Forex Today: US Dollar rises on escalating tensions in Middle East, eyes on inflation data
Here is what you need to know on Thursday, May 28:
Following the bearish action seen in the first half of the day on Wednesday, the US Dollar (USD) gathered strength in the American session as markets reacted to escalating tensions in the Middle East. The USD continues to benefit from the risk-averse market atmosphere early Thursday as investors await key macroeconomic data releases from the US, including a revision to the first-quarter Gross Domestic Product (GDP) growth and the Personal Consumption Expenditures (PCE) Price Index for April.
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 Australian Dollar.
| USD | EUR | GBP | JPY | CAD | AUD | NZD | CHF | |
|---|---|---|---|---|---|---|---|---|
| USD | 0.25% | 0.38% | 0.41% | 0.32% | 0.55% | -0.14% | 0.46% | |
| EUR | -0.25% | 0.16% | 0.20% | 0.08% | 0.26% | -0.39% | 0.21% | |
| GBP | -0.38% | -0.16% | -0.19% | -0.10% | 0.10% | -0.56% | 0.08% | |
| JPY | -0.41% | -0.20% | 0.19% | -0.11% | 0.10% | -0.57% | 0.04% | |
| CAD | -0.32% | -0.08% | 0.10% | 0.11% | 0.21% | -0.46% | 0.17% | |
| AUD | -0.55% | -0.26% | -0.10% | -0.10% | -0.21% | -0.65% | -0.06% | |
| NZD | 0.14% | 0.39% | 0.56% | 0.57% | 0.46% | 0.65% | 0.64% | |
| CHF | -0.46% | -0.21% | -0.08% | -0.04% | -0.17% | 0.06% | -0.64% |
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).
Iran's State TV reported on Wednesday that the unofficial framework of the Memorandum of Understanding (MOU) with the United States (US) has the US military forces withdrawing from the vicinity of Iran and lifting the naval blockade. In return, Iran has committed to restoring the number of commercial transit ships through Hormuz Strait to pre-war levels within one month. Although this headline helped the risk mood improve slightly, safe-haven flows returned in the second half of the day as US President Donald Trump said that he will not be rushed into a deal. Additionally, news of the US targeting Iranian drones and a launch site around the Strait of Hormuz and Iran retaliating by launching an attack against an American base they believed to be the source of the US strikes caused investors to lose optimism about a US-Iran deal.
Early Thursday, the barrel of West Texas Intermediate (WTI) is up about 2% on the day and the USD Index clings to small daily gains above 99.30. In the meantime, US stock index futures are down between 0.2% and 0.4% on the day, reflecting the sourding market mood.
Gold remains under heavy bearish pressure after losing more than 1% for two consecutive days and trades at its lowest level in a month below $4,400.
EUR/USD trades in the red near 1.1600 after posting marginal losses on Wednesday. Later in the session, the European Central Bank (ECB) will publish the accounts of the April policy meeting. Additionally, the European Commission will release business and consumer sentiment data for May.
GBP/USD stays on the back foot after posting losses for two consecutive days and tests 1.3400 in the European morning on Thursday.
USD/JPY climbs to 159.50 area and trades at its highest level since Japan intervened in the foreign exchange market on April 30.
AUD/USD remains under bearish pressure and declines toward 0.7100 after losing more than 0.3% on Wednesday.
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.
