Forex Today: US Dollar looks to post strong weekly gains, supported by rising bond yields
Here is what you need to know on Friday, December 13:
The US Dollar (USD) Index continues to push higher early Friday and trades at its strongest level in over two weeks above 107.00 after closing in positive territory every day this week. Eurostat will publish Industrial Production data for October and the US economic calendar will feature Export Price Index and Import Price Index data for November ahead of the weekend.
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 | 1.06% | 0.83% | 1.97% | 0.58% | 0.43% | 1.39% | 1.68% | |
| EUR | -1.06% | -0.22% | 1.01% | -0.40% | -0.54% | 0.42% | 0.70% | |
| GBP | -0.83% | 0.22% | 1.06% | -0.18% | -0.32% | 0.63% | 0.91% | |
| JPY | -1.97% | -1.01% | -1.06% | -1.40% | -1.43% | -0.69% | -0.21% | |
| CAD | -0.58% | 0.40% | 0.18% | 1.40% | -0.10% | 0.82% | 1.10% | |
| AUD | -0.43% | 0.54% | 0.32% | 1.43% | 0.10% | 0.96% | 1.24% | |
| NZD | -1.39% | -0.42% | -0.63% | 0.69% | -0.82% | -0.96% | 0.27% | |
| CHF | -1.68% | -0.70% | -0.91% | 0.21% | -1.10% | -1.24% | -0.27% |
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 European Central Bank (ECB) announced on Thursday that it lowered key rates by 25 basis points (bps) following the December meeting, as expected. In the post-meeting press conference, ECB President Christine Lagarde refrained from committing to further policy easing in the near term but noted that they have discussed a 50 bps cut at the meeting. She also acknowledged that the recovery in the Euro area was slower than expected and noted that they expect inflation to settle at around the Governing Council's 2% medium-target on a sustained basis. EUR/USD stretched lower following the ECB event and closed the fifth consecutive trading day in the red on Thursday. The pair struggles to stage a rebound on Friday and trades at around 1.0450.
Meanwhile, the data from the US showed on Thursday that the annual Producer Price Index rose by 3% in November. This reading followed the 2.6% increase recorded in October and surpassed the market expectation of 2.6%. The benchmark 10-year US Treasury bond yield extended its weekly uptrend and climbed above 4.3% in the American session, boosting the USD.
In the European morning on Friday, the UK's Office for National Statistics reported that the Gross Domestic Product contracted by 0.1% on a monthly basis in October, coming in worse than analysts' estimate for an expansion of 0.1%. GBP/USD came under renewed bearish pressure after this data and was last seen trading below 1.2650.
USD/CHF rose sharply after the Swiss National Bank (SNB) decided to cut the policy rate by 50 bps on Thursday. The pair continues to edge higher and trades slightly below 0.8950 early Friday, rising more than 1.5% this week.
The data from Japan showed in the Asian session that Industrial Production increased by 2.8% on a monthly basis in October, compared to the market expectation of 3%. USD/JPY showed no reaction to this report and was last seen consolidating its weekly gains slightly below 153.00.
After posting strong gains in the first half of the week, Gold staged a deep correction on Thursday and lost more than 1% on the day. XAU/USD holds its ground early Friday but stays below $2,700.
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.