EUR/GBP keeps wavering below 0.8750 with Eurozone inflation data on tap

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The Euro continues to trade in a choppy and volatile manner within a tight range, with 0.8750 capping upside attempts and bears contained above 0.8715 so far, as markets await the release of Eurozone inflation data for further clues about the ECB’s rate path.

The Euro has been trading choppy between 0.8715 and 0.8750 for the last two weeks.
The Eurozone HICP is expected to show that consumer inflation accelerated in September.
On Tuesday, upbeat UK GDP data provided an additional impulse to the GBP

Eurozone’s preliminary Harmonized Index of Consumer Prices (HICP) is expected to show an acceleration to a 2.2% year-on-year rate, from the 2.0% reading seen in August. The core inflation, however, is expected to grow at a 2.3% pace, unchanged from the previous month.

On Tuesday, German inflation numbers surprised with a larger-than-expected pick up in September, and ECB President Christine Lagarde affirmed that the bank is ready to act if inflation risks shift, as investors pare back bets of further rate cuts.

The Euro, however, remained on its back foot on Tuesday, weighed by a firmer British Pound following a stronger-than-expected UK economic growth in the second quarter.

Data released by National Statistics on Tuesday revealed that UK Gross Domestic Product (GDP) grew at a 0.3% pace in Q2, unchanged from the previous quarter, but at a 1.4% yearly rate, up from 1.2% in the first three months of the year and beating expectations of a 1.2% reading. The Pound appreciated across the board following the data release.

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.

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