Forex Today: Pound Sterling benefits from UK inflation data, markets await central bank speak
Here is what you need to know on Wednesday, November 20:
Pound Sterling gathers strength against its peers early Wednesday, supported by the stronger-than-forecast inflation readings for October. Later in the day, investors will pay close attention to comments from Federal Reserve (Fed) and Bank of England (BoE) policymakers.
British Pound PRICE Today
The table below shows the percentage change of British Pound (GBP) against listed major currencies today. British Pound was the strongest against the Japanese Yen.
| USD | EUR | GBP | JPY | CAD | AUD | NZD | CHF | |
|---|---|---|---|---|---|---|---|---|
| USD | 0.06% | -0.22% | 0.51% | -0.08% | 0.05% | 0.14% | 0.20% | |
| EUR | -0.06% | -0.28% | 0.46% | -0.14% | -0.02% | 0.07% | 0.13% | |
| GBP | 0.22% | 0.28% | 0.71% | 0.14% | 0.26% | 0.36% | 0.42% | |
| JPY | -0.51% | -0.46% | -0.71% | -0.59% | -0.47% | -0.39% | -0.32% | |
| CAD | 0.08% | 0.14% | -0.14% | 0.59% | 0.12% | 0.22% | 0.28% | |
| AUD | -0.05% | 0.02% | -0.26% | 0.47% | -0.12% | 0.10% | 0.16% | |
| NZD | -0.14% | -0.07% | -0.36% | 0.39% | -0.22% | -0.10% | 0.06% | |
| CHF | -0.20% | -0.13% | -0.42% | 0.32% | -0.28% | -0.16% | -0.06% |
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 British Pound from the left column and move along the horizontal line to the US Dollar, the percentage change displayed in the box will represent GBP (base)/USD (quote).
The UK's Office for National Statistics announced on Wednesday that annual inflation in the UK, as measured by the change in the Consumer Price Index (CPI), climbed to 2.3% in October from 1.7% in September. The Core CPI, which excludes volatile food and energy prices, rose 3.3% in the same period, coming in above the market expectation of 3.1%. On a monthly basis, the CPI increased 0.6% after staying unchanged in September. Finally, the Retail Price Index was up 3.4% on a yearly basis, compared to 2.7% in September. GBP/USD edged higher with the immediate reaction to these figures and was last seen trading in positive territory slightly above 1.2700.
Escalating geopolitical tensions caused investors to seek refuge on Tuesday, allowing the US Dollar (USD) to stay resilient against its major rivals following Monday's decline. The USD Index closed the day virtually unchanged and started to edge slightly higher early Wednesday. Reuters reported that Ukraine has struck an arms depot about 100 km inside Russia, near the town of Karaches, using US ATACMS missiles. Wall Street's main indexes closed mixed for the second consecutive day on Tuesday. In the European morning on Wednesday, US stock index futures trade modestly higher.
Gold benefited from the risk-averse market atmosphere and rose nearly 0.8% on Tuesday. After reaching its highest level in a week above $2,640 in the early Asian session on Wednesday, XAU/USD retreated to the $2,630 area.
During the Asian trading hours on Wednesday, the People’s Bank of China (PBoC), China's central bank, announced that it left the one-year and five-year Loan Prime Rates (LPRs) unchanged at 3.10% and 3.60%, respectively. This decision came in line with the market expectation. After ending the third consecutive day in positive territory, AUD/USD inched higher earlier in the day but declined below 0.6530 by the European morning.
EUR/USD recovered late Tuesday after falling toward 1.0520 and closed the day virtually unchanged. The pair trades in a tight range below 1.0600 to start the European session. The European Central Bank will release Negotiated Wage Rates data for the third quarter on Wednesday. Later in the day, ECB President Christine Lagarde will deliver a welcome address at the ECB conference on financial stability and macroprudential policy in Frankfurt, Germany.
USD/JPY gathers bullish momentum and trades near 155.50 in the European morning following Tuesday's choppy action. Bank of Japan Governor Kazuo Ueda is scheduled to deliver a speech in the Asian session on Thursday.
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.
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