Forex Today: Yet to be confirmed US-Iran MOU caps US Dollar's upside
Here is what you need to know on Friday, May 29:
The US Dollar (USD) weakened against its major rivals in the second half of the day on Thursday as markets turned optimistic about the United States (US) and Iran reaching a deal to extend the ceasefire and open the Strait of Hormuz. Early Friday, the USD Index holds steady at around 99.00 and US stock index futures trade marginally higher on the day. The economic calendar will feature preliminary May Consumer Price Index (CPI) data from Germany and first-quarter Gross Domestic Product (GDP) growth data from Canada. During the American trading hours, several Federal Reserve (Fed) policymakers will be delivering speeches as well.
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 | 0.04% | 0.24% | 0.25% | -0.03% | 0.04% | -1.33% | -0.03% | |
| EUR | -0.04% | 0.23% | 0.26% | -0.07% | -0.04% | -1.38% | -0.08% | |
| GBP | -0.24% | -0.23% | -0.21% | -0.30% | -0.26% | -1.60% | -0.26% | |
| JPY | -0.25% | -0.26% | 0.21% | -0.30% | -0.24% | -1.61% | -0.30% | |
| CAD | 0.03% | 0.07% | 0.30% | 0.30% | 0.05% | -1.31% | 0.04% | |
| AUD | -0.04% | 0.04% | 0.26% | 0.24% | -0.05% | -1.33% | -0.05% | |
| NZD | 1.33% | 1.38% | 1.60% | 1.61% | 1.31% | 1.33% | 1.36% | |
| CHF | 0.03% | 0.08% | 0.26% | 0.30% | -0.04% | 0.05% | -1.36% |
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).
After several news outlets reported on Thursday that the US and Iran have reached an agreement on a Memorandum of Understanding (MOU) to extend the ceasefire for 60 days, open the Strait of Hormuz and start nuclear talks. The White House confirmed these reports but also noted that US President Donald Trump has yet to give his approval. Meanwhile, citing a source close to Iran's negotiating team, Iran’s semi-official Tasnim news agency reported that the text of the MOU had not yet been finalised or confirmed.
The US Bureau of Economic Analysis (BEA) reported on Thursday that annual inflation in the US, as measured by the change in the Personal Consumption Expenditures (PCE) Price Index, climbed to 3.8% in April from 3.5% in March. In this period, the core PCE Price Index, which excludes volatile food and energy prices, rose 3.3%, as anticipated. On a monthly basis, the PCE Price Index and the core PCE Price Index increased 0.4% and 0.2%, respectively. Additionally, the BEA revised the annualized GDP growth for the first quarter lower to 1.6% from 2% reported in the initial estimate.
Gold (XAU/USD) dropped to its weakest level in two weeks below $4,370 on Thursday but reversed its direction in the American session to end the day in positive territory. XAU/USD extends its recovery early Friday and trades above $4,520.
EUR/USD benefited from the renewed selling pressure surrounding the USD and gained about 0.2% on Thursday. The pair struggles to hold its ground early Friday and trades marginally lower on the day below 1.1650. The European Central Bank’s (ECB) latest Consumer Expectations Survey (CES) showed that consumers immediately increased their attention to price changes when the Iran conflict started, even though inflation was still around 2%, the central bank's target level.
Japan’s Chief Cabinet Secretary Minoru Kihara said during the European trading session on Friday that the government is extremely concerned about speculative foreign exchange moves and added that they will be ready to take appropriate action if needed. After posting marginal losses on Thursday, USD/JPY trades in a narrow channel above 159.00 on Friday.
GBP/USD snapped a two-day losing streak on Thursday, supported by the USD weakness. The pair corrects lower on Friday but manages to hold comfortably above 1.3400.
AUD/USD turned north in the second half of the day on Thursday and gained 0.3%. The pair stays in a consolidation phase, slightly above 0.7150, in the European morning.
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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