Forex Today: Slow start to big central bank week
Here is what you need to know on Monday, March 18:
Major currency pairs fluctuate in narrow ranges to start the week as market participants refrain from taking large positions ahead of this week's critical central bank meetings and data releases. In the European session, Eurostat will release revisions to February inflation data. In the Asian trading hours on Tuesday, the Bank of Japan (BoJ) and the Reserve Bank of Australia (RBA) will announce monetary policy decisions.
The US Dollar (USD) Index snapped a three-week losing streak as the benchmark 10-year US Treasury bond yield climbed to 4.3%, gaining more than 5% on a weekly basis. The USD Index holds steady at around 130.50 in the European morning on Monday and the 10-year yield moves sideways near 4.3%. Meanwhile, US stock index futures trade modestly higher in the early European session.
US Dollar price in the last 7 days
The table below shows the percentage change of US Dollar (USD) against listed major currencies in the last 7 days. US Dollar was the strongest against the Japanese Yen.
| USD | EUR | GBP | CAD | AUD | JPY | NZD | CHF | |
| USD | 0.49% | 0.94% | 0.36% | 0.89% | 1.64% | 1.42% | 0.69% | |
| EUR | -0.49% | 0.45% | -0.14% | 0.40% | 1.15% | 0.94% | 0.21% | |
| GBP | -0.94% | -0.44% | -0.58% | -0.04% | 0.72% | 0.50% | -0.23% | |
| CAD | -0.36% | 0.13% | 0.57% | 0.53% | 1.28% | 1.06% | 0.33% | |
| AUD | -0.90% | -0.40% | 0.04% | -0.54% | 0.76% | 0.54% | -0.20% | |
| JPY | -1.65% | -1.15% | -0.46% | -1.31% | -0.75% | -0.20% | -0.97% | |
| NZD | -1.44% | -0.94% | -0.49% | -1.08% | -0.53% | 0.22% | -0.74% | |
| CHF | -0.69% | -0.19% | 0.25% | -0.32% | 0.21% | 0.95% | 0.74% |
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 Euro from the left column and move along the horizontal line to the Japanese Yen, the percentage change displayed in the box will represent EUR (base)/JPY (quote).
Earlier in the day, the data from China showed that January-February Retail Sales rose 5.5% on a yearly basis in February, this reading came in better than the market expectation for an increase of 5.2%. Additionally, Industrial Production expanded by 7% in the same period, surpassing analysts' estimate of 5%. In a press conference on Monday, China's National Bureau of Statistics (NBS) noted the national economy continued to recover and turn for the better in the January-February period, with macro policies taking effect. The NBS also noted that the foundation for economic recovery and growth needs to be "further consolidated."
The RBA is forecast to leave the policy rate unchanged at 4.35%. After falling nearly 1% in the previous week, AUD/USD stays in a consolidation phase slightly above 0.6550 in the European morning on Monday.
Australian Dollar holds its ground amid weaker US Dollar, ASX 200 Index.
The BoJ announced on Monday that it will conduct an unscheduled bond operation, offering to buy 3 trillion yen of bonds (JGBs) in an agreement starting on Tuesday and ending on Thursday. Markets are still uncertain about whether the BoJ will end its negative interest rate policy following the March meeting. USD/JPY rose over 1% last week and stabilized above 149.00.
Japanese Yen remains depressed against USD, traders seem non-committed ahead of BoJ and Fed.
EUR/USD failed to stage a rebound following Thursday's sharp decline and closed the previous week in negative territory. Early Monday, the pair moves up and down in a tight channel slightly below 1.0900.
GBP/USD fell nearly 1% and registered its largest one-week loss since December last week. The pair stays below 1.2750 in the early European morning.
Gold closed in negative territory last week and continued to stretch lower to start the new week. At the time of press, XAU/USD was down nearly 0.5% on a daily basis below $2,150.
Gold price struggles below $2,150, over one-week low as traders look to Fed for fresh impetus.
Central banks FAQs
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%.
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.
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%.
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.