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Forex Today: US Dollar post-CPI gains remain limited
Here is what you need to know on Wednesday, March 13:
The US Dollar (USD) is having a tough time gathering recovery momentum early Wednesday. After posting modest daily gains on Tuesday, the USD Index (DXY) holds steady slightly below 103.00 in the European morning. The US economic docker will not offer any high-impact macroeconomic data releases later in the day. Eurostat will release Eurozone Industrial Production data for January.
The data from the US showed on Tuesday that inflation, as measured by the change in the Consumer Price Index (CPI), edged higher to 3.2% on a yearly basis from 3.1% in January. On a monthly basis, the CPI and the Core CPI, which excludes volatile food and energy prices, both increased 0.4%. The benchmark 10-year US Treasury bond yield recovered above 4.1% after inflation data and helped the USD find demand. The risk-positive market atmosphere, however, didn't allow the currency to continue to gather strength. Early Wednesday, the 10-year US yield holds steady at around 4.15% and US stock index futures trade mixed.
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 | CAD | AUD | JPY | NZD | CHF | |
| USD | 0.14% | 0.47% | 0.07% | 0.19% | 0.66% | 0.27% | 0.03% | |
| EUR | -0.13% | 0.34% | -0.06% | 0.05% | 0.54% | 0.12% | -0.10% | |
| GBP | -0.47% | -0.34% | -0.41% | -0.28% | 0.21% | -0.21% | -0.44% | |
| CAD | -0.06% | 0.06% | 0.40% | 0.12% | 0.57% | 0.20% | -0.04% | |
| AUD | -0.19% | -0.05% | 0.28% | -0.12% | 0.48% | 0.07% | -0.15% | |
| JPY | -0.67% | -0.55% | 0.04% | -0.61% | -0.48% | -0.40% | -0.65% | |
| NZD | -0.27% | -0.12% | 0.21% | -0.21% | -0.07% | 0.42% | -0.23% | |
| CHF | -0.03% | 0.10% | 0.44% | 0.04% | 0.15% | 0.62% | 0.23% |
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 Euro from the left column and move along the horizontal line to the Japanese Yen, the percentage change displayed in the box will represent EUR (base)/JPY (quote).
Citing Japanese news outlets, Reuters reported on Wednesday that Japan's largest trade union confederation's, Rengo, demand for pay rises of 5.85%, or JPY18,215, this year, had been met. Japan’s Chief Cabinet Secretary Yoshimasa Hayashi said that he wants to see widespread wage rises across the economy, adding that it's important for wage hikes to spread to mid-sized, small companies. After rising nearly 0.5% on Tuesday, USD/JPY stays relatively quiet above 147.50 to start the European session.
Commenting on these developments, "we must scrutinize whether a positive wage-inflation cycle emerges, in deciding whether conditions for phasing out stimulus are falling into place," Bank of Japan (BoJ) Governor Kazuo Ueda said.
Japanese Yen bulls seem non-committed despite bets for an imminent shift in BoJ's stance.
GBP/USD holds steady at around 1.2800 in the European morning after closing the second consecutive day in negative territory on Tuesday. The UK's Office for National Statistics reported that the real Gross Domestic Product (GDP) expanded by 0.2% on a monthly basis in January. This reading followed the 0.1% contraction recorded in December and came in line with the market expectation.
Gold snapped a nine-day winning streak on Tuesday and lost more than 1%, pressured by recovering US T-bond yields. XAU/USD stays in a consolidation phase at around $2,160 on Wednesday.
Gold price sticks to modest gains as sliding US bond yields keep USD bulls on defensive.
EUR/USD staged a recovery after meeting support near 1.0900 and closed the day flat on Tuesday. The pair fluctuates in a tight range near 1.0930 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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