- EUR/GBP remains subdued following the inflation data release from Germany.
- German Harmonized Index of Consumer Prices maintained a 2.0% YoY increase in August, as expected.
- The ILO UK Unemployment Rate eased to 4.1% in the three months leading up to July, down from 4.2% in June.
EUR/GBP depreciates for the second successive session, trading around 0.8440 during Tuesday’s European hours. The Euro faces challenges against the Pound Sterling (GBP) following the inflation data from Germany.
Germany's Harmonized Index of Consumer Prices (HICP) maintained a 2.0% year-on-year increase in August, in line with expectations. The monthly index showed a steady decline of 0.2%, also as forecasted. Similarly, the Consumer Price Index (CPI) remained stable at 1.9% year-on-year in August, meeting market expectations.
The recent headline inflation from the Eurozone remains near 2%, coupled with mixed Gross Domestic Product (GDP) data has reinforced expectations of a potential rate cut by the European Central Bank (ECB) at upcoming Thursday's policy meeting.
The Pound Sterling receives support from the mixed employment data from the United Kingdom (UK). ILO Unemployment Rate eased to 4.1% in the three months to July, following June’s 4.2% print, the data published by the Office for National Statistics (ONS).
UK Claimant Count Change showed that the change in the number of unemployed people fell to 23.7K in August, falling short of the market expectations of 95.5K and the previous 102.3K readings. Average Earnings Including Bonus (3Mo/Yr) came in at 4.0% in July, against the expected 4.1% and prior 4.6% readings.
Bank of England (BoE) policymakers remain concerned about persistent inflation, particularly within the services sector. A slowdown in wage growth would ease these concerns and likely increase market speculation about potential interest rate cuts by the BoE in September. The focus now turns to UK GDP numbers due on Wednesday.
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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