Euro holds ground against US Dollar amid Fed uncertainty ahead of US CPI
- EUR/USD trades flat as the US Dollar steadies following its post-NFP weakness.
- Weak US payrolls have reduced Fed rate-hike bets, while elevated Oil prices complicate the inflation outlook.
- Traders await US CPI data for fresh clues on the Fed’s September interest rate decision.
EUR/USD treads water on Monday as the US Dollar (USD) steadies following its post-NFP weakness, while Oil prices rise amid uncertainty over the reopening of the Strait of Hormuz. At the time of writing, the pair trades around 1.1553, virtually unchanged on the day.
Price action has been confined to a narrow range for more than a week, with the US Dollar Index (DXY) also attempting to stabilise above 99.50. The index, which tracks the Greenback’s value against a basket of six major currencies, trades around 99.70, up 0.10% on the day.
The sideways trading comes as investors assess the Federal Reserve’s (Fed) monetary policy path and developments in the Middle East. Weaker-than-expected US Nonfarm Payrolls (NFP) data for July prompted traders to scale back expectations for a Fed rate hike at the September meeting.
However, elevated Oil prices are raising concerns that inflation could stay above the Fed’s target for longer, preventing traders from fully ruling out a rate hike. According to the CME FedWatch Tool, markets still price in around a 44% chance of a September hike.
Attention now turns to the US Consumer Price Index (CPI) data due on Wednesday. A softer-than-expected reading could further reduce the probability of a rate hike next month and weigh on the US Dollar.
Analysts at ING highlight that with the key July data now out of the way and August is “typically a quiet month for European Central Bank communication.” They note that the ECB has effectively given markets “a quasi-commitment to a September hike,” limiting the scope for fresh policy surprises from the Eurozone side in the near term.
Against that backdrop, ING argues that “that leaves EUR/USD firmly dominated by the USD side of the equation.” The bank stresses that “a softer US CPI print would increase the chances of a break above 1.160 already this week,” adding that “the next important resistance beyond that is the 200-day moving average at 1.1630.”
On the geopolitical front, US President Donald Trump says Washington is “semi-negotiating” with Tehran while “low-keying” its military campaign. Iran, however, denies holding direct talks and has tied the reopening of the Strait of Hormuz to US concessions, including sanctions relief, compensation for war damage and security guarantees.
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.
