EUR/GBP pares gains above 0.8650 after hotter UK CPI inflation data
- EUR/GBP trims gains around 0.8675 in Wednesday’s early European session.
- UK CPI inflation rose to 3.6% YoY in June from 3.4% in May, hotter than expected.
- EU officials stated that discussions to avoid US tariffs are still underway, though a retaliatory package is being prepared.
The EUR/GBP cross trades in positive territory near 0.8675 during the early European session on Wednesday. However, the Pound Sterling (GBP) recovers some lost ground against the Euro (EUR) after the UK Consumer Price Index (CPI) inflation report. Traders await the US Producer Price Index (PPI), followed by the Fed Beige Book and Industrial Production due later on Wednesday.
Data released by the United Kingdom’s Office for National Statistics on Wednesday showed that the country’s headline CPI rose 3.6% YoY in June, compared to an increase of 3.4% in May. This reading came in above the market consensus of 3.4%. The Core CPI, which excludes the volatile prices of food and energy, climbed 3.7% YoY in June versus 3.5% prior, hotter than the expectation of 3.5%.
Meanwhile, the monthly UK CPI inflation rose to 0.3% in June from 0.2% in May. Markets projected an increase of 0.2% reading. The Pound Sterling attracts some buyers in an immediate reaction to the hotter UK CPI inflation data.
Renewed trade tensions between the US and the European Union (EU) might cap the upside for the EUR. The Wall Street Journal reported on Tuesday that the bloc is preparing tariffs on US goods, including aircraft, alcohol, coffee, and medical devices worth 72 billion euros ($84 billion) in case no trade deal is reached by August 1. This action came after Trump threatened to impose a 30% tariff on imports from the EU and Mexico beginning early August.
Traders will closely monitor the developments surrounding the US-EU trade deal. Higher US tariffs on imports from the EU would further weaken growth in the Eurozone, and likely prompt the European Central Bank (ECB) to lower borrowing costs. This, in turn, could drag the shared currency lower in the near term.
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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