EUR/USD trades close to 1.0900 as Fed rate-cut bets shoot
- EUR/USD holds gains on diminished fears of the widening French financial crisis.
- ECB officials refrain from commiting a specific rate-cut path.
- Hot PPI and soft CPI would jeopardize market expectations for Fed rate cuts in September.
EUR/USD recaptures a monthly high of 1.0900 in Friday’s American session. The major currency pair strengthens as the US Dollar (USD) remains weak even though the United States (US) Producer Price Index (PPI) report showed that producer inflation grew at a faster-than-expected pace in June. The report showed that annual core PPI, which excludes volatile food and energy prices, rose strongly by 3.0% from the estimates of 2.5% and the former release of 2.3%. On month, core PPI grew at a robust pace of 0.4% from the consensus of 0.2% and the prior reading of 0.3%, upwardly revised from an unchanged position.
On the contrary, consumer inflation in June decelerated faster than expected. The combination of hotter-than-expected producer inflation and softer-than-projected consumer inflation would jeopardize market speculation that the Federal Reserve (Fed) will begin reducing interest rates after the September meeting.
According to the CME FedWatch tool, the central bank is certain to cut interest rates in September and is also expected to deliver a subsequent rate cut in the November or December meeting. The expectations for Fed rate cuts have been prompted by the United States (US) Consumer Price Index (CPI) data for June, published on Thursday, which indicated that the disinflation process has resumed after a hiatus in the first quarter of this year.
On Thursday, the CPI report showed that annual core inflation, which is generally considered by Fed officials for decision-making on interest rates as it excludes volatile food and energy items, unexpectedly decelerated to 3.3%. Economists expected the underlying inflation to have increased steadily by 3.4%. The headline inflation rose to 3.0%, the lowest reading in a year, due to easing energy prices and rentals. Monthly headline inflation deflated by 0.1% after remaining unchanged in May.
Cooling US inflationary pressures and easing labor market conditions increased Fed officials’ confidence that inflation is on course to return to the desired rate of 2%. San Francisco Fed President Mary Daly said on Thursday that a slowdown in inflationary pressures is a “welcome relief” and bolsters the case for lower interest rates. However, the timing remains a matter of debate, Reuters reported.
Daily digest market movers: EUR/USD rises as Far Right’s defeat improves Euro’s outlook
- EUR/USD holds gains near 1.0900 as fears of a financial crisis in the Eurozone’s second-largest nation diminished and easing expectations of subsequent interest rate cuts by the European Central Bank (ECB) next week have improved the Euro’s outlook.
- Immediate risks of a widening financial crisis in France have waned as Marine Le Pen’s far-right National Rally failed to maintain dominance over other parties. Economists were worried that the far right could boost fiscal spending if it came into power. However, uncertainty over the new fiscal policy framework remains high due to the expected coalition of French President Emmanuel Macron's centrist alliance and the left wing, also known as the New Popular Front, led by Jean-Luc Mélenchon.
- Meanwhile, expectations for the ECB's subsequent rate cuts have diminished as officials see price pressures remaining close to their current levels for the entire year. ECB policymakers have refrained from committing a pre-defined rate-cut path as they worry that an aggressive policy expansion could revamp price pressures again.
Technical Analysis: EUR/USD aims for triangle breakout
EUR/USD gathers strength to deliver a breakout of the Symmetrical Triangle formation on the daily timeframe. The major currency pair hovers near the downward-sloping border of the above-mentioned chart pattern around 1.0880, which is plotted from the March 8 high at 1.0980. The upward-sloping border of the triangle formation is marked from the April 16 low around 1.0620.
Advancing 20-day Exponential Moving Average (EMA) near 1.0800 suggests that the near-term trend is bullish.
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.
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.
Author
Sagar Dua
FXStreet
Sagar Dua is associated with the financial markets from his college days. Along with pursuing post-graduation in Commerce in 2014, he started his markets training with chart analysis.
