Euro slips back below 1.1500 as US Dollar recovers
- The Euro weakens as the US Dollar rebounds after Thursday's sharp sell-off.
- Hawkish comments from Federal Reserve officials reinforce expectations for higher US interest rates.
- Eurozone inflation data reinforce expectations for another European Central Bank rate hike.
The Euro (EUR) weakens against the US Dollar (USD) on Friday as short-covering in the Greenback following the previous day’s sharp sell-off pushes EUR/USD back below 1.1500. At the time of writing, the pair trades around 1.1488, easing from the six-week high of 1.1537 touched on Thursday.
Meanwhile, the war in the Middle East and hawkish Federal Reserve (Fed) expectations continue to provide underlying support to the US Dollar. The US Dollar Index (DXY), which tracks the Greenback’s value against a basket of six major currencies, trades around 100.34, up 0.37% on the day.
Despite limited forward guidance from Fed Chair Kevin Warsh at this week’s monetary policy meeting, traders still see a meaningful chance that the central bank will raise interest rates later this year as elevated Oil prices keep inflation risks tilted to the upside.
According to the CME FedWatch Tool, traders currently price in around a 66% probability of a 25-basis-point rate hike in September. Traders now await the final University of Michigan Consumer Sentiment and Inflation Expectations data due later on Friday.
The Fed left interest rates unchanged within the 3.50%-3.75% range on Wednesday, with three policymakers voting for an immediate 25-basis-point rate hike.
Two of the three dissenters reinforced their hawkish positions on Friday. Cleveland Fed President Beth Hammack said monetary policy is not restrictive enough and argued that the central bank should focus on inflation while the labour market remains stable.
Minneapolis Fed President Neel Kashkari said, “If inflation remains elevated, a potential series of small policy moves would be better than waiting and concluding that bolder actions were necessary.”
Across the Atlantic, preliminary Eurozone inflation data for July failed to lift the Euro. The Harmonized Index of Consumer Prices (HICP) rose 2.9% YoY, matching forecasts and edging up from 2.8% in June. Core inflation accelerated to 2.5% from 2.4%.
Eurozone inflation data keep ECB on track for September hike
Analysts at Societe Generale note that the latest Euro area inflation release "points to limited indirect spillovers from the energy shock to consumer prices so far," even as energy-driven volatility keeps the outlook uncertain. They caution, however, that "this should not be taken as evidence that broader second-round effects will fail to materialise, as upstream energy price pressures typically take time to pass through supply chains."
In their view, "Friday's figures are consistent with the ECB's June forecast of 2.5% YoY for 3Q26" and, "together with the solid 2Q26 GDP print, the latest release should support another ECB rate hike in September."
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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