Forex Today: US inflation data leaves US Dollar holding firm

Wednesday, 11 November: Key market developments

The USD Index advanced more than 0.5% on Tuesday. The US Dollar (USD) strengthened against its peers, reversing Monday's bearish tone. By early Wednesday, the index remains comfortably above 102.30. Meanwhile, the benchmark 10-year US Treasury bond yield is up more than 2% on the day and stands near 5%. With no high-impact macroeconomic releases on the calendar, investors can keep their attention on bond and equity markets.

US Dollar Performance This Week

This week's percentage moves in the US Dollar (USD) against the major currencies listed are set out below. Its largest gain was against the Swiss Franc.

	USD	EUR	GBP	JPY	CAD	AUD	NZD	CHF
USD		-0.13%	0.14%	0.32%	0.66%	-0.08%	-0.67%	1.02%
EUR	0.13%		0.28%	0.44%	0.80%	0.15%	-0.53%	1.15%
GBP	-0.14%	-0.28%		0.15%	0.50%	-0.13%	-0.82%	0.87%
JPY	-0.32%	-0.44%	-0.15%		0.35%	-0.44%	-0.96%	0.66%
CAD	-0.66%	-0.80%	-0.50%	-0.35%		-0.76%	-1.35%	0.39%
AUD	0.08%	-0.15%	0.13%	0.44%	0.76%		-0.68%	0.91%
NZD	0.67%	0.53%	0.82%	0.96%	1.35%	0.68%		1.72%
CHF	-1.02%	-1.15%	-0.87%	-0.66%	-0.39%	-0.91%	-1.72%

Percentage movements between the major currencies appear in the heat map. Select the base currency in the left-hand column and the quote currency in the top row. Selecting the US Dollar on the left and following its row across to the Japanese Yen, for instance, gives the percentage change for USD (base)/JPY (quote) in the corresponding cell.

TMGM Analysis: Financial Market News, Economic Calendar & Market Insights

October's Consumer Price Index (CPI) rose 0.4%, while core CPI increased 0.3%, according to Tuesday's release from the US Bureau of Labor Statistics (BLS). Both readings exceeded market forecasts, lifting the USD. Wall Street's decline after the inflation release provided further support for the currency. The probability of a December Federal Reserve (Fed) rate increase, as measured by the CME FedWatch Tool, moved above 85%, up from about 80% before the CPI figures.

2027 inflation decline expected, but US price pressures to stay high: Commerzbank

US price pressures are still uncomfortably high, Commerzbank economists caution. They emphasise that “prices are still rising too quickly, even though the increase was somewhat smaller than in September.” In their assessment, “the rapid decline in inflation that the Fed had hoped for has yet to materialize,” while a “strong economy and the ongoing conflict in the Middle East suggest that inflation is unlikely to ease in the near term.” Commerzbank therefore maintains that “inflation is not expected to decline until 2027, and even then it is likely to remain above a level consistent with price stability.”

Chicago Federal Reserve President Austan Goolsbee, responding to the inflation figures, said CPI was "borderline disturbing". He added that inflation becoming embedded in expectations would be a "major concern".

Gold held above $4,000 despite intense selling that drove a daily decline of more than 2.5% on Tuesday. A corrective rebound is under way early Wednesday, with the precious metal trading around $4,060.

EUR/USD surrendered much of Monday's advance as broad-based USD strength sent the pair down more than 0.5% on Tuesday. Trading is relatively subdued around 1.1150 during the European morning. Wednesday's schedule includes speeches from several European Central Bank (ECB) policymakers, among them ECB President Christine Lagarde.

GBP/USD has steadied above 1.3300 at midweek after ending Tuesday about 0.75% lower. Speaking on Tuesday, Bank of England (BoE) Deputy Governor Clare Lombardelli declined to rule out a December rate increase, while stressing that she did not yet have sufficient information to confirm one. Third-quarter Gross Domestic Product (GDP) figures are due from the UK's Office for National Statistics on Thursday.

USD/JPY extended its upward momentum with a gain of more than 0.5% on Tuesday. Early Wednesday, the pair is pushing towards 159.00, reaching its highest trading level in nearly a month.

Inflation: Key Questions

How is inflation measured?

A rise in the cost of a representative basket of goods and services is measured as inflation. The headline rate is generally reported as a percentage change month-on-month (MoM) and year-on-year (YoY). Food and fuel, whose prices can move sharply with geopolitical developments and seasonal factors, are excluded from core inflation. Economists concentrate on this core measure, which central banks also target under their mandate to maintain manageable inflation, typically around 2%.

Consumer Price Index (CPI): What does it track?

Changes in the cost of a basket of goods and services over time are tracked by the Consumer Price Index (CPI). Reporting typically takes the form of percentage changes month-on-month (MoM) and year-on-year (YoY). Central banks target core CPI because it strips out volatile food and fuel components. A core CPI reading above 2% usually leads to higher interest rates; a reading below 2% generally has the reverse effect. Higher rates support a currency, so rising inflation normally strengthens it. Falling inflation has the opposite effect.

Inflation and foreign exchange: What is the link?

A country's currency tends to appreciate when inflation is high and weaken when inflation is low, however counter-intuitive that may appear. The explanation lies in interest rates: central banks normally raise them to contain stronger price pressures. Those higher rates draw additional global capital from investors seeking attractive returns on their money.

Gold prices: How does inflation matter?

Historically, investors sought Gold during periods of high inflation for its ability to retain value. They still often buy it as a safe haven during extreme market turmoil, but that pattern does not hold in most circumstances. High inflation prompts central banks to raise interest rates to bring price pressures under control. For Gold, higher rates are a negative: they raise the opportunity cost of owning the metal rather than an interest-bearing asset or a cash deposit. Lower inflation, by contrast, tends to benefit Gold by bringing interest rates down and making the metal a more attractive investment alternative.