Euro consolidates below mid-1.1500s vs USD ahead of German HICP, US CPI
- EUR/USD extends its consolidative price move as traders opt to wait for the key US inflation figures.
- Germany’s Harmonized Index of Consumer Prices (HICP) for July could also provide some impetus.
- Geopolitical risks, inflation fears and Fed hike bets underpin the safe-haven USD, capping the pair.
The EUR/USD pair struggles to gain any meaningful traction and holds steady around mid-1.1500s during the Asian session on Wednesday, within a familiar range held over the past week or so. Traders keenly await the release of the key US inflation data and further developments surrounding the Middle East crisis before placing fresh directional bets.
The crucial US Consumer Price Index (CPI), due later today, and the Producer Price Index (PPI) on Thursday will be looked for fresh cues about the US Federal Reserve's (Fed) future policy path. The outlook, in turn, will play a key role in influencing the US Dollar (USD) demand in the near term and providing some meaningful impetus to the EUR/USD pair. In the meantime, oil-driven inflation fears keep Fed rate hike bets on the table, underpinning the buck and capping the currency pair.
Crude oil prices shot to a one-and-a-half-week high on Tuesday after an advisor to Iran’s Supreme Leader Mojtaba Khamenei said that the Strait of Hormuz will not be opened until the US met Tehran's demands. Adding to this, Iran-backed Houthi rebels in Yemen escalated attacks on vessels in the Red Sea and Bab el-Mandeb, particularly targeting Saudi-linked ships. This led to increased war-risk premiums, acting as a tailwind for crude oil prices and the safe-haven Greenback.
Investors remain worried that higher energy prices will rekindle inflationary pressures and force major central banks, including the Fed, to adopt a more hawkish stance. According to the CME Group's FedWatch Tool, traders are pricing in a greater chance that the US central bank will raise borrowing costs by the end of this year. The expectations remain supportive of elevated US Treasury bond yields, which favors USD bulls and should keep a lid on any meaningful upside for the EUR/USD pair.
Traders on Wednesday will further take cues from Germany’s Harmonized Index of Consumer Prices (HICP) for July, though the EUR/USD pair remains at the mercy of the USD price dynamics.
EUR/USD daily chart
Technical Analysis
The EUR/USD pair remains capped beneath the 100-day Simple Moving Average (SMA) at 1.1567 and the 50.0% Fibonacci retracement of the May-June fall, at 1.1562. This suggests that upside attempts are vulnerable while these levels cap the advance. On the downside, initial support aligns with the 38.2% Fibo. retracement at 1.1506, ahead of the 23.6% retracement at 1.1437, where buyers could attempt to stabilize spot prices.
(The technical analysis of this story was written with the help of an AI tool. Know more.)
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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