Forex Today: Risk aversion grips markets as tensions in Mideast escalate further
Here is what you need to know on Wednesday, September 2:
Markets adopt a cautious stance midweek as the crisis in the Middle East deepens. In the second half of the day, private sector employment data from the United States (US) will be watched closely by investors. Additionally, the Bank of Canada (BoC) will announce its monetary policy decisions.
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 | 0.07% | 0.23% | -0.26% | 0.11% | 0.23% | 1.53% | 0.63% | |
| EUR | -0.07% | 0.16% | -0.31% | 0.03% | 0.15% | 1.41% | 0.57% | |
| GBP | -0.23% | -0.16% | -0.56% | -0.13% | -0.02% | 1.24% | 0.32% | |
| JPY | 0.26% | 0.31% | 0.56% | 0.28% | 0.46% | 1.66% | 0.76% | |
| CAD | -0.11% | -0.03% | 0.13% | -0.28% | 0.12% | 1.38% | 0.45% | |
| AUD | -0.23% | -0.15% | 0.02% | -0.46% | -0.12% | 1.26% | 0.33% | |
| NZD | -1.53% | -1.41% | -1.24% | -1.66% | -1.38% | -1.26% | -0.91% | |
| CHF | -0.63% | -0.57% | -0.32% | -0.76% | -0.45% | -0.33% | 0.91% |
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).
During the American trading hours on Tuesday, crude Oil prices surged higher on news of the US military carrying out strikes that Tehran claimed killed civilians. Following the attack, "they will be hit again at a much harder and higher level, but it will not be the biggest attack of them all, that is waiting in the wings and, when it is over, there will be very little left of the Islamic Republic of Iran," US President Donald Trump wrote on Truth Social. In response, the Islamic Revolutionary Guard Corps says it attacked two US military bases in the United Arab Emirates (UAE).
The barrel of West Texas Intermediate (WTI) gained nearly 5% on Tuesday and touched its highest level since late July above $90 during the Asian trading hours on Wednesday before correcting lower. At the time of press, WTI was trading flat on the day, at around $89.50.
Brent extends gains as US-Iran tensions stoke supply fears
Analysts at Danske Bank note that in commodities, Brent crude has “climbed above USD 95/bbl., after trading around USD 90/bbl. earlier this week,” marking its highest level in nearly six weeks as renewed US-Iran hostilities intensify concerns over Middle East supply risks. They highlight that the US has “launched a second round of strikes in three days against IRGC targets,” with Trump warning that if Tehran retaliates, it will be hit “at a much harder and higher level.”
The US Dollar (USD) also benefited from the risk-averse market atmosphere on Tuesday, with the USD Index closing in positive territory. Early Wednesday, the USD Index continues to push higher toward 100.00.
The Reserve Bank of New Zealand (RBNZ) announced that it raised the policy rate by 25 basis points to 2.75% early Wednesday. This decision came in line with the market expectation. In the post-meeting press conference, RBNZ Governor Anna Breman said that they will need to take some time to assess the stance of the policy, adding that they are not on a preset course and the timing of another possible rate hike is highly uncertain. NZD/USD came under heavy bearish pressure following the RBNZ event and was lasts seen trading at its weakest level in nearly 3 weeks below 0.5850, losing about 0.9% on the day.
The data from Australia showed in the Asian session that the Gross Domestic Product (GDP) expanded at an annual rate of 2.1% in the second quarter. This print followed the 2.5% growth recorded in the first quarter and came in better than analysts' estimate of 1.8%. AUD/USD showed no reaction to the GDP reading and was last seen trading flat on the day, slightly below 0.7150.
USD/CAD gathers bullish momentum after closing in positive territory on Tuesday and trades above 1.3900 in the European session on Wednesday. Markets expect the BoC to leave the interest rate unchanged at 2.25%.
Canada-US tensions keep pressure on the Loonie despite BoC stance
Analysts at Commerzbank argue that the key headwind for the Canadian Dollar lies beyond domestic monetary policy. They stress that “the main problem for the CAD is nevertheless likely to remain unresolved: Relations between Canada and the US have once again hit a low point, and it is unclear whether the situation will improve in the coming weeks.” In their view, even if the BoC uses today’s meeting to signal a slightly more hawkish bias, “even if officials drop hints today, market participants should thus be aware that the CAD's fate currently depends more on US relations than on Canadian monetary policy.”
Bank of Japan (BoJ) board member Hajime Takata argued on Wednesday that the BoJ needs a nimble approach with rate hikes, adding that they need to consider a broad range of options, not just a 0.25% rate increase each time. "Rate hike pace should be assessed at every meeting. Generally speaking, consecutive rate hikes could be a possibility," he noted. USD/JPY stays on the back foot following these remarks and was last seen losing 0.35% on the day at 159.65.
Pressured by the broad-based USD strength, EUR/USD edges lower in the European morning on Wednesday and closes in on 1.1550.
Gold (XAU/USD) suffered heavy losses on escalating geopolitical tensions on Tuesday, losing more than 2.5% on the day. XAU/USD struggles to stage a rebound early Wednesday and fluctuates in a relatively narrow channel above $4,300.
Gold slips as higher oil prices revive US inflation concerns
ING commodities strategists note that gold has come under renewed pressure, with prices "eased to a two-week low, slipping below $4,300/oz," as escalating tensions in the Middle East drive oil prices higher. They explain that this move in energy markets has "prompted markets to reassess the outlook for US interest rates," with "rising energy costs" seen as potentially adding "to inflationary pressures and reduce the scope for near-term Federal Reserve easing," a combination that is "weighing on non-yielding assets such as Gold."
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.