Euro rises against US Dollar as latter corrects ahead of US CPI data

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The Euro (EUR) trades slightly higher to near 1.1395 against the US Dollar (USD) during the European trading session on Tuesday. The major currency pair gains as the US Dollar corrects ahead of the United States (US) Consumer Price Index (CPI) data for June, which will be published at 12:30 GMT.

The Euro gains against the US Dollar in the countdown to the US inflation data for June.
Fed’s Waller signals that monetary tightening would become inevitable if inflation figures come higher again.
MUFG expects the ECB to deliver one more interest rate hike this year.

In the European trade, the US Dollar Index (DXY), which gauges the Greenback’s value against six major currencies, trades 0.13% lower to near 101.15.

Investors will closely track the US inflation data, as Federal Open Market Committee (FOMC) minutes of the June policy meeting showed that policymakers see high inflation as a “dominant risk”. On Monday, Federal Reserve (Fed) Governor Christopher Waller also warned of tight monetary conditions in the near-term if inflation figures come higher again.

"I don’t take the inflationary signals I have discussed today lightly. If we get another hot reading on core inflation this week, then the FOMC will need to consider tightening monetary policy in the near term," Waller said, Reuters report.

According to estimates, the US headline CPI growth cooled down to 3.8% Year-on-Year (YoY) in June from 4.2% in May, with core figures rising steadily by 2.9%. On a monthly basis, the headline inflation is seen declining by 0.1%, while core figures are estimated to have remained steady at 0.2%.

Later in the day, investors will also focus on Fed Chair Kevin Warsh’s testimony before Congress. Warsh is unlikely to provide cues regarding the US interest rate outlook, as he clarified in June’s policy press conference that forward guidance is not well-suited in the current policy juncture.

On the Euro front, investors seek fresh cues regarding whether the European Central Bank (ECB) will raise interest rates again this year. Analysts at MUFG expect the ECB to deliver another 25 basis points (bps) rate hike in the September meeting. The ECB also raised its key rates in the June policy meeting and guided to remain data-dependent going forward.

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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