EUR/USD slips as US CPI meets expectations
- EUR/USD edges lower as the US Dollar strengthens after US CPI matched expectations.
- Steady US inflation reinforces expectations for a cautious Federal Reserve monetary policy stance.
- US-Iran war fuels Oil-driven inflation fears, clouding the global monetary policy outlook.
The Euro (EUR) weakens against the US Dollar on Wednesday as the Greenback strengthens after US inflation data came broadly in line with forecasts. At the time of writing, EUR/USD is trading around 1.1587, extending losses for the second straight day.
The latest US inflation data showed that the Consumer Price Index (CPI) rose 0.3% MoM in February, matching market expectations and accelerating from 0.2% in January. On an annual basis, headline CPI held steady at 2.4% YoY, also in line with forecasts.
Meanwhile, core CPI, which excludes volatile food and energy prices, rose 0.2% MoM in February, slowing from the 0.3% increase recorded in January, while the annual rate held steady at 2.5%.
In reaction to the data, the US Dollar extends its intraday advance, reclaiming the 99.00 mark. The US Dollar Index (DXY), which tracks the Greenback’s value against a basket of six major currencies, is trading around 99.13, up nearly 0.20% on the day.
The data reinforced expectations that the Federal Reserve (Fed) could maintain a cautious policy stance. Although the figures came in line with forecasts, inflation pressure remains sticky and well above the Fed’s 2% target, suggesting policymakers may keep interest rates higher for longer.
According to the CME FedWatch Tool, markets widely expect the Federal Reserve to keep interest rates unchanged at next week’s meeting and again in April. However, traders are pricing in a 36.2% probability of a 25-basis-point rate cut in June, rising to 51.3% in July.
Elsewhere, geopolitical tensions from the ongoing US-Iran war are also clouding the outlook for future interest-rate decisions by major central banks, as investors fear that rising Oil prices could fuel inflation.
Since Europe is a major net importer of energy, elevated Oil prices could fuel inflationary pressures. As a result, markets have already started pricing in the possibility of an European Central Bank (ECB) rate hike. However, the Euro has failed to draw support, as investors worry that higher Oil prices could weigh on economic growth in the Eurozone.
ECB Vice President Luis de Guindos said on Wednesday that “price risks remain skewed to the upside, while risks to growth are tilted to the downside.”
Meanwhile, ECB Governing Council member Peter Kažimír said that a rate hike linked to the Iran conflict “may be closer than previously thought,” adding that the ECB “will be ready to act if needed.”
Central banks FAQs
Central Banks have a key mandate which is making sure that there is price stability in a country or region. Economies are constantly facing inflation or deflation when prices for certain goods and services are fluctuating. Constant rising prices for the same goods means inflation, constant lowered prices for the same goods means deflation. It is the task of the central bank to keep the demand in line by tweaking its policy rate. For the biggest central banks like the US Federal Reserve (Fed), the European Central Bank (ECB) or the Bank of England (BoE), the mandate is to keep inflation close to 2%.
A central bank has one important tool at its disposal to get inflation higher or lower, and that is by tweaking its benchmark policy rate, commonly known as interest rate. On pre-communicated moments, the central bank will issue a statement with its policy rate and provide additional reasoning on why it is either remaining or changing (cutting or hiking) it. Local banks will adjust their savings and lending rates accordingly, which in turn will make it either harder or easier for people to earn on their savings or for companies to take out loans and make investments in their businesses. When the central bank hikes interest rates substantially, this is called monetary tightening. When it is cutting its benchmark rate, it is called monetary easing.
A central bank is often politically independent. Members of the central bank policy board are passing through a series of panels and hearings before being appointed to a policy board seat. Each member in that board often has a certain conviction on how the central bank should control inflation and the subsequent monetary policy. Members that want a very loose monetary policy, with low rates and cheap lending, to boost the economy substantially while being content to see inflation slightly above 2%, are called ‘doves’. Members that rather want to see higher rates to reward savings and want to keep a lit on inflation at all time are called ‘hawks’ and will not rest until inflation is at or just below 2%.
Normally, there is a chairman or president who leads each meeting, needs to create a consensus between the hawks or doves and has his or her final say when it would come down to a vote split to avoid a 50-50 tie on whether the current policy should be adjusted. The chairman will deliver speeches which often can be followed live, where the current monetary stance and outlook is being communicated. A central bank will try to push forward its monetary policy without triggering violent swings in rates, equities, or its currency. All members of the central bank will channel their stance toward the markets in advance of a policy meeting event. A few days before a policy meeting takes place until the new policy has been communicated, members are forbidden to talk publicly. This is called the blackout period.
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