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Forex Today: EU inflation data, Lagarde and Powell speeches to drive markets
Here is what you need to know on Tuesday, July 2:
Following Monday's choppy action, major currency pairs seem to have stabilized early Tuesday. Eurostat will release Harmonized Index of Consumer Prices for June in the European session. Later in the day, European Central Bank (ECB) President Christine Lagarde and Federal Reserve (Fed) Chairman Jerome Powell will speak on the policy outlook at the ECB Forum on Central Banking in Sintra. The US economic calendar will also feature JOLTS Job Openings data for May.
The US Dollar (USD) started the week on a weak note but managed to stage a rebound later in the American session. Despite the disappointing ISM Manufacturing PMI data for June, the USD benefited from rising US Treasury bond yields and the USD Index closed the day virtually unchanged. In the European morning on Tuesday, the index stays in a consolidation phase slightly below 106.00 and the benchmark 10-year US Treasury bond yield holds steady at around 4.45%. Meanwhile, US stock index futures trade marginally lower on 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 | -0.13% | 0.10% | 0.58% | 0.53% | 0.45% | 0.74% | 0.64% | |
| EUR | 0.13% | 0.00% | 0.42% | 0.35% | 0.47% | 0.56% | 0.46% | |
| GBP | -0.10% | -0.00% | 0.39% | 0.35% | 0.47% | 0.56% | 0.46% | |
| JPY | -0.58% | -0.42% | -0.39% | -0.06% | -0.07% | 0.15% | 0.08% | |
| CAD | -0.53% | -0.35% | -0.35% | 0.06% | -0.03% | 0.21% | 0.11% | |
| AUD | -0.45% | -0.47% | -0.47% | 0.07% | 0.03% | 0.09% | 0.05% | |
| NZD | -0.74% | -0.56% | -0.56% | -0.15% | -0.21% | -0.09% | -0.08% | |
| CHF | -0.64% | -0.46% | -0.46% | -0.08% | -0.11% | -0.05% | 0.08% |
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).
Earlier in the day, the Minutes of the Reserve Bank of Australia’s (RBA) June monetary policy meeting showed that policymakers thought that another rate hike might be needed if they judged that the policy was not sufficiently restrictive. The publication further noted that the board saw the case for holding rates steady was stronger than for hiking. After closing in negative territory on Monday, AUD/USD continued to stretch lower during the Asian trading hours on Tuesday and the pair was last seen trading below 0.6650.
USD/JPY closed the first trading day of the week little changed as investors refrained from taking large positions. The pair trades marginally higher on the day above 161.50 in the European morning on Tuesday.
After spiking above 1.2700 in the American session on Monday, GBP/USD reversed its direction and erased its daily gains to close at 1.2650. The pair struggles to regain its traction and trades below this level to start the European session.
EUR/USD opened with a bullish gap on Monday and touched its highest level in nearly three weeks above 1.0770. The pair, however, lost its bullish momentum in the American session and finished the day with small gains. Early Tuesday, EUR/USD stays below 1.0750.
Gold failed to make a decisive move in either direction on Monday. XAU/USD extends its sideways grind at around $2,330 during the European trading hours on Tuesday.
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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