EUR/GBP recovers to near 0.8680 as investors brush off soft Eurozone HICP data

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The EUR/GBP pair recovers its early losses and trades marginally higher to near 0.8680 during the late Asian trading session on Thursday. The pair gains as investors brush off soft Eurozone preliminary Harmonized Index of Consumer Prices (HICP) data for December.

EUR/GBP rebounds to near 0.8680 as investors digest soft Eurozone flash HICP data.
Eurozone’s inflation grew moderately on an annualized basis in December.
Investors await ECB Vice President Guindos’s comments in an event for fresh cues on the interest rate outlook.

Eurostat reported on Wednesday that the headline HICP grew at an annualized pace of 2%, as expected, slower than 2.1% in November. In the same period, the core HICP – which excludes volatile, such as food, energy, alcohol, and tobacco – rose at a slower pace of 2.3% against estimates and the prior reading of 2.4%.

Month-on-month headline and core HICP rose by 0.2% and 0.3%, respectively, after deflating in November.

Soft Eurozone HICP data is unlikely to influence market expectations for more interest rate cuts by the European Central Bank (ECB) in the near term, as inflation remains close to its 2% target.

During the day, investors will focus on comments from ECB Vice President Luis de Guindos in a fireside chat at Vocento's 2nd Edition of Next Spain Global at 08:30 GMT.

Meanwhile, the Pound Sterling (GBP) exhibits a mixed performance against its peers in a light United Kingdom (UK) economic calendar week. This week, the British currency is majorly driven by risk sentiment, and expectations about how the Bank of England’s (BoE) monetary policy will flair this year.

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.