- EUR/USD rose to a fresh one-month high near 1.0900 as soft US inflation data weighs heavily on the US Dollar.
- Annual headline and core inflation decelerated more-than-expected to 3% and 3.3%, respectively.
- The Euro capitalizes on easing fears of a widening French financial crisis and diminishing ECB rate cut prospects.
EUR/USD rallies to near 1.0900 in Thursday’s New York session. The major currency pair strengthens after the United States (US) Consumer Price Index (CPI) report for June turned out to be softer than expected. This has boosted market speculation for the Federal Reserve (Fed) to start reducing interest rates from the September meeting. The CME FedWatch tool shows that the probability of the Fed cutting rates from September jumps to 69.5%.
US annual core inflation, which strips off volatile food and energy prices, decelerated to 3.3% from the estimates and May’s reading of 3.4%. In the same period, the headline inflation grew at a slower pace of 3% against expectations of 3.1% and the prior release of 3.4%. Monthly headline CPI surprisingly deflated by 0.1% after remaining unchanged, while investors forecasted a nominal increase of 0.l%. The core inflation rose by 0.1%, slower than estimates and the former reading of 0.2%.
A consecutive decline in the US inflation would also increase the confidence of investors that the disinflation process has resumed and that the high price pressures recorded in the first quarter were merely a short-term blip.
A higher-than-expected decline in US inflation data weighs heavily on the US Dollar and Treasury yields. The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, tumbles to near 104.50. 10-year US Treasury yields plummet below 4.20%.
Daily digest market movers: EUR/USD rises as ECB hesitates to commit to a pre-defined rate-cut path
- EUR/USD moves higher to 1.0850 as concerns over the widening French financial crisis ease as Marine Le Pen’s far-right National Rally failed to maintain dominance over French President Emmanuel Macron’s centrist alliance and the left-wing coalition, also known as New Popular Front, led by Jean-Luc Melenchon.
- Economists were worried about the far right coming to power, which was expected to steer fiscal expansion. Currently, the centrist alliance is expected to join hands with the left wing to form a coalition government.
- Apart from diminishing fears of French financial crisis, easing expectations of subsequent rate cuts by the European Central Bank (ECB) have also brought stability to the Euro’s appeal.
- Traders pare bets favoring ECB’s back-to-back rate cuts as ECB policymakers hesitate to commit to a specific rate-cut path. ECB officials worry that an aggressive approach could revamp price pressures again. However, they are comfortable with expectations of more rate cuts this year.
- Meanwhile, revised estimates for the German Harmonized Index of Consumer Prices (HICP) confirmed that price pressures decelerated in June. Annual HICP grew at a slower pace of 2.5% from May’s reading of 2.8%.
Technical Analysis: EUR/USD rises close to 1.0900
EUR/USD strengthens after delivering a breakout of the Bullish Flag formation in a 4-hour timeframe. A breakout of the above-mentioned chart pattern results in a continuation of the trend, which in this case is bullish.
The 20-period Exponential Moving Average (EMA) near 1.0825 continues to support the Euro bulls.
The 14-day Relative Strength Index (RSI) establishes into the bullish range of 60.00-80.00, indicating that momentum has leaned to the upside.
Going forward, the psychological figure of 1.0900 will be a key target for the Euro bulls. On the downside, the June 19 high at around 1.0750 will be a major support zone.
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.
