Forex Today: China’s inflation looms as Lagarde tees up ECB decision

Forex markets have remained relatively inactive since the start of the week, with the US Dollar (USD) trading near 99.00 on Tuesday, as indicated by the US Dollar Index (DXY). Inflation data has taken center stage, with investors closely watching Thursday and Friday's Producer Price Index (PPI) and Consumer Price Index (CPI) reports in the United States.

The DXY, which measures the performance of six currencies against the USD, is currently at 98.82, close to the opening price on Tuesday, but forming a 'doji' candlestick that suggests uncertainty among traders. On Wednesday, the economic calendar will include the ADP Employment Change 4-week Average, followed by Thursday's Producer Price Index (PPI) release, which will be of particular interest to investors.

The European Central Bank (ECB) President, Christine Lagarde, will deliver a speech on Thursday, with money markets fully anticipating a 100% chance of a quarter-point rate hike during the ECB's monetary policy meeting. GBP/USD briefly surged to 1.3561 before consolidating around 1.3539 following comments by Bank of England (BoE) officials.

In this context, the Bank of England Governor Andrew Bailey stated that the US-Iran war is contributing to rising energy prices, while Megan Greene expressed concern over the prolonged period of high oil prices. Alan Taylor argued for maintaining "moderately restrictive" interest rates, while Dave Ramsden believed the domestic inflation situation to be relatively benign.

The economic agenda will remain quiet until Friday, when Gross Domestic Product (GDP) figures will be released. USD/JPY has continued to weaken, coinciding with suspected intervention by Japanese authorities, as the pair fell below 153.00 before rebounding. Even though US Treasury Secretary Scott Bessent is urging Japanese authorities to tighten policy, the pair might retest pre-intervention levels in the near term, driven by US inflation data and the strong correlation with the US 10-year Treasury yield.

Traders will be focusing on Machine Tool Orders in Japan. AUD/USD reached its daily high as Reserve Bank of Australia (RBA) Deputy Governor Hauser indicated that they will deliberate on raising rates at the upcoming meeting. In the meantime, Chinese inflation data will likely influence the market, ahead of the Australian Consumer Inflation Expectations for September.

Oil prices, especially West Texas Intermediate (WTI), have surged to a six-week high due to escalating hostilities, with the Houthis launching attacks on Saudi Arabia. Investment banks are worried that the conflict could persist until 2027. Gold prices have dipped below $4,400 a troy ounce as investors await the release of US inflation figures.

Notably, despite being a hedge against inflation, a higher interest rate environment may lead to higher bond yields, posing a challenge for gold bullion. Consequently, the yellow metal is likely to remain within established ranges until Friday's inflation report. The table below illustrates the percentage change of the US Dollar (USD) against major currencies today.

The US Dollar has been the strongest against the New Zealand Dollar. The heat map displays the percentage changes of major currencies against one another, with the base currency listed on the left column and the quote currency on the top row. For instance, selecting the US Dollar from the left column and moving horizontally to the Japanese Yen will display the percentage change between USD (base) and JPY (quote).

Markets analyst, news editor, and trading instructor with over 14 years of experience across foreign exchange, commodities, U.S. equity indices, and global macro markets.