Euro steadies as traders weigh conflicting US-Iran headlines, stronger Eurozone inflation data
- EUR/USD holds firm as traders react to conflicting US-Iran headlines.
- Euro finds support from hotter Eurozone inflation data and ECB rate hike expectations.
- The US Dollar stays supported as key sticking points in US-Iran negotiations remain unresolved.
EUR/USD holds firm on Tuesday as traders react to conflicting headlines surrounding US-Iran negotiations. At the time of writing, the pair trades around 1.1639 after touching a daily high near 1.1655.
Iran's semi-official Fars News Agency, citing an informed source, reported that the exchange of messages between Iran and the United States has been suspended for at least a few days over the proposed memorandum of understanding (MoU).
The report contrasts with comments from US President Donald Trump, who said on Monday that negotiations with Iran are continuing “at a rapid pace.” Trump also told ABC News that he expects Washington and Tehran to reach an agreement within the next week to extend the ceasefire and reopen the Strait of Hormuz.
Meanwhile, US Secretary of State Marco Rubio said an Iran deal “could happen today, tomorrow or next week.” Rubio also said the first condition in negotiations is for Iran to reopen the Strait of Hormuz, while Tehran must also agree on the disposition of its highly enriched uranium.
The US Dollar (USD) remains supported as major sticking points in negotiations remain unresolved, reducing hopes for a near-term deal.
The US Dollar Index (DXY), which tracks the Greenback's value against a basket of six major currencies, is consolidating minor losses above the 99.00 mark.
The Euro (EUR) also finds support from the preliminary Eurozone inflation data. The Harmonized Index of Consumer Prices (HICP) rose 3.2% YoY in May from 3.0% in April, matching forecasts. The core HICP accelerated to 2.5% from 2.2%.
The latest inflation data increased the likelihood of a rate hike at the upcoming European Central Bank (ECB) monetary policy meeting later this month. ECB policymaker Olli Rehn said on Tuesday that the ECB is preparing an “insurance hike” in June.
Meanwhile, US JOLTS Job Openings rose to 7.618 million in April from 6.887 million in March, beating market expectations of 6.88 million. Traders now turn their attention to the ADP Employment Change due on Wednesday and the Nonfarm Payrolls (NFP) report on Friday.
Ongoing Oil-driven inflation risks have strengthened expectations that the Federal Reserve (Fed) may keep interest rates unchanged this year. The upcoming US labor market data could play a key role in shaping those expectations.
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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