Euro holds recent gains with markets focusing on US inflation numbers
- EUR/USD edges up on Tuesday, reaching levels near 1.1230, after bouncing from 1.1137 on Monday.
- Oil prices have dropped about 20% in the last week, providing important relief to Eurozone economies.
- Investors are wary of selling the USD on Tuesday, ahead of the release of the US CPI report.
The Euro (EUR) edges up against the US Dollar (USD) on Tuesday, holding gains from a sharp rebound on Monday, with traders bidding their time, ahead of the release of US Consumer Price Index (CPI) figures due later in the day. The EUR/USD pair is trading just below 1.1230 at the European session opening times, after bouncing from 1.1137 lows on Monday.
The common currency has drawn support from a risk-on market at the week opening, as reports of advances in the diplomatic efforts to bring the Middle East conflict to an end have pushed Oil prices to fresh two-month lows.
Beyond thst, US President Donald Trump discarded any attack on Iran while negotiations continue, which contributed to improving market sentiment. Against this backdrop, Brent Oil has dropped more than 20% in the last week, providing important relief to the Eurozone’s Oil-importing economies.
Investors' focus turns to the US CPI release with Fed policy in the background
Market volatility, however, has tamed on Tuesday, as investors brace for the release of US CPI figures, which are expected to show that consumer inflation accelerated to a 3.9% year-over-year rate in October, its highest reading in the last five months. Excluding food and energy, the core CPI is seen accelerating to 2.8%, from 2.6% in the previous month.
These figures follow an upbeat US labour market report last Friday, which showed outstanding growth in net employment in October. Before that, Gross Domestic Product (GDP) figures revealed that the economy grew at a 3.4% annualised rate in the third quarter. All in all, an ideal scenario for the Federal Reserve (Fed) to tighten its monetary policy further over the coming months.
Strategists at Brown Brothers Harriman observe that the Dollar "pared back some of Friday’s strong October non-farm payrolls gains,” although they note that the broader backdrop remains constructive for the greenback, as “robust US economic activity, favorable labor market conditions and sticky underlying inflation back the Fed’s hawkish bias, keeping rate differentials supportive of USD.”
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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