range above 1.1200 for the third consecutive day on Wednesday. European Central Bank (ECB) President Christine Lagarde is scheduled to deliver a speech later in the day.
Gold stays on the back foot after closing marginally lower on Tuesday and closes in on $4,100 early Wednesday.
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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