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Fed talk and inflation data from Canada attract market attention

Here's what you need to know on Tuesday, August 20:

Major currency pairs appear to have stabilized on Tuesday morning in Europe as investors await the next catalyst. Eurostat will release revisions to July inflation data later in the session and Statistics Canada will release July consumer price index data later in the day. Market participants will also be paying close attention to comments from Federal Reserve (Fed) officials.

After starting the week under bearish pressure, US Dollar (USD) The US stock index continued to weaken against its major rivals in the second half of the day on Monday, as bullish developments on Wall Street suggested an improvement in risk appetite. In the early European session, US stock index futures traded marginally higher on the day, with the USD index holding steady just below 102.00.

US Dollar Price This Week

The table below shows the percentage change of the US dollar (USD) against the major listed currencies this week. The US dollar was weakest against the New Zealand dollar.

USD EUR GBP EUR CAD AUD NZD CHF
USD -0.51% -0.39% -0.41% -0.41% -0.90% -1.36% -0.42%
EUR 0.51% 0.04% 0.13% 0.11% -0.49% -1.02% 0.06%
GBP 0.39% -0.04% -0.06% 0.03% -0.54% -1.00% 0.01%
EUR 0.41% -0.13% 0.06% -0.07% -0.53% -0.84% -0.15%
CAD 0.41% -0.11% -0.03% 0.07% -0.53% -0.88% -0.06%
AUD 0.90% 0.49% 0.54% 0.53% 0.53% -0.38% 0.55%
NZD 1.36% 1.02% 1.00% 0.84% 0.88% 0.38% 0.97%
CHF 0.42% -0.06% -0.01% 0.15% 0.06% -0.55% -0.97%

The heatmap shows the percentage changes of the major currencies relative to each other. The base currency is selected from the left column, while the quote currency is selected from the top row. For example, if you select the US dollar from the left column and move along the horizontal line to the Japanese yen, the percentage change shown in the box corresponds to USD (base)/JPY (quote).

EUR/USD rose 0.5% for the second straight trading day on Monday, reaching its highest level since late December at 1.1090. Early Tuesday, the pair remains in a consolidation phase at around 1.1080. The European Central Bank (ECB) is due to release data on negotiated wages for the second quarter later in the day.

During Asian trading hours, the People's Bank of China (PBoC) announced that it had left the one-year and five-year loan prime rates (LPRs) unchanged at 3.35% and 3.85%, respectively, a decision in line with market expectations.

Minutes of the Reserve Bank of Australia's (RBA) August meeting show that board members considered a rate hike but decided that a stable outcome would better balance risks. The central bank further said that the key rate may need to remain stable for a “prolonged period.” After rising almost 1% on Monday to its highest level in a month, AUD/USD fell slightly and was last quoted above 0.6700. Meanwhile USD/CHF maintains its bullish momentum and is trading at a new six-week high at around 0.6130.

Inflation in Canada, as measured by the change in the consumer price index (CPI), is expected to decline from 2.7% in June to 2.5% in July. USD/CAD is trading slightly lower at 1.3620 early Tuesday morning, after losing 0.3% on Monday.

GBP/USD continued its uptrend, reaching its highest level in over a month at 1.3000 during Asian trading hours on Tuesday. Heading into the European session, the pair remains just below that level.

USD/JPY recovered from the two-week low it hit on Monday, but ended the day deep in the red. The pair rose slightly to 147.00 on Tuesday morning in Europe.

Gold on Monday, there was a downward correction towards $2,480, but it managed to regain ground in the American session, closing the day just above $2,500. Early Tuesday, XAU/USD is fluctuating in a tight channel at around $2,505.

Frequently asked questions about risk sentiment

In the world of financial jargon, the two widely used terms “risk on” and “risk off” refer to the level of risk that investors are willing to take during the period in question. In a “risk on” market, investors are optimistic about the future and are more willing to buy risky assets. In a “risk off” market, investors start to “play it safe” because they are worried about the future and therefore buy less risky assets that are more certain to produce a return, even if it is relatively small.

In times when risks are high, stock markets typically rise, and most commodities – except gold – also gain value as they benefit from positive growth prospects. The currencies of countries that are major commodity exporters strengthen due to increased demand, and cryptocurrencies rise. In a “risk-off” market, bonds – especially large government bonds – rise, gold shines, and safe haven currencies like the Japanese yen, Swiss franc and US dollar benefit.

The Australian Dollar (AUD), Canadian Dollar (CAD), New Zealand Dollar (NZD), and smaller currencies such as the Ruble (RUB) and South African Rand (ZAR) all tend to rise in risk-on markets. This is because the economies of these currencies are heavily dependent on commodity exports for growth, and commodity prices tend to rise during risk-on times. This is because investors expect higher demand for commodities in the future due to increased economic activity.

The main currencies that tend to rise during times of “risk aversion” are the US dollar (USD), the Japanese yen (JPY) and the Swiss franc (CHF). The US dollar because it is the world's reserve currency and because in times of crisis investors buy US government bonds, which are considered safe since the world's largest economy is unlikely to default. The yen because demand for Japanese government bonds has increased because a large portion of them are held by domestic investors who are unlikely to dump these bonds – even in a crisis. The Swiss franc because Switzerland's strict banking laws offer investors better capital protection.

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