The People’s Bank of China (PBOC), which sets the daily midpoint for the yuan (also called renminbi or RMB), operates a managed floating exchange rate system. This system allows the yuan to fluctuate within a band of plus or minus 2% around the central reference rate, known as the midpoint.

The previous day’s closing rate was 6.9835. The PBOC has just injected 34 billion yuan through 7-day reverse repos at an unchanged interest rate of 1.4%. However, over the past week, the central bank has withdrawn a total of 1.655 trillion yuan via open market operations (OMOs), marking the largest weekly cash withdrawal in two years.

Earlier forecasts from Reuters anticipate the PBOC to set the USD/CNY reference rate at around 6.9832.

Traders should also note that China’s inflation figures are due shortly, at 0130 GMT (2030 US Eastern time). This data will be closely watched for indications of China’s domestic demand and price pressure trends.

Current inflation dynamics show persistently low inflation with slight upward momentum in consumer prices. In November, China’s Consumer Price Index (CPI) rose 0.7% year-on-year, marking its fastest increase in nearly two years. This rise was mainly driven by rebounding food prices, particularly fresh produce, alongside modest gains in other categories. Meanwhile, core inflation has remained stable at around 1.2%.

Conversely, the Producer Price Index (PPI) remains deeply negative, reflecting ongoing factory-gate deflation as industrial prices continue to lag. Although the PPI showed some month-on-month stabilisation towards the end of 2025, it remains a concern.

Market participants will scrutinise today’s inflation figures for clues on whether domestic demand is strengthening and if inflationary pressures are extending beyond the volatile food sector. The data will also influence assessments of China’s economic growth path and its impact on global reflation expectations for early 2026.

A firm called Zhe Shang Securities predicts the CPI to remain unchanged at 0.7% year-on-year, with no month-on-month change expected (0.0%). Notably, there is no consensus forecast available for the month-on-month figure. For PPI, Zhe Shang expects it to stay negative at approximately -1.9% year-on-year, which, although an improvement from November, remains deeply deflationary.

Forex traders should consider these developments as they assess potential impacts on the yuan and broader market sentiment.

Original Source: Eamonn Sheridan of investinglive.com