Forex Today: Critical central bank week begins with fresh US-Iran news

US Dollar Price Last 7 Days

The table below shows the percentage change of US Dollar (USD) against listed major currencies last 7 days. US Dollar was the strongest against the Swiss Franc.

	USD	EUR	GBP	JPY	CAD	AUD	NZD	CHF
USD		0.14%	-0.37%	0.33%	-0.20%	-0.55%	-0.40%	0.48%
EUR	-0.14%		-0.50%	0.19%	-0.31%	-0.66%	-0.58%	0.34%
GBP	0.37%	0.50%		0.71%	0.20%	-0.15%	-0.08%	0.85%
JPY	-0.33%	-0.19%	-0.71%		-0.53%	-0.82%	-0.76%	0.16%
CAD	0.20%	0.31%	-0.20%	0.53%		-0.25%	-0.23%	0.67%
AUD	0.55%	0.66%	0.15%	0.82%	0.25%		0.16%	1.03%
NZD	0.40%	0.58%	0.08%	0.76%	0.23%	-0.16%		0.89%
CHF	-0.48%	-0.34%	-0.85%	-0.16%	-0.67%	-1.03%	-0.89%

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).

Over the weekend, US President Donald Trump called off the delegation that was supposed to travel to Pakistan for the next round of talks with Iran, saying that Iran has "offered a lot, but not enough." On Sunday, President Trump reiterated that that the Iran war will end soon and they will be victorious. During the Asian trading hours on Monday, Iran reportedly sent a new proposal to the US to reopen the Strait of Hormuz and to end the conflict. According to Axios, Iran offered to hold nuclear talks once the US blockade of the Strait of Hormuz is lifted.

The US Dollar (USD) opened with a bullish gap but erased its gains in the early Asian session. As of writing, the USD Index was virtually unchanged on the day at 98.50. On Wednesday, the Federal Reserve (Fed) will announce monetary policy decisions. Meanwhile, US stock index futures trade mixed.

USD/JPY fell about 0.25% on Friday but managed to end the week in positive territory, snapping a three-week losing streak in the process. In the European morning on Monday, the pair fluctuates in a tight channel below 159.50. The Bank of Japan (BoJ) is widely expected to keep its policy settings policy unchanged following the April meeting.

The data froM Germany showed that the GfK Consumer Confidence Index for May declined to -33.3 from -28.1 in April. EUR/USD holds steady above 1.1700 after having registered marginal gains in the previous week. The European Central Bank will announce its interest rate decision on Thursday.

GBP/USD moves sideways above 1.3500 in the early European session on Monday.

Gold (XAU/USD) lost more than 2% last week and failed to stage a rebound early Monday. XAU/USD stays relatively quiet and moves up and down in a narrow band above $4,700.

USD/CAD edges slightly lower and trades at around 1.3650 in the European morning. The Bank of Canada is another major central bank that will hold its policy meeting this week.

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.