Euro holds gains above 1.1500 awaiting of Eurozone inflation data
- EUR/USD stands near six-week highs above 1.1500, on track for its strongest weekly performance since April.
- Eurozone HICP is seen accelerating to 2.9% YoY in July, up from 2.8% in June.
- German inflation and Eurozone growth figures beat expectations on Thursday and cemented hopes of an ECB hike in September.
The Euro (EUR) nudges lower against the US Dollar (USD) on Friday, but remains near six-week highs, holding well above 1.1500 so far, on track for a 1.3% rally this week, its best weekly performance in nearly four months. Eurozone GDP data beat expectations on Thursday, and investors await July’s preliminary inflation figures to assess the chances of a European Central Bank (ECB) rate hike in September.
Eurozone’s Harmonized Index of Consumer Prices (HICP) is expected to have ticked up to a 2.9% year-on-year (YoY) rate in July from 2.8% in June. Core inflation is seen growing at a steady 2.8% YoY pace, anyway, at levels well above the ECB’s 2% target.
Inflationary pressures increase in Germany and France
Earlier on Friday, preliminary Consumer Price Index (CPI) figures from France showed that yearly inflation accelerated to 2.4% in July from 2% in June, well above the 2.1% increase forecast by market analysts. Month-on-month consumer prices rose 0.6%, twice as much as the 0.3% rise expected and largely reversing the 0.3% contraction seen in June.
On Thursday, preliminary German HICP figures showed that consumer inflation rose to a 2.8% yearly rate from 2.4% in June. Beyond that, the Eurozone preliminary Gross Domestic Product (GDP) surprised with 0.4% growth in the second quarter and a 1% year-on-year rise, beating the market consensus of 0.2% and 0.5% increases, respectively. These figures cemented hopes that the ECB will hike interest rates in September and boosted the Euro against the USD.
Analysts at ING caution that the latest Euro strength may have its limits, arguing that they “would not view a move above 1.160 as very sustainable unless markets repriced USD rates materially lower again and Middle East tensions eased.” Even so, they note that “EUR/USD may continue to find buyers around the 1.150 level for a while longer,” suggesting near-term support remains intact despite questions over the durability of any further upside.
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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