Forex Today: Major pairs stabilize as markets assess central bank policy outlooks

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 weakest against the New Zealand Dollar.

	USD	EUR	GBP	JPY	CAD	AUD	NZD	CHF
USD		-1.26%	-1.37%	-0.76%	-0.02%	-1.42%	-1.66%	-0.13%
EUR	1.26%		-0.09%	0.42%	1.25%	-0.15%	-0.39%	1.14%
GBP	1.37%	0.09%		0.66%	1.34%	-0.05%	-0.30%	1.30%
JPY	0.76%	-0.42%	-0.66%		0.77%	-0.65%	-0.88%	0.66%
CAD	0.02%	-1.25%	-1.34%	-0.77%		-1.43%	-1.63%	-0.10%
AUD	1.42%	0.15%	0.05%	0.65%	1.43%		-0.27%	1.30%
NZD	1.66%	0.39%	0.30%	0.88%	1.63%	0.27%		1.53%
CHF	0.13%	-1.14%	-1.30%	-0.66%	0.10%	-1.30%	-1.53%

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 Bank of England (BoE) announced on Thursday that it maintained the bank rate at 3.75%, as widely expected. All nine members of the Monetary Policy Committee (MPC) voted in favor of the decision. Markets were expecting two policymakers to vote for a rate cut. In the policy statement, the BoE acknowledged that higher global energy prices are already feeding into petrol prices and said that the MPC stays ready to act as needed to ensure the Consumer Price Index (CPI) inflation remains on track to meet the 2% target and that is has a range of possible responses. GBP/USD rose sharply on Thursday and gained more than 1% before entering a consolidation phase above 1.3400 in the European morning on Friday.

The European Central Bank (ECB) decided to leave key rates unchanged following the March policy meeting, as anticipated. "The war in the Middle East has made outlook significantly more uncertain, creating upside risks for inflation and downside risks for economic growth," the ECB said. In the post-meeting press conference, ECB President Christine Lagarde noted that a prolonged war could increase energy prices for longer and erode incomes. Lagarde added that risks to inflation are tilted to the upside in the near term and said that they could have a "temporary, targeted and tailored" response to the energy shock. EUR/USD gathered bullish momentum and rose 1.2% on Thursday. Early Friday, the pair corrects lower but manages to hold above 1.1550.

Following Wednesday's rally, which was fuelled by the Federal Reserve's hawkish tone, the US Dollar (USD) Index reversed its direction and ended the day deep in negative territory on Thursday. In the European morning on Friday, the USD Index holds steady above 99.00. US stock index futures trade mixed after Wall Street's main indexes closed marginally lower on Thursday.

European Union (EU) leaders called for a moratorium on military strikes on energy and water facilities in the Middle East amid growing concerns about the impact of the Iran war on the global economy, Reuters reported on Thursday. Meanwhile, US Treasury Secretary Scott Bessent told Fox Business Network that the US may "unsanction Iranian oil on water in coming days." Crude oil prices continues to push lower after posting large losses on Thursday. At the time of press, the barrel of West Texas Intermediate (WTI) was trading near 93.50, losing about 1% on the day.

Gold extended its weekly slide on Thursday and touched its lowest level since early February near $4,500. XAU/USD stages a rebound in the European morning on Friday and trades at around $4,700.

USD/JPY gains traction and rises toward 158.50 early Friday after losing more than 1% on Thursday.

USD/CAD struggled to find direction and close virtually unchanged on Thursday. The pair edges lower on Friday but holds slightly above 1.3700. Statistics Canada will publish January Retail Sales data later in the day.

Central banks FAQs

What does a central bank do?

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%.

What does a central bank do when inflation undershoots or overshoots its projected target?

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.

Who decides on monetary policy and interest rates?

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%.

Is there a president or head of a central bank?

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.