Forex Today: US Dollar rebounds, focus shifts to UK 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 weakest against the Japanese Yen.

	USD	EUR	GBP	JPY	CAD	AUD	NZD	CHF
USD		0.08%	-0.06%	-0.45%	0.03%	0.43%	0.40%	0.05%
EUR	-0.08%		-0.14%	-0.55%	-0.06%	0.37%	0.32%	-0.02%
GBP	0.06%	0.14%		-0.27%	0.08%	0.51%	0.46%	0.09%
JPY	0.45%	0.55%	0.27%		0.49%	0.89%	0.84%	0.70%
CAD	-0.03%	0.06%	-0.08%	-0.49%		0.41%	0.38%	0.13%
AUD	-0.43%	-0.37%	-0.51%	-0.89%	-0.41%		-0.05%	-0.40%
NZD	-0.40%	-0.32%	-0.46%	-0.84%	-0.38%	0.05%		-0.37%
CHF	-0.05%	0.02%	-0.09%	-0.70%	-0.13%	0.40%	0.37%

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).

On Tuesday, the US Bureau of Labor Statistics (BLS) released its official employment report for the first time since the US government reopened. The publication showed that Nonfarm Payrolls declined by 105,000 in October and rose by 64,000 in November. The Unemployment Rate in November edged higher to 4.6% from 4.4%, while the annual wage inflation softened to 3.5% from 3.7% in this period. The USD Index declined to its lowest level since early October below 98.00 with the initial reaction before recovering a large portion of its losses later in the American session. Early Wednesday, the USD Index rises toward 98.50. In the second half of the day, several Fed policymakers will be delivering speeches.

After rising more than 0.3% on Tuesday, GBP/USD reversed its direction early Wednesday and declined below 1.3400. Annual inflation in the UK, as measured by the change in the Consumer Price Index (CPI), is forecast to soften to 3.5% in November from 3.6% in October.

EUR/USD climbed above 1.1800 for the first time since late September on Tuesday but lost its bullish momentum. The pair corrects lower and trades below 1.1750 in the European morning on Wednesday. Later in the session, IFO business sentiment data from Germany will be featured in the European economic calendar. Additionally, Eurostat will release revisions to November inflation data. On Thursday, the European Central Bank (ECB) will announce rate decisions and publish the revised macroeconomic projections.

USD/JPY closed the second consecutive day in negative territory on Tuesday before staging a rebound. At the time of press, the pair was up 0.3% on the day at 155.15.

After failing to find direction on Tuesday, Gold gains traction early Wednesday and gains about 0.7% on the day near $4,330.

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.