Forex Today: Pound Sterling rebounds after hot UK inflation data
Here is what you need to know on Wednesday, July 16:
Pound Sterling gains traction in the European morning on Wednesday and the US Dollar (USD) Index pulls away from the multi-week high it set on Tuesday. The US economic calendar will feature producer inflation data for June alongside Industrial Production figures and several Federal Reserve (Fed) policymakers will be delivering speeches later in the day. Finally, the Fed will release its Beige Book.
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 | 0.37% | 0.62% | 0.97% | 0.06% | 0.57% | 0.84% | 0.37% | |
| EUR | -0.37% | 0.23% | 0.59% | -0.32% | 0.19% | 0.46% | -0.01% | |
| GBP | -0.62% | -0.23% | 0.30% | -0.55% | -0.04% | 0.23% | -0.10% | |
| JPY | -0.97% | -0.59% | -0.30% | -0.77% | -0.39% | -0.06% | -0.53% | |
| CAD | -0.06% | 0.32% | 0.55% | 0.77% | 0.50% | 0.78% | 0.31% | |
| AUD | -0.57% | -0.19% | 0.04% | 0.39% | -0.50% | 0.25% | -0.19% | |
| NZD | -0.84% | -0.46% | -0.23% | 0.06% | -0.78% | -0.25% | -0.48% | |
| CHF | -0.37% | 0.00% | 0.10% | 0.53% | -0.31% | 0.19% | 0.48% |
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 UK's Office for National Statistics announced early Wednesday that annual inflation in the UK, as measured by the change in the Consumer Price Index (CPI), climbed to 3.6% in June from 3.4% in May. This reading came in above the market expectation of 3.4%. On a yearly basis, the core CPI rose 3.7%, compared to analysts' estimate of 3.5%. After closing the first two days of the week deep in negative territory, GBP/USD stages a rebound and trades marginally higher on the day above 1.3400 in the European morning.
On Tuesday, the data from the US showed that the annual CPI inflation climbed to 2.7% in June from 2.4% in May. In this period, the core CPI rose 2.9% following the 2.8% increase recorded in the previous month. The USD Index gathered bullish momentum and rose to its highest level in over three weeks near 98.70. Early Wednesday, the USD Index corrects lower and fluctuates at around 98.50. US President Donald Trump said late Tuesday that letters notifying smaller countries of their US tariff rates would go out soon and explained that his administration would likely set a tariff of "a little over 10%" for those countries. Following the mixed action seen in Wall Street on Tuesday, US stock index futures are down about 0.3% early Wednesday.
Following Monday's subdued action, EUR/USD turned south and dropped below 1.1600 for the first time since June 24. The pair corrects higher in the European morning on Wednesday and trades near 1.1620. Eurostat will release Trade Balance data for May later in the session.
After losing about 0.5% on Tuesday, AUD/USD holds its ground and trades comfortably above 0.6500. In the Asian session on Thursday, Australian labor market data for June will be watched closely by market participant.
Following Tuesday's rally, USD/JPY advanced to its highest level since early April above 149.00 in the Asian session on Wednesday. The pair edges lower in the European morning and trades above 148.50.
Gold closed in negative territory for the second consecutive day on Tuesday. Early Wednesday, XAU/USD recovers and trades at around $3,340.
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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