Forex Today: US Dollar and Oil rally stall to start big central bank week
Here is what you need to know on Monday, March 16:
Crude Oil prices edge lower following a bullish opening and the US Dollar (USD) Index corrects lower early Monday after rising more than 1.5% in the previous week. In the second half of the day, Statistics Canada will release February Consumer Price Index (CPI) data. The US economic calendar will feature Industrial Production data for February, in addition to the NY Empire State Manufacturing Index for March. Later in the week, the Reserve Bank of Australia (RBA), the Bank of Canada (BoC), the Federal Reserve (Fed), the European Central Bank (ECB), the Bank of England (BoE) and the Bank of Japan (BoJ) will conduct policy meetings.
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 1.02% 0.70% 0.73% 0.84% -0.46% 1.02% 1.51% EUR -1.02% -0.34% -0.27% -0.20% -1.49% -0.03% 0.47% GBP -0.70% 0.34% 0.08% 0.14% -1.16% 0.31% 0.80% JPY -0.73% 0.27% -0.08% 0.13% -1.17% 0.30% 0.78% CAD -0.84% 0.20% -0.14% -0.13% -1.31% 0.17% 0.66% AUD 0.46% 1.49% 1.16% 1.17% 1.31% 1.49% 1.98% NZD -1.02% 0.03% -0.31% -0.30% -0.17% -1.49% 0.49% CHF -1.51% -0.47% -0.80% -0.78% -0.66% -1.98% -0.49%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, the US military hit targets located on Kharg Island, a strategic Iranian outpost in the Persian Gulf, and warned it could hit oil infrastructure next if Tehran keeps disrupting naval activity in the Strait of Hormuz. Trump also called on allies to help secure the Strait of Hormuz. Reporting on the matter, the Wall Street Journal said that the White House was preparing to announce that multiple countries have agreed to form a coalition to escort ships.
European Union (EU) foreign ministers are reportedly debating a potential naval response to the effective closure of the Strait of Hormuz, and the UK plans to send minesweeping drones to help secure the flow of Oil exports. Japanese Prime Minister (PM) Sanae Takaichi said on Monday that they are exploring ways to protect Japanese vessels in the Middle East, but said they don't currently have any plans to dispatch the navy to the Middle East.
Meanwhile, US Energy Secretary Chris Wright said that he expects the conflict to come to an end within the next few weeks and added that they will see a rebound in Oil supplies, followed by a decline in prices. The barrel of West Texas Intermediate (WTI) started the week with a small bullish gap and tested $100 before retreating toward $98.
The USD Index fluctuates at around 100.30 in the European morning after touching its highest level since May above 100.50 on Friday.
Gold (XAU/USD) lost nearly 3% in the previous week and dropped to its weakest level in nearly a month below $4,970 in the early trading hours of the Asian session on Monday. XAU/USD stages a rebound in the European morning and trades slightly above $5,000.
EUR/USD finds a foothold and recovers toward 1.1450 after posting large losses last week.
GBP/USD clings to modest daily gains near 1.3250 in the European morning on Monday.
AUD/USD gains traction at the beginning of the week and trades above 0.7000, rising more than 0.5% on the day. The RBA is expected to raise the policy rate by 25 basis points to 4.1% after the March meeting.
USD/JPY rose more than 1% last week and closed the fourth consecutive week in positive territory. The pair corrects lower and trades below 159.50 in the early European session. Japan’s Finance Minister Satsuki Katayama said on Monday that officials were prepared to take decisive steps on foreign exchange.
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.
