Forex Today: Easing Fed rate hike bets weigh on USD amid Mideast stalemate
Here is what you need to know on Friday, August 14:
The US Dollar (USD) struggles to stay resilient against its rivals on Thursday but manages to limit its losses as investors reassess the Federal Reserve's (Fed) policy outlook, while evaluating the developments in the Middle East. The European economic calendar will feature second-quarter Gross Domestic Product (GDP) growth data. In the second half of the day, July Retail Sales and the University of Michigan's preliminary Consumer Sentiment Index data from the United States (US) will be watched closely by market participants.
The data from the US showed on Thursday that annual producer inflation, as measured by the change in the Producer Price Index (PPI) softened to 4.7% in July from 5.5% in June. This print came in below the market expectation of 4.9%. According to the CME FedWatch Tool, the odds of a 25 basis points Fed rate hike in September currently stands about 33%, compared to nearly 50% a week ago. In turn, the USD Index stays in negative territory below 100.00 in the European session on Friday.
Fed hawkish rhetoric persists as August inflation data looms large
Analysts at Commerzbank argue that the upcoming US data will be pivotal for policy, noting that "the August inflation figures, which will be released shortly before the next Fed meeting, are now likely to be decisive." Against this backdrop, they highlight that Cleveland Fed President Beth Hammack is "working hard to cement her status as a hawk." Hammack "does not believe that inflation will subside on its own" and insists "the Fed must therefore back up its words with action." Moreover, Commerzbank underscores that, in her view, "a single interest rate hike would not be enough," reinforcing the message that parts of the Fed remain firmly committed to a tougher stance on inflation despite recent softer readings.
Meanwhile, US Treasury Secretary Scott Bessent noted on Thursday that Washington is going to apply measures that have "never been seen" on Iran, and US Secretary of Defense Pete Hegseth said that the US can sustain its blockade against Iran “indefinitely.” Following Thursday's choppyy action, crude Oil prices stretch higher early Friday, rising about 1% near $81.30.
Citing three sources familiar with the matter, Reuters reported on Friday that the Bank of Japan (BoJ) is set to raise interest rates as soon as September and is likely to hike more aggressively thereafter from the current pace of roughly twice a year. USD/JPY edges lower in the European morning and trades below 159.30.
Yen reaction muted even as BoJ tightening pace reaches historic clip
Analysts at OCBC highlight that, “despite the shift in expectations, the JPY's response has been muted,” even as markets increasingly price in another Bank of Japan move next month. They note that if the BoJ “deliver[s] another rate hike in September, it would mark its third increase in nine months and the fastest pace of policy tightening since the collapse of Japan's asset bubble in 1989.” However, OCBC cautions that “it remains unclear how much appetite the government has for additional rate hikes beyond September or October,” leaving investors uncertain about how far and how fast Japan’s policy normalisation can ultimately run.
Despite shifting expectations about a Fed rate increase in September, the uncertainty surrounding the situation in the Middle East made it difficult for Gold (XAU/USD) to build on its weekly gains. After closing in negative territory on Thursday, XAU/USD stays on the back foot and trades below $4,350 in the European session on Friday, down about 0.5% on the day.
After falling toward 1.1500 on Thursday, EUR/USD staged a rebound to close the day virtually unchanged. The pair holds its ground and trades marginally higher on the day, slightly below 1.1550, in the European morning. The Eurozone economy is foreacst to expand at an annual rate of 1% in the second quarter.
GBP/USD corrects higher and fluctuates at around 1.3500 early Friday, following two consecutive days of small losses.
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.