Forex Update: Optimism Grows as EU-US Relations Stabilize, Focus Shifts to US Economic Data
It's a positive turn in the markets this Thursday, January 22, as easing tensions between the United States and the European Union lift spirits. Investors are eagerly anticipating key economic updates from the US, including a revised report on third-quarter Gross Domestic Product (GDP) from the US Bureau of Economic Analysis, along with the Personal Consumption Expenditure (PCE) Price Index data for October and November. Additionally, attention will be directed towards the weekly Initial Jobless Claims report, a vital indicator of employment trends.
US Dollar Performance This Week
The following table illustrates how the US Dollar (USD) has fared against major currencies throughout this week. Notably, the USD experienced its most significant decline against the New Zealand Dollar.
| Currency | USD | EUR | GBP | JPY | CAD | AUD | NZD | CHF |
|----------|-----|-----|-----|-----|-----|-----|-----|-----|
| USD | -0.90% | -0.60% | 0.68% | -0.64% | -1.98% | -2.01% | -0.81% |
| EUR | 0.90% | 0.31% | 1.56% | 0.25% | -1.10% | -1.12% | 0.08% |
| GBP | 0.60% | -0.31% | 1.02% | -0.06% | -1.40% | -1.43% | -0.22% |
| JPY | -0.68% | -1.56% | -1.02% | -1.30% | -2.61% | -2.63% | -1.46% |
| CAD | 0.64% | -0.25% | 0.06% | 1.30% | -1.31% | -1.35% | -0.17% |
| AUD | 1.98% | 1.10% | 1.40% | 2.61% | 1.31% | -0.03% | 1.19% |
| NZD | 2.01% | 1.12% | 1.43% | 2.63% | 1.35% | 0.03% | 1.22% |
| CHF | 0.81% | -0.08% | 0.22% | 1.46% | 0.17% | -1.19% | -1.22% |
This table serves as a heat map, showcasing the percentage changes among major currencies. To interpret it, for example, if we look at the USD row and move horizontally to the JPY column, the value indicates how the USD has changed in relation to the JPY.
On late Wednesday, market risk sentiment improved after President Donald Trump announced that an agreement had been reached regarding the "framework of a future deal with respect to Greenland." He also stated that tariffs planned for eight European countries, which were set to take effect on February 1, would not be imposed. Following a significant drop earlier in the week, Wall Street's major indexes rebounded, each rising over 1% midweek. As of early Thursday, US stock index futures are trading slightly higher. In contrast, the US Dollar Index remains relatively stable below the 99.00 mark after breaking a two-day losing streak on Wednesday.
Meanwhile, Australian data released early Thursday revealed a decrease in the Unemployment Rate to 4.1% for December, down from 4.3% in November, which surpassed market expectations of 4.4%. Additionally, the Employment Change showed an increase of +65.2K for this period, following a drop of 28.7K in November. The AUD/USD pair is gaining positive momentum due to this encouraging data, trading at its highest level since October 2024, above 0.6800, marking a rise of approximately 0.7% for the day.
The EUR/USD currency pair remains in a consolidation phase, hovering below the 1.1700 mark after a decline exceeding 0.3% on Wednesday. Later today, the European Central Bank (ECB) is scheduled to release the minutes from their Monetary Policy Meeting, while the European Commission will present preliminary Consumer Confidence Index figures for January.
The GBP/USD exchange rate is showing sideways movement above the 1.3400 level during Thursday's European session, following a correction on Wednesday.
After struggling for direction earlier in the week, USD/JPY is now gaining momentum, moving toward the 159.00 level early Thursday. The Bank of Japan (BoJ) is expected to announce its monetary policy decisions during the Asian session on Friday.
Gold prices have retreated from their recent record high near $4,890 reached on Wednesday, yet the precious metal managed to close the day positively. Following a decline during the Asian session, XAU/USD found support and is currently trading flat above $4,800.
Understanding Inflation
Inflation refers to the increase in prices across a representative basket of goods and services. Typically, headline inflation is reported as a percentage change on both a month-over-month (MoM) and year-over-year (YoY) basis. Core inflation, which excludes more volatile components like food and fuel, is a key focus for economists and is the target for central banks aiming to maintain manageable inflation levels, often around 2%.
The Consumer Price Index (CPI) tracks the price changes of a selected basket of goods and services over time, expressed as a percentage change on a MoM and YoY basis. The Core CPI, which central banks prioritize, omits fluctuating food and fuel prices. When Core CPI exceeds 2%, it usually leads to increased interest rates, and conversely, when it falls below 2%, interest rates may decline. Higher interest rates typically strengthen a currency, while lower inflation can weaken it.
It may sound counterintuitive, but high inflation in a country often boosts its currency's value, while low inflation does the opposite. This occurs because central banks typically raise interest rates to combat rising inflation, attracting international capital from investors seeking profitable opportunities.
Historically, Gold has been viewed as a reliable asset during periods of high inflation due to its ability to retain value. While many investors still regard Gold as a safe haven during extreme market volatility, this isn't always the case. When inflation rises, central banks tend to increase interest rates, which negatively impacts Gold's attractiveness relative to interest-bearing investments or cash deposits. Conversely, lower inflation tends to be favorable for Gold, as it leads to reduced interest rates, making it a more appealing investment choice.
