AUD/USD eases to 0.7060 as optimism about Iran’s truce ebbs

AUD/USD ticks down to 0.7060, although it remains on track for a 2.6% weekly rally.
Risk appetite has waned on Friday as hopes of a peace deal in Iran fade.
Later on Friday, US CPI data is expected to show higher inflationary pressures in March.

Guillermo Alcala FXStreet

The Australian Dollar (AUD) trims gains on Friday as the US-Iran peace truce staggers. Cautious markets feature a mild return to the US Dollar’s (USD) safety following a risk-on week, and pulling the AUD/USD down from three-week highs near 0.7090 to session lows around 0.7060 so far. The pair, however, remains more than 2.5% up on the week.

Risk appetite waned on Friday, as investors’ optimism about the outcome of the peace talks scheduled for this weekend, in Islamabad, Pakistan, faded.

Iranian authorities affirmed that they will not take part in any peace negotiation until Israel stops its attacks on Lebanon, and US President Donald Trump complained about the poor handling of the Strait of Hormuz by Tehran, which maintains a de facto blockade in a key waterway for global Gas and Oil supply.

Data from Australia released earlier this week revealed that an inflation gauge by the Melbourne Institute (MI) showed its highest monthly increase in history, highlighting the inflationary impact of the Oil shock triggered by the war in Iran. These figures strengthen the case for a near-term interest rate hike by the Reserve Bank of Australia (RBA).

In the US, the March Consumer Price Index (CPI) numbers, due later on Friday, are likely to provide some distraction from the events in the Middle East. Consumer inflation is expected to have jumped to a 3.3% yearly rate, its highest level in nearly two years, providing further reasons for Federal Reserve (Fed) hawks to tip the scales towards monetary tightening.

Inflation FAQs

What is inflation?

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%.

What is the Consumer Price Index (CPI)?

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.

What is the impact of inflation on foreign exchange?

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.

How does inflation influence the price of Gold?

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.

Author

Guillermo Alcala

FXStreet

Graduated in Communication Sciences at the Universidad del Pais Vasco and Universiteit van Amsterdam, Guillermo has been working as financial news editor and copywriter in diverse Forex-related firms, like FXStreet and Kantox.

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