Forex Today: US Dollar rally pauses ahead of critical inflation data

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		1.00%	0.13%	0.32%	0.52%	1.70%	1.73%	0.61%
EUR	-1.00%		-0.87%	-0.59%	-0.43%	0.75%	0.68%	-0.38%
GBP	-0.13%	0.87%		0.00%	0.39%	1.56%	1.56%	0.46%
JPY	-0.32%	0.59%	0.00%		0.15%	1.36%	1.38%	0.23%
CAD	-0.52%	0.43%	-0.39%	-0.15%		1.20%	1.24%	0.06%
AUD	-1.70%	-0.75%	-1.56%	-1.36%	-1.20%		-0.00%	-1.08%
NZD	-1.73%	-0.68%	-1.56%	-1.38%	-1.24%	0.00%		-1.08%
CHF	-0.61%	0.38%	-0.46%	-0.23%	-0.06%	1.08%	1.08%

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).

The USD preserved its bullish momentum midweek as investors continued to stay away from risk-sensitive assets. In the European session on Thursday, US stock index futures trade in positive territory, with the Nasdaq Futures rising more than 2% as the biggest gainer.

Iran’s Revolutionary Guard has rejected the proposal for a shipping route through the Strait of Hormuz and warned that any vessel using it will be in danger. In the meantime, The Israeli defence minister, Israel Katz, said that the Israeli military would not withdraw from southern Lebanon despite pressure from the United States (US) as fighting in Lebanon continues to be an obstacle to permanent peace, the Guardian reported early Thursday.

EUR/USD trades in a tight range near 1.1350 early Thursday after losing 0.2% on Wednesday. The European Central Bank will publish its Economic Bulletin later in the session.

GBP/USD holds steady above 1.3150 in the European morning following Wednesday's decline.

USD/JPY continues to inch higher toward 162.00 after posting marginal gains on Wednesday, raising the risk of an intervention. Bank of Japan (BoJ) board member Naoki Tamura said on Thursday that Japan has already achieved the Bank of Japan’s (BoJ) 2% inflation target and the central bank must raise rates near neutral to avoid underlying inflation from overshooting above target.

Gold (XAU/USD) remains under persistent selling pressure and trades below $4,000 in the European morning on Thursday. XAU/USD is down more than 4% since the beginning of the week.

The data from Australia showed earlier in the day that the Unemployment Rate edged lower to 4.4% in May from 4.5% in April, as expected. In this period, Full-Time Employment rose 5.2K after declining 21.7K in April. AUD/USD struggles to gather recovery momentum but manages to stabilize at around 0.6900 in the European morning on Thursday.

Inflation FAQs

What is inflation?

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%.

What is the Consumer Price Index (CPI)?

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.

What is the impact of inflation on foreign exchange?

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.

How does inflation influence the price of Gold?

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.