Euro maintains recent gains as US inflation data take centre stage

Near 1.1230, EUR/USD is edging higher on Tuesday. The move follows Monday’s recovery from 1.1137.
About 20% has been wiped off Oil prices over the past week, offering substantial relief to Eurozone economies.
Ahead of the US CPI report, investors remain cautious about selling the USD on Tuesday.

EUR/USD trades just below 1.1230 as Tuesday’s European session opens. After rebounding sharply from Monday’s lows of 1.1137, the Euro (EUR) is extending its gains against the US Dollar (USD). Traders are biding their time ahead of the US Consumer Price Index (CPI) figures scheduled for release later in the day.

TMGM Analysis: Financial Market News, Economic Calendar & Market Insights

Risk appetite at the start of the week has supported the common currency. Reports of progress in diplomatic efforts to end the Middle East conflict have driven Oil prices to new two-month lows.

Market sentiment also improved after US President Donald Trump ruled out any attack on Iran while negotiations continue. Against this backdrop, Brent Oil has lost more than 20% over the past week, delivering substantial relief to the Eurozone’s Oil-importing economies.

US CPI Takes Focus as Fed Policy Remains in View

3.9% is the expected year-on-year US inflation rate for October. That would mark an acceleration to the highest reading in the last five months. Volatility has eased on Tuesday as investors await the CPI release. Stripping out food and energy, core CPI is forecast to accelerate from the previous month’s 2.6% to 2.8%.

The inflation release comes after last Friday’s strong US labour market report, which recorded outstanding net employment growth in October. Earlier Gross Domestic Product (GDP) data showed third-quarter economic growth at an annualised 3.4%. Taken together, the figures present an ideal backdrop for the Federal Reserve (Fed) to tighten monetary policy further in the coming months.

Although the broader environment remains favourable for the greenback, Brown Brothers Harriman strategists observe that the Dollar “pared back some of Friday’s strong October non-farm payrolls gains,” adding that “robust US economic activity, favorable labor market conditions and sticky underlying inflation back the Fed’s hawkish bias, keeping rate differentials supportive of USD.”

Inflation: Key Questions Answered

Inflation: Measuring Price Increases

A rise in the cost of a representative basket of goods and services is measured as inflation. The headline measure is generally reported as a percentage change month-on-month (MoM) and year-on-year (YoY). By contrast, core inflation removes more volatile components, including food and fuel, whose prices can shift with geopolitical developments and seasonal factors. Economists concentrate on this core measure. It is also the measure targeted by central banks, whose mandate is to maintain manageable inflation, generally around 2%.

Consumer Price Index (CPI): Tracking Price Changes

Changes in the prices of a basket of goods and services over time are tracked by the Consumer Price Index (CPI). The index is generally reported as a percentage change month-on-month (MoM) and year-on-year (YoY). Central banks target core CPI, which removes volatile food and fuel components. A core CPI reading above 2% generally leads to higher interest rates, while a reading below 2% tends to have the reverse effect. Higher rates support a currency, so rising inflation usually strengthens it. Falling inflation typically has the opposite effect.

Inflation’s Effect on Foreign Exchange

Higher inflation tends to lift a country’s currency, while lower inflation tends to weaken it, despite this relationship appearing counter-intuitive. The reason lies in the central bank’s usual response: raising interest rates to contain inflation. Those higher rates draw additional global capital from investors seeking attractive returns on their money.

Inflation and Gold Prices

Investors historically sought Gold during periods of high inflation for its ability to retain value. They still frequently buy it as a safe haven during severe market turmoil, but this is not the usual pattern in most circumstances. High inflation prompts central banks to raise interest rates to bring price pressures under control. Those higher rates weigh on Gold by increasing the opportunity cost of holding it rather than an interest-bearing asset or a cash deposit. Conversely, lower inflation generally supports Gold because it reduces interest rates, making the precious metal a more attractive investment alternative.