The EUR/USD pair trades marginally higher to near 1.1810 in the late Asian trading session on Friday, ahead of the release of preliminary inflation data for February from Germany and its major states during the day.
Flash German Harmonized Index of Consumer Prices (HICP) is estimated to have grown 0.5% Month-on-Month (MoM) after declining 0.1% in January, with annual figures rising steadily by 2.1%.
The impact of the German inflation data is expected to be limited on the Eurozone’s interest rate outlook, as European Central Bank (ECB) President Christine Lagarde said before the Committee on Economic and Monetary Affairs (ECON) of the European Parliament on Thursday that she is confident about inflation stabilizing at the 2% target in the near term.
On the monetary policy outlook, ECB’s Lagarde said, “Our interest rate decisions will be based on our assessment of the inflation outlook and the risks surrounding it,” and, “We [ECB] will continue to follow a data-dependent and meeting-by-meeting approach to determining the appropriate monetary policy stance.”
Meanwhile, the US Dollar (USD) ticks lower ahead of the United States (US) Producer Price Index (PPI) data for January, which will be published at 13:30 GMT. As of writing, the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, is down 0.1% to near 97.65.
Investors will closely monitor the PPI data to get fresh cues on the current state of inflation. The impact of the producer inflation could be significant on the Federal Reserve’s (Fed) monetary policy outlook, as several officials have advocated for holding interest rates steady in the near term, citing upside inflation risks.
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.
Source: https://www.fxstreet.com/news/eur-usd-ticks-higher-to-near-11800-ahead-of-flash-german-inflation-data-202602270528
