Daily Financial Update – May 21
Here’s what you should know today:
The British pound (GBP) has gained traction against other currencies early Wednesday. This comes after the April inflation figures from the UK were released. Meanwhile, the US dollar (USD) is continuing to weaken amidst uncertainties around trade and ongoing political matters. It’s a relatively quiet day in terms of major data releases, which leaves investors focusing more on geopolitical developments and insights from central bankers.
This Week’s USD Performance
The table below illustrates how the US dollar compares to other currencies this week, with the dollar notably weak against the Swiss franc.
| USD | EUR | GBP | JPY | CAD | AUD | NZD | CHF | |
|---|---|---|---|---|---|---|---|---|
| USD | -1.36% | -1.27% | -1.22% | -0.64% | -0.80% | -1.14% | -1.78% | |
| EUR | 1.36% | 0.07% | 0.20% | 0.79% | 0.70% | 0.29% | -0.41% | |
| GBP | 1.27% | -0.07% | -0.17% | 0.71% | 0.62% | 0.21% | -0.49% | |
| JPY | 1.22% | -0.20% | 0.17% | 0.59% | 0.59% | 0.28% | -0.51% | |
| CAD | 0.64% | -0.79% | -0.71% | -0.59% | -0.14% | -0.50% | -1.20% | |
| AUD | 0.80% | -0.70% | -0.62% | -0.59% | 0.14% | -0.41% | -1.09% | |
| NZD | 1.14% | -0.29% | -0.21% | -0.28% | 0.50% | 0.41% | -0.70% | |
| CHF | 1.78% | 0.41% | 0.49% | 0.51% | 1.20% | 1.09% | 0.70% |
The accompanying heatmap gives a clearer picture of the currency fluctuations, where the base currency is listed in the left column and the estimated currency at the top. For instance, the change shown for USD to JPY reflects the USD’s value against the yen.
The UK’s National Statistics Office released data this morning indicating that annual inflation surged to 3.5%, up from 2.6% in March, exceeding the market consensus of 3.3%. Month-to-month, the Consumer Price Index rose 1.2% after a prior increase of 0.3%. Additionally, core CPI, which, as you might know, strips out food and energy prices, ticked up to 3.8%, topping the expected 3.6%.
As a result, the GBP/USD pair has gained momentum from this positive inflation report, climbing above 1.3450, reaching a peak not seen since February 2022.
On another front, China’s Commerce Department criticized the US’s advanced measures, describing them as an example of unilateral bullying and protectionism. They argued that the US is breaching international laws by misusing export controls against China.
As for the USD index, it is facing downward pressure, trading around 99.50, down about 0.5% for the day. This comes after significant losses for major US indices on Tuesday.
In early European trading, the EUR/USD pair is expected to edge higher, targeting around 1.1350, supported by recent weekly gains. The European Central Bank is set to release a financial stability review later today.
On the Asian front, Japan’s data indicated a year-on-year increase of 2% in April, with imports showing a decline of 2.2%. Consequently, the USD/JPY pair is forecasted to drift down towards 143.50.
In the commodities market, gold saw a 2% rise on Tuesday, buoyed by a risk-averse sentiment. The XAU/USD pair is trading well above $3,300 and has gained about 1% in a day.
Turning to the USD/CAD, after two down days to start the week, it remains under pressure, trading below 1.3900 as Statistics Canada indicated that annual CPI inflation eased to 1.7% in April from 2.3% in March.
Inflation FAQ
What does inflation measure?
Inflation tracks the increase in prices for a typical basket of goods and services. Headline inflation is typically reported in monthly and year-over-year percentages, while core inflation, which excludes more volatile items like food and fuel, tends to grab economists’ attention, especially as central banks aim to keep it around 2%.
What is the Consumer Price Index (CPI)?
The CPI measures the price changes of a basket of goods and services over time, reported in percentage changes on monthly and yearly bases. The core CPI excludes food and energy prices, serving as a target for central banks. When core CPI exceeds 2%, interest rates tend to rise, and if it falls below, the opposite occurs. Normally, higher inflation correlates with a stronger currency.
How does high inflation impact currency value?
This may sound contradictory, but high inflation can actually boost a currency’s value. Central banks often raise interest rates to tackle inflation, drawing in capital from investors seeking a solid return.
What about gold as an investment during inflation?
Gold is often seen as a safe haven during high inflation, but that isn’t always the case. As inflation rises, central banks may increase interest rates, which can negatively impact gold’s appeal. Conversely, lower inflation generally favors gold, as reduced interest rates make it a more attractive investment option.
