Forex Today: Eyes on German inflation data and Fedspeak as trading conditions normalize

Here is what you need to know on Tuesday, April 2:

Trading conditions are starting to normalizing on Tuesday with investors returning from the long Easter holiday. Germany’s Destatis will release preliminary Consumer Price Index data for March and the US economic docket will feature Factory Orders and JOLTS Job Openings data for February. Several Federal Reserve (Fed) policymakers are scheduled to deliver speeches during the American trading hours as well.

Following a quiet European session on Monday, the US Dollar (USD) gathered strength against its rivals in the second half of the day, supported by rising US Treasury bond yields and the ISM Manufacturing PMI data, which came in better than expected. The USD Index rose 0.4% on the day and reached its highest level since November before going into a consolidation phase above 105.00 early Tuesday. Meanwhile, the 10-year US Treasury bond yield holds steady above 4.3% after rising 2.5% on Monday. 

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 Pound Sterling.

 
USD
EUR
GBP
CAD
AUD
JPY
NZD
CHF

USD
 
0.61%
0.73%
0.40%
0.67%
0.22%
0.67%
0.62%

EUR
-0.62%
 
0.12%
-0.21%
0.05%
-0.40%
0.05%
0.01%

GBP
-0.74%
-0.12%
 
-0.33%
-0.06%
-0.53%
-0.06%
-0.12%

CAD
-0.42%
0.21%
0.32%
 
0.25%
-0.20%
0.24%
0.20%

AUD
-0.66%
-0.04%
0.08%
-0.26%
 
-0.44%
0.01%
-0.04%

JPY
-0.23%
0.41%
0.51%
0.19%
0.48%
 
0.46%
0.40%

NZD
-0.67%
-0.05%
0.07%
-0.25%
0.01%
-0.46%
 
-0.05%

CHF
-0.63%
-0.01%
0.11%
-0.22%
0.05%
-0.41%
0.05%
 

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).

EUR/USD broke below 1.0800 and lost nearly 0.5% on a daily basis on Monday. The pair stays on the back foot and trades in negative territory below 1.0750 in the European morning.

GBP/USD turned south in the American session on Monday and slumped to the 1.2550 area. The pair holds steady near that level on Tuesday.

The minutes of the Reserve Bank of Australia’s (RBA) March meeting showed that board members did not consider the option for an interest rate rise. AUD/USD showed no reaction to this publication and was last seen consolidating Monday’s losses slightly below 0.6500.

Australian Dollar moves sideways amid an improved US Dollar.

After moving sideways in a very tight channel for several days, USD/JPY closed in positive territory and came within a touching distance of multi-decade highs on Monday. The pair stays relatively quiet at around 151.70 early Tuesday. Japanese Finance Minister Shunichi Suzuki repeated that they will not rule out any steps to respond to disorderly moves and that they will monitor foreign exchange moves with a high sense of urgency. 

Japanese Yen languishes near multi-decade low, seems vulnerable to slide further.

Gold reached a new all-time high above $2,260 early Monday but erased a portion of its daily gains on broad-based USD strength in the American session. XAU/USD seems to have stabilized at around $2,250 on Tuesday.

US Dollar FAQs

The US Dollar (USD) is the official currency of the United States of America, and the ‘de facto’ currency of a significant number of other countries where it is found in circulation alongside local notes. It is the most heavily traded currency in the world, accounting for over 88% of all global foreign exchange turnover, or an average of $6.6 trillion in transactions per day, according to data from 2022. Following the second world war, the USD took over from the British Pound as the world’s reserve currency. For most of its history, the US Dollar was backed by Gold, until the Bretton Woods Agreement in 1971 when the Gold Standard went away.

The most important single factor impacting on the value of the US Dollar is monetary policy, which is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability (control inflation) and foster full employment. Its primary tool to achieve these two goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, the Fed will raise rates, which helps the USD value. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates, which weighs on the Greenback.

In extreme situations, the Federal Reserve can also print more Dollars and enact quantitative easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used when credit has dried up because banks will not lend to each other (out of the fear of counterparty default). It is a last resort when simply lowering interest rates is unlikely to achieve the necessary result. It was the Fed’s weapon of choice to combat the credit crunch that occurred during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy US government bonds predominantly from financial institutions. QE usually leads to a weaker US Dollar.

Quantitative tightening (QT) is the reverse process whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing in new purchases. It is usually positive for the US Dollar.

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