Euro jumps as softer-than-expected US CPI cools Fed rate-hike bets
- EUR/USD climbs after US inflation data comes in softer than expected.
- The US Dollar falls as traders scale back Fed rate-hike bets.
- Attention turns to Fed Chair Kevin Warsh’s congressional testimony later on Tuesday.
EUR/USD snaps a two-day losing streak on Tuesday as softer-than-expected United States (US) inflation data weighs on the US Dollar (USD) and prompts traders to scale back expectations of a near-term Federal Reserve (Fed) interest rate hike.
At the time of writing, the pair trades around 1.1450, up nearly 0.60% on the day. Meanwhile, the US Dollar Index (DXY), which tracks the Greenback’s value against a basket of six major currencies, trades around 100.70, retreating from an intraday high of 101.32.
The US Consumer Price Index (CPI) declined 0.4% MoM in June, marking its largest decline since April 2020. Markets had expected a smaller 0.1% decrease following May’s 0.5% rise. Annual inflation eased sharply to 3.5% from 4.2%, below the 3.8% forecast.
Underlying inflation also cooled more than markets expected. Core CPI, which excludes volatile food and energy prices, was flat on a monthly basis, missing expectations for a 0.2% increase. The annual core rate slowed to 2.6% from 2.9%, below the 2.8% forecast.
Traders quickly reacted to the data by scaling back Fed rate-hike bets. According to the CME FedWatch Tool, the probability of a July hike fell to 16% from 40% before the CPI release, while the odds of a September increase eased to 60% from 74%.
Still, the broader inflation outlook remains uncertain as renewed tensions between the US and Iran push energy prices higher. West Texas Intermediate (WTI) crude Oil trades around $80.00, up nearly 12% so far this week. If Oil prices remain elevated, the Fed could still consider raising interest rates later this year.
Attention now turns to Fed Chair Kevin Warsh’s congressional testimony, due later in the American session. In prepared remarks, Warsh said the Fed has “no tolerance for persistently elevated inflation” while describing the labor market as broadly stable. He added that if policymakers get policy right, the inflation surge of the past five years will become “a thing of the past.”
Inflation FAQs
Inflation measures the rise in the price of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core inflation excludes more volatile elements such as food and fuel which can fluctuate because of geopolitical and seasonal factors. Core inflation is the figure economists focus on and is the level targeted by central banks, which are mandated to keep inflation at a manageable level, usually around 2%.
The Consumer Price Index (CPI) measures the change in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core CPI is the figure targeted by central banks as it excludes volatile food and fuel inputs. When Core CPI rises above 2% it usually results in higher interest rates and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually results in a stronger currency. The opposite is true when inflation falls.
Although it may seem counter-intuitive, high inflation in a country pushes up the value of its currency and vice versa for lower inflation. This is because the central bank will normally raise interest rates to combat the higher inflation, which attract more global capital inflows from investors looking for a lucrative place to park their money.
Formerly, Gold was the asset investors turned to in times of high inflation because it preserved its value, and whilst investors will often still buy Gold for its safe-haven properties in times of extreme market turmoil, this is not the case most of the time. This is because when inflation is high, central banks will put up interest rates to combat it. Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold vis-a-vis an interest-bearing asset or placing the money in a cash deposit account. On the flipside, lower inflation tends to be positive for Gold as it brings interest rates down, making the bright metal a more viable investment alternative.
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